The heart-soul-engine of banking from issuance to settlement, from multi-currency cash management to financing, from incidental overdrafts to billions in long-balances, from fund NAV’s to securities lending – other than a few blots, Fintech is no where to be seen in a section of banking which is crying out for automation and innovation. The blot, by the way, is the biggest media-hype – settlement via blockchain. Fintech in transaction banking is not a one-off tackle, it is not a ninety minute game either, it is disruption and innovation that has to eat the archaic processes like a termite.
There is no starting point but the end-game will have annuity revenue with with high margins if technology is to be used. A recent Deloitte report – How can Fintech facilitate fund distribution? for Association of the Luxembourg Fund Industry (ALFI) highlights and discusses the impact of technology and dramatic increase in speeds when compared to the traditional model. Fact is – Fintech is yet make a significant impact in the core institutional space where telephone, close to 20% reliance on fax (according to the report mentioned above), assessment of each legal entity to perform necessary KYC (Know-your-customer) checks, there is almost a boring slowness (or more like drunkenness) to these processes.
This post will not discuss anything that has to do with Blockchain and Settlement – the reason is – I think solving for Settlement using Blockchain is solving for the most difficult element of the system.
In the next few paragraphs, I will attempt to look at some of the verticals of the Transaction banking business. Remember, Transaction banking is back-end and middle office of a lot of processes. I will look at the front faces of the Transaction banking processes and of whatever we have seen in Fintech to-date, how Fintech can help the Transaction banking inefficiencies.
Transaction banking (Global revenue of $ 1.1 trillion, Source BCG) has a fair few functions. Cash Management and Securities Services are the broad product lines that fall under this category. In this post, I will discuss Fintech and Cash Management.
Cash management – Payments, Trade Finance, Overnight yield on idle Cash, Long-term placements are just some of the products that the cash management provider can offer. What does it mean? A corporate of any size, selling products globally, an institutional cash management bank will process the payments, manage receivables, manage forex, provide liquidity, investment vehicles, card solutions and treasury placements. Sounds familiar? Upcoming forex players can handle some parts of it, payment providers can manage some processes – the only thing missing is a stamp of a large bank that assumingly makes it all very secure. There is one clear benefit of using a financial institution, you can get all of this in one place with one bank provider. With $76 billion gone into payments-related businesses since 2010 (Source: BCG), is Fintech a bit immature?
So far, innovation and disruption in Fintech is weighted towards payments and to a degree in trade finance and forex. The volume and value that institutions garner through their clients is not yet seen with the Fintech players. Breaking away from retail and possibly low-margin space will be a game-changer for Fintech. Is it about the engine or the front-end? Lending firms are playing a dual segment role by actively engaging SMEs. There is a Fintech segment working on lending against invoices as collateral, the cash is not yet institutional but where do you get more stickiness and price advantage? Then answer is obvious, question is who will blink first – a shake of the hand in a partnership model or will we witness crazy valuations for technology purchases.
Treasury functions are under-utilised and under-valued. Fintech can drive integration by becoming a vertical engine for the corporate treasuries. The stickiness will not come from managing actual cash but by processing the activity. Once the needle is threaded Fintech can then be dam that holds it together, at this stage the transactional charging will adapt to value-based pricing.
Retail payments, Remittances, Marketplace and Direct Lending – constitute for a tad more than 50% of the Fintech firms (as shown by Venture Scanner) – is this a problem? No, not for Transactional banking. This could easily go beyond technology play and this is where we start to discuss the alternative banking space where transactions are technology and the rest is value. How many founders and investors are looking towards capturing the imagination? We are getting to the point of inflexion where treasury placements, cross currency pooling, yield on idle cash, forecasting and financing could be just driven out of these engines.
According to BCG, account and payment revenues stood at $243 billion in 2014, Trade finance about $45 billion and the rest value-add services added another $40 billion, making Treasury and Trade business worth $330 billion in revenue (Source: BCG). What is most intriguing is that as and when the lines within institutional and corporate cash management channels will start to blur with the Fintech current target segment – how will the banks react? Will we witness P2P phenomenon in the institutional or corporate space? The use of technology matching the treasury of one corporate to the possible user of funds may just eliminate the need for Balance sheet usage (something that has been discussed in the Fintech space).
Trade and Treasury businesses along with institutional cash management is not in sight of Fintech as yet. Who will move first towards technology – the Banks or the Corporates towards Fintech? The music is playing, do we need a change of track or instrument? The key message, there are parallels in the institutional space to utilise similar concepts and more importantly the use of processing power, maybe time to find more value and stickiness. Just thinking a bit ahead.
Next week, the concluding post will feature – Fintech and Securities Services.