whitepaper the growing need for specialized platforms in

The Growing Need for Specialized Platforms in Corporate Banking

The Rise of Transaction BankingAmong the many consequences of the global financial crisis was the increased importance banks placed on transaction banking. Once considered the poor cousin of the more attractive areas of banking, transaction banking is now known for facilitating a closer working relationship with, and a deep understanding of, their customers’ businesses. Banks also benefit from more predictable and long-term revenue streams that generate both interest and fee income, thereby making revenues and profits “stickier”. According to IBM, transaction banking customers spend up to five times more on bank services than credit-only customers.

Evolving landscape requires a more focused approach

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The sector has also been spared the rising capital charges associated with asset-based businesses, and therefore often outperforms those businesses in terms of earnings. A recent McKinsey study found that banks with a focus on transaction banking had an operating annual return on risk-weighted assets of 5.3%, compared to only 2.3% for traditional corporate banks. Payment services which were until recently frowned upon, are now looked at more favorably as they require low capital, generate recurring revenues

THE GROWING NEED FOR SPECIALIZED PLATFORMS IN CORPORATE BANKING - EVOLVING LANDSCAPE REQUIRES A MORE FOCUSED APPROACH 02

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and offer increasing opportunities for cross selling.

Globally, transaction banking forms 35% of corporate banking revenues. The revenue pools have been growing rapidly year-on-year for the last five years and is projected by Boston Consulting Group (BCG) to grow by 8% annually and exceed USD 1.1 trillion by 2022. BCG also expects both the volume and value of transactions to increase by about 9% per year reaching about 750 billion transactions valued at $782 trillion by 2020.

THE CHANGING LANDSCAPE AND NEED FOR FOCUSED TRANSACTION BANKING SERVICES

The macro-economic climate continues to be extremely volatile, interest rates continue to remain low (or even negative in some geographies), and market sentiments (including that of most Governments) poor, shareholders yearn for high returns from their investments in banks’ stocks and the pressure on banks both, on the

costs and revenues front has been at its peak. Regulators globally have been sharpening their axes and increasing the compliance framework, cybersecurity needs and guidelines (Basel III, for instance). The result is an ever increasing cost of compliance. Additionally, with the boom in FinTech startups, customers’ expectations continue to increase with each segment having different needs and preferred products.

With more than 80% of transaction banking customers served being direct customers like SMEs, corporate, government & public administrations, banks require advanced trades and payment services systems to cater to their customers’ specific needs.

Corporate treasurers are demanding easier access to a more comprehensive set of data points as they have to cope with a large number of complex, interdependent risks in multiple geographies, while providing liquidity and availability of funds in the cheapest and most efficient manner.

TRANSACTION BANKING CUSTOMERS SPEND UP TO FIVE TIMES MORE ON BANK SERVICES THAN CREDIT-ONLY CUSTOMERS

Financial institutions

Government & PAs

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Cash management

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Figure 1: Increasing market complexities


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All of this begs the question – can technology help banks “add value to their customers, without destroying their profits?”

MOVING FROM GENERALIST TO SPECIALIST PLATFORMS

Some banks believe that a single core banking solution is an answer to all their questions. Their prevailing line of thought is to invest in a good Core Banking System (CBS) and do away with having to implement and integrate it with a lot of satellite/sub-systems. They also believe that the CBS will by itself help them dramatically reduce the number of different systems, reduce costs, close gaps, eliminate risks and get a 360 degree view of the customers. While these systems (CBS) do offer tremendous benefits, are they panacea that they appear to be? Should a modern, sophisticated and agile corporate bank conduct its business on a core banking system or do they need a specialist transaction banking system (TBS) to aid its quest of becoming the principal bank of its key customers? Let’s look at some of the arguments:

GENERALIST VS SPECIALIST

We live in a world of specialization and super-specialization. Choosing a good CBS is like visiting to your family doctor when you need open heart surgery – you simply wouldn’t do it. Family doctors or general practitioners as they are known in many parts of the world are experts in their area, but when it comes to specializations you need to visit the specialist. Transaction banking products and services are sophisticated and evolving, the market is moving faster and hence specialist TBS are required.

CUSTOMIZED SOLUTION VS “ONE SIZE FITS ALL”

CBS by design, needs to cover a wider footprint across the bank – from assets to liabilities. They also need to cover disparate market segments – from mass market retail, through SMEs, up to large corporates. This typically results in a “wide but reasonably shallow” coverage of a bank’s needs. When the bank needs “more”, the resulting customization stretches their capabilities and parameterization stacks even further until they reach “breaking point” which affects timely resolution to any customer-facing issues. Worse, they reach a “tipping point” which creates a “bespoke” solution for the individual

bank and hence they become “stuck” with the system’s limitations forever. For the same reason, most banks are trying to limit the amount of customization they do to their systems. As the market requirements don’t stand still, it makes more sense to start with a system that is designed for the market, i.e. a specialized transaction banking solution.

LARGE CUSTOMERS’ ACQUISITION VS EXISTING CUSTOMERS’ RETENTION

It is not uncommon for banks to focus on new (large) customers’ acquisition while giving secondary importance to retaining their existing customers’ business. This strategy, though not recommended, can work fine for banks that are focusing on a credit relationship with their existing customers since credit requirements do not change as rapidly as their customers’ transaction banking requirements. A lot of leading edge innovation and disruption is being targeted by FinTech startups in the areas of payments and receivables. Banks which are aiming to be their customers’ transaction banking

CORE BANKING SYSTEMS HAVE WIDE COVERAGE OF BANKS NEEDS BUT RARELY DO THEY HAVE DEEP COVERAGE

RAISE FINANCE

LIQUIDITY MANAGEMENT

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Notional/Hybrid Pooling

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Interest Rate Risk

Working Capital

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Figure 2: Responsibilities of a corporate treasurer

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partner would do well to bring such innovation into their TBS and/or rapidly prototype new product variants/features so that their existing customers continue to remain “locked in” with them and not move their business to a more nimble competing bank or a FinTech startup.

GLOBAL SERVICE EXPERIENCE VS LOCAL SERVICE EXPERIENCE

Many banks follow a phased implementation approach when it comes to rolling out their CBS,given the sheer magnitude and impact of this exercise. While one would argue that it is a prudent method from a risk mitigation perspective, however, the customer’s service experience suffers in such a roll out process. Corporate treasurers who want to have a single view of all the accounts maintained across the geographies, the bank will have to make compromises until the same CBS release has been rolled out in all countries. Receivables and Payments’ processes standardization also suffer due to this phased roll out approach adopted by many banks. On the other hand, for the TBS rollout, many banks choose a “Big Bang” approach to ensure consistency in their customers’ global service experience, process standardization, customer/supplier onboarding, global reporting/exceptions approvals, transaction tracking and aggregation. Not only is the approach manageable, it further helps mitigate any downsides for their customers and cut down any potential risk of competition weaning away customers’ transaction banking business during this transition phase.

COST OF OWNERSHIP

We raised the argument of the difficult environment in which banks are functioning today and it goes without saying that the cost of ownership is

a key parameter when it comes to the selection of a technology system. Transaction banking is a specialized field which requires domain expertise both of banks as well as of their corporate customers to be incorporated seamlessly into TBS, so as to bring the desired benefits and sustainable competitive advantage to all the parties concerned.

SPECIALIZED TRANSACTION BANKING PLATFORMS ARE ESSENTIAL FOR GAINING AND MAINTAINING COMPETITIVE ADVANTAGE IN THE CORPORATE BANKING SPACE

A bank’s aspiration to be the principal bank for each corporation is not surprising when the size and stickiness of the revenues is considered. To fulfil this aspiration, their new services must be underpinned by sophisticated cash and liquidity management solutions. While the principles of liquidity and cash management may not be so very different now to what they were a decade before, their application and execution has reached a whole new level of complexity. A complexity that involves multiple currencies, countries and regulators; a host of new techniques such as pooling and sweeps in all their variant forms; accommodation of country-specific permutations and global 24/7 operations; many more risk dimensions and far more investment vehicles. Banks need to transform their business, operating and sourcing models to deal with this complexity. And the first step in this transformation is to have a specialized platform in place which would not only be more flexible than a traditional legacy system but will also help them rapidly respond to changing customer expectations, regulatory demands and increased competition from the new entrants.


ABOUT NUCLEUSSOFTWARE

Nucleus Software is the leading provider of mission critical lending and transaction banking products to the global financial services industry. With three decades of expertise and experience, today, it powers the operations of more than 150 companies in 50 countries, supporting retail banking, corporate banking, cash management, internet banking, automotive finance and other business areas

whitepaper the growing need for specialized platforms in

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