The Future of Transaction Banking

The Sibos 2022 conference agenda centered on the theme “Progressive finance for a changing world”, recognizing the need to embrace digital transformation, successfully navigate new risks as well as drive sustainability and ethical change. Nino Ciganovic and Sacha Iten attended this year’s conference in Amsterdam. Below is a summary of what we believe might be important to you.

Communication was among the most emphasized topics. The participants held the view that the sell-side and the buy-side should proactively have conversations and engage in dialogue with innovators to embrace digital transformation, as the innovation wheel is expected to turn even faster in the future. In this context, agile leadership and adaptation to new circumstances were believed to be crucial to tackle sustainability and ethical change. Moreover, Tech & Trust, i.e., people and machines, are expected to become increasingly important in the challenging times ahead. In our opinion, the future of transaction banking holds enormous potential if the strategy is properly planned and implemented. Large investments are expected to be made for a successful transformation in transaction banking, but proper planning of resource allocation will still be required.

In our opinion, the range of products and offerings will increase while only the fittest market participants will survive, and the value chain will see further drastic changes in the years to come. New entrants such as FinTech companies are increasingly penetrating the transaction banking space as they expand their capabilities at a much faster pace while being much stronger today than they were five years ago. Banks can either try to gain a first-mover advantage or remain on the sidelines and therefore lose out on opportunities. Demand for transaction banking services continues to rise as cost pressures increase alongside economic growth and regulatory challenges. However, competition is intense, especially as the new players enter the market. We believe that a clear strategy and future services developed in cooperation with clients will increase reach and efficiency. Overall, transaction banking is a robust and reliable business that can leverage services of internal and external clients. To put it briefly: It is not primarily about selling a product, but about adding value in a team effort with key stakeholders, namely the clients.

From our point of view a transaction banking unit currently has three different options for conducting the business. Each is potentially growth-enhancing or at least increases efficiency.

The low-cost strategy

Standardization is a key element to improve cost efficiency and ensure low pricings for institutional clients. Streamlining of all processes will result in high STP rates across all services. However, this is directly linked to substantial investments in a first stage.

Our take: There certainly is a need for it, especially among smaller banks and challengers in the financial sector, however, a more diversified value chain with specialization in different services may also provide advantages. Standardization could be improved by cognitive analytics, which is a type of decision-making inspired by the human brain. We are in an experimental phase of AI in our transaction banking unit and are learning how to use this technology to improve both efficiency and the customer experience. It should be noted that the general state of the global economy may lead to targeted government intervention, which could diminish the efficiencies gained through technology in recent years.

The innovator strategy

The second strategy is to launch new innovative products to meet customers' needs and give them an advantage. However, this comes at a price. We believe banks willing to bear this cost will become the bank of choice when it comes to innovative, tailor-made solutions for the needs of clients in the transaction business.

Our take: There is a need for this service as some banks specialize in certain areas and need to be at the cutting edge of technology in particular services. Vontobel has recently launched several projects in the areas of data analytics, TCA and other unique services. We are happy to explain more details about these "game changers" in a personal conversation.

The consolidation strategy

The third and last strategy is the divestment of certain businesses on the service provider’s or the clients' side as well as operational consolidation, including the consolidation of processes, applications and infrastructures. We expect companies which anticipate a more fragmented value chain in the coming years to focus more on their core business.

Our take: Generally, this is a difficult strategy as there is not yet sufficient market pressure. However, this could change in the near future given the upcoming challenges we see in the years to come (e.g., regulation, competition, inflation). Given the broad skills required for transaction banking services, it is crucial that platforms have the highest possible throughput. As with most banking services, economies of scale are a key factor for success. We are happy to discuss with our clients’ potential collaborations in any area of interest. Considering that the cost of data, development, custodial services and other external providers will most likely increase in the coming months, this will also impact the client’s business. Consolidating and sharing certain costs could be an efficient way to reduce overall costs while providing a tailored service that meets the client’s needs.

What do we think the future will look like?

Our ultimate goal is to make our clients stand out in front of their customers, to reduce costs as much as possible and to maximize the quality of service without putting too much of the work on the client. Therefore, we believe that a mix of the above is the way to go. High STP rates, flexible systems, fees for manual intervention and pay per service could provide a well-rounded solution to cover the increased costs and at the same delivering the edge in terms of service to the client.

Trends / HR

Skills development - Employees are the key - What qualifications does the future employee in transaction banking need to have and what are the challenges?

There is an ever-growing need for data scientists, blockchain specialists and more generally experienced employees with customer contact and a basic level of technical expertise. However, these employees are all scarce while a larger number of companies, banks and technology firms are competing for their limited supply. Therefore, an alternative approach could be used, which is to train existing staff. However, this requires an appropriate budget, time and, above all, excellent leadership to guide colleagues. Basically, enablers as well as disruptors need to be identified. Both are critical to success. While the former focuses on improving existing functions, the latter is more likely to be the creative individual with a solid industry background who disrupts existing workflows. AI, especially natural language processing, is on the verge of adding real value to improve processes such as customer interaction. It's time for the industry to have a breakthrough.