Billions of transactions are made around the world everyday. Transaction banking may be the process of transferring from one place to another, but transaction banking is critical to any business in Singapore – and around the world.
Therefore every bank is involved in transaction banking. Transaction banking isn’t just about moving cash but also entails that security requirements that come with it.
To ensure that processes are as streamlined as possible despite its complexity, banks often have large teams of professionals dedicated to helping clients with their transactions.
Transaction banking: Talk of the town
Once a hardly talked-about area, transaction banking has been termed the "new sexy" in recent times. Before the global financial crisis of 2008, transaction banking had yet to pick up popularity amidst those in the know.
Today, it has quietly become the talk of the town. It has gained popularity because of its ability to stay afloat and generate revenue during difficult times.
While transaction banking has become an area of focus for many banks, how exactly does it compare with its more glamorous siblings - Investment banking and sales and trading?
The straightforward nature of this business forms the basis for a picture of stability and reliability many often associate it with.
While the Dodd Frank Act annihilated the proprietary trading function within all major banks, thus diminishing the volatility and potential gains of the sales and trading divisions, all major functions within the transaction banking division gained a stronger footing.
Trade finance and cash management products - once deemed necessary tools for corporations to execute their daily business smoothly, are now even more significant.
The stability of transaction banking
As investors exercise more caution against an unstable economic backdrop, we have witnessed a surge in the amount of bank guarantees and letters of credit being issued.
Rather than betting against the market, we see more regular flows of non-speculative deposits and foreign exchange taking place.
This seems to liken transaction banking to US treasuries, a must-have amidst a better economic climate and a safe haven investors turn to during a downturn for its low risk and low returns.
This is in comparison to buying into equities or structured notes – products that generate a higher return but accompanied with a potential huge downside, like failed products from certain banks.
The safety of transaction banking is why this division can boast of year on year returns while other areas have struggled in recent years.
Still a small area for most banks
However, one might be surprised to realise that the transaction banking division still accounts for less than 20 per cent of the profits generated from most banks’ sales and trading or investment banking divisions. One can imagine how this ratio used to be, or would be, when the economy starts to pick up.
In an industry where one’s remuneration and key performance index are pegged to the bottom line, the transaction banking division still remains as a less attractive option for fresh graduates.
Likewise, from the bank’s perspective, it can promise stable, but hardly stratospheric returns. Ironically, to accelerate these returns, banks are introducing more complex products into the transaction banking fold, contrary to the plain vanilla nature of its products.
Nevertheless, the steady growth of this division has caught the attention of the finance industry. Transaction banking, often termed as the "bread and butter" of banking, is displaying the resilience the industry expects of it.
Slowly, but surely, the tide is shifting. As the banking sector continues to shrink globally, we can expect the business to go back to basics.
While investors choose to hold on to what is certain and banks vying for a larger share of this pie, transaction banking looks certain to be one of the few bright lights of banking in the near future.
The views expressed in this column are the author's own and do not necessarily reflect this publication's view, and this article is not edited by Asian Banking & Finance. The author was not remunerated for this article.
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Christina Ng is Associate Director of the Banking & Financial Services division at Robert Walters Singapore. Robert Walters is an award-winning business and one of the leading international recruitment consultancies