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A new landscape: How technological innovation is transforming transaction banking

By Daniel Verbruggen, Head of Relationship Management Europe, and MEA & CIS respectively, Treasury Services, BNY Mellon.

Bana Akkad Azhari, Head of Relationship Management Europe, and MEA & CIS respectively, Treasury Services, BNY Mellon.

Transaction banking is undergoing significant change. While a combination of factors is responsible– including new regulatory requirements, globalisation and evolving client demands – it is technology that is really driving the transformation. For example, the growth of digital solutions across finance is contributing to evolving consumer expectations, while PSD2 regulations have been introduced in response to the growth of fintech.

This new landscape is challenging banks, which must adapt to manage an increasingly technology-focused environment. Yet,importantly, technology is introducing a multitude of opportunities, enabling banks to leverage this shifting industry and its capabilities to optimise their transaction services.

Transaction banking needed change

Bana Akkad Azhari
Bana Akkad Azhari

Transaction banking stands to benefit considerably from innovative, digital enhancements.Trade processes, for instance, are often plagued by time and cost inefficiencies, with manual, paper-based tasks increasing labour costs and decelerating cash flow.Meanwhile, administrative, documentation tasks – required for trade services – can prevent staff from concentrating on more strategic priorities, thus further driving down efficiency.

Payment processes – particularly those involving international payments – are also subject to inefficiencies. The outdated back-end systems and procedures involved can result in slow and expensive transactions, with the tracking and transparency procedures required for cross-border operations further increasing banking costs and processing times.

Innovation is enhancing processes

Certainly, transaction banking is an environment ripe for reform, with technology providing the catalyst. A number of initiatives – including SWIFT’s global payment innovation (gpi) initiative, artificial intelligence (AI), application programming interfaces (APIs) and blockchain technology– are being explored by banks to help transform payments and trade.

SWIFT gpi, for example,aims to enhance transaction banking by delivering improved speed, efficiency and transparency to international payments.The first phase of gpi is already live and delivering tangible benefits: over 180 banks are now members[i] and the majority of the approximately US$100 billion worth of SWIFT gpi messages sent in the daily flow of transactions are being credited within 24 hours[ii]. Gpi is also improving payment visibility through its Tracker. Unique tracking codes enable visibility of the lifecycle of a payment, allowing them to be traced with ease. Such visibility can reduce tracking operational costs for banks by up to 50%[iii].

AI is also being leveraged by banks. BNY Mellon, for example, is utilising AI robots to automate certain straightforward, manual procedures, and is experiencing significant improvement in processing times as a result. One branch of AI – known as “machine learning” – has the potential for higher value applications. Machine learning is the ability for applications to use datasets to learn how to identify patterns and trends – and then apply this knowledge to “think” in a logical way.Applying the full capabilities of machine learning is still some way away, but its practical applications could include supporting fraud detection, and enabling algorithmic trading – AI systems that make extremely fast trading decisions.

Elsewhere, APIs can be harnessed to enrich the payment and trade space. APIs permit streamlined communication between various software components and can be particularly valuable in creating digital ecosystems that are accessible by clients.

Blockchain technology could also deliver value-added payment solutions. Blockchainis a digitalised, decentralised ledger that is inviolable and transparent, and it could potentially be used to streamline payments between people operating under different levels of regulation and security; which has the overall effect of speeding-up the entire transaction. Similarly, trade services often involve ecosystems of external partners, with each independent participant further decelerating the process. As blockchains facilitate transactions under one system, ongoing developments aim to also support faster trade operations.

Leveraging the digital space

Daniel Verbruggen
Daniel Verbruggen

The innovations touched upon are just some of those that could enhance payments and trade. But how can banks ensure they leverage these new capabilities in order to optimise their transaction services?

At the heart of any banking strategy should be client value. The first step should therefore be to determine which initiatives will enhance the experience of the client. Every region is different, so banks must consult their client base to develop deep insights that determine which clients will benefit from each initiative.

If banks believe the developments will enhance their clients’ experience, it is then a case of prioritisation. With new fintechs continually entering the market – and one in four failing[iv]– banks should be prudent when investing in technology, looking at what will add value to client relationships in both the short and the long term.

A collaborative approach

Of course,leveraging the digital space is rarely simple. For smaller – perhaps local banks – investing in cutting-edge technology can pose a significant challenge. Technologies can change rapidly, picking winners in this environment can becomplex.

It is here that a collaborative approach can provide a solution. Non-compete alliances between local and global banks combine the capabilities and skillsets of both parties – local banks gain access to the technology solutions needed to enhance their services while global banks gain access to unrivalled, country specific insights and expertise from local banks. Corporate clients can therefore benefit from an experience fuelled by the strengths of both parties.

Yet, collaboration does not need to stop there. The new landscape is also generating opportunities for partnership that extend to fintechs. A bank-fintech alliance is equally valuable. Participation not only gives banks access to technology services, but also allows fintechs to benefit from the extended reach of banks.

Technological innovation is transforming transaction banking. Technology solutions can deliver enhanced capabilities, transforming payments and trade. And by collaborating, banks of all sizes and reach can access these enhanced services, delivering a new, value-added experience to clients.

 The views expressed herein are those of the authors only and may not reflect the views of BNY Mellon. This does not constitute treasury services advice, or any other business or legal advice, and it should not be relied upon as such.