Forging a path to the future of transaction banking in Asian Business

With increased competition, thinning margins and volatile earnings in other businesses such as investment banking, transaction banking has made a return to the spotlight. These bread and butter transaction services – providing trade finance, managing cash and facilitating payments – hold promise for a steadier source of business for the banks with relatively attractive capital efficiency. Deutsche Bank, for example, has recently announced its ambition to increase share of revenue from retail banking, asset management and transaction banking to 65 percent by 2021. Indeed, revenues from global transaction banking rose 4 percent year-on-year to US$13.8 billion in the first half of 2017. Some large global banks including Standard Chartered even reported double-digit revenue growth during the same period.

Asia presents immense opportunities for growth in transaction banking business, fuelled by the region’s burgeoning economies, growing maturity of intra-regional trade and increasing e-commerce flows. Corporates looking to do business in the region will need support in managing their complex liquidity risks involving multiple currencies and business locations. Close attention will also be paid to trade financing and conducting safe transactions in real time without compromising on convenience and affordability.

A recent study suggests that emerging Asia in particular holds tremendous potential, leading the global corporate banking growth with a CAGR of 12 percent from 2009 to 2016, compared with 10 percent in Latin America and 9 percent in Eastern Europe, Middle East and Africa as a whole. Recognising this opportunity for example, Mizuho opened its global transaction banking headquarters in Singapore in 2016, the first time it has located the head office of a business line outside Japan and doubled its headcount in the past few years.

Competition intensifies in Asian transaction banking market

However, amid concerns over greater restrictions imposed by regulators and shifting customer expectations as they become increasingly sophisticated, not to mention disruption from fintech innovation especially in the payments space, transaction banks need to rethink their role in this business. As a cradle of innovation, the competitive landscape of the Asian market is rapidly evolving. Some innovations in the region are primarily driven by government, such as in the case of the Unified Payments Interface (UPI) in India and the FinTech Regulatory Sandbox initiative in Singapore, while others are propelled by the private sector such as Alipay in China.

Latest research from East and Partners (East) reveals that while the big three banks in the region – Standard Chartered, HSBC and Citigroup – continue to be Asia’s transaction banking powerhouses holding over half of all primary relationships between them with large corporates, financial institutions (FIs) that have traditionally focused more on investment banking including Deutsche Bank and JPMorgan are giving them a run for their money. Aggregate primary transaction banking market share of these international banks excluding the big three has increased by 11 percent from a decade ago to 20.7 percent.

By comparison, cumulative market share for local and regional banks fell marginally from 27.0 percent in 2008 to 26.5 percent. Importantly, Bank of China is making steady inroads into the Asian transaction banking market, recording a CAGR of 4.6 percent in the last decade, albeit from a low base. The Bank successfully broke into the top five in the second half of 2013 and has maintained its position since then.

Adding value to your customer relationships

Banks that wish to stay ahead of the game must seek ways to add value to their customer relationships. Many FIs have focused on delivering a seamless customer experience across all channels with better user interfaces. In order to elevate customer engagement beyond traditional transaction banking, FIs will also want to provide customised product offerings and advisory services. In fact, having a solid understanding of a customer’s business and industry are key to successful transaction banking relationships. According to research by East, banks that are positioned to demonstrate knowledge and understanding of these critical areas will be talking to over 45 percent of the large corporates in Asia.

With respect to engagement touchpoints, corporates in the region show a clear preference for direct face-to-face interaction as opposed to indirect means. Whilst more than half prefer to liaise with multiple service individuals that are equipped with specific expertise for their day-to-day servicing, 60 percent want their relationship managers to act as a single point of contact when it comes to escalating issues. This further highlights the value clients place on their relationship bank’s expertise and tailored solutions, rather than cookie cutter approaches.

Opportunities with Chinese corporates going global

For FIs looking to seize opportunities from the Belt and Road Initiative (BRI), the “going out” Chinese corporate is a particularly attractive segment. In May 2017, a vice-minister of the National Development and Reform Commission said the Chinese outbound investment is projected to reach US$600 billion to US$800 billion in total over the next five years, and a fairly large proportion of this flow will go into BRI-related markets. East’s research shows that more than half of Chinese corporates plan to seek guidance from banks to support their BRI projects, much higher than the global average of 37 percent.

These Chinese corporates, more so than their counterparts in the rest of the world, want their banks to share information on new developments regarding BRI alongside expert advice on managing the risks as well as opportunities involved. They want to see real world information on how their banks can provide product solutions and network support. The latter demand in particular plays to the strength of large international banks with broad global networks. Not surprisingly, the top three financial solutions requested by outbound Mainland China corporates are trade finance, foreign exchange/ hedging solutions, and cross border cash management solutions. Banks’ success in reaping the full benefits of BRI will hinge on how they navigate issues relating to tax, credit analysis, financial planning and compliance for their corporates.