As competition heats up, costs fall and large tech players move into the corporate transaction banking space, banks need to rethink their strategies. Thomas Olsen, a partner with Bain’s Financial Services practice, discusses disruptions in the market as well as steps banks can take to stay competitive.
Read the Bain Brief: Wolf in Sheep's Clothing—Disruption Ahead for Transaction Banking
Read the transcript below.
THOMAS OLSEN: There are surprises lurking in the corporate transaction banking market. Traditional wisdom on transaction banking is leading banks to increase their investment and their expectations. Transaction banking is one of the fundamental services banks provide: cash management, trade finance, collections, and other services underpin the function of companies and the global economy. And transaction banking has been a very attractive market for banks. It's high growth. It's less capital intensive, and important source of fee income and liability deposits. And it's less volatile than many other parts of banking.
So many wholesale banks' plans and budgets depend on increasing growth in transaction banking to improve their cost of capital, and to grow. The surprise—or the problem—is that more and more banks—local, regional and global—are investing and planning to grow market share in transaction banking. There's not enough to go around. They're all competing with each other.
In parallel, technology is enabling better client propositions and much lower marginal costs. This will result in price compression as automation, blockchain solutions in trade finance, cross-border payments start impacting the market pricing. Further, large-platform players like Alibaba and Amazon are developing payments and financing solutions into their e-commerce, creating a new source of competition.
The implication of this is that banks that are slow to react to this and understand the changes in the structural market will struggle to hit their budgets and their plans, and improve their cost of capital. However, banks that are early movers, who are able to adapt technology, develop Agile operating models and partnerships, are going to win in this space, and consolidate the growth in transaction banking.
The field is getting crowded and technology-intensive. How can banks stand out?