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Transaction banks are in the eye of a perfect storm, so how many will survive?

At Deutsche Bank’s traditional Pre-SIBOS press lunch on 12 September, Satvinder Singh, Head of Institutional Cash & Securities Services described how he felt that the transaction banks are in a perfect storm as:

  • competition is increasing: more and more banks are entering the business/ramping up their efforts because they realise how critical Corporate Transaction Banking services are to developing and maintaining relations with key corporates
  • regulatory compliance is driving up costs and also bringing with it large fines for non-compliance 
  • revenues are shrinking: % rates are at record lows, and margins are decreasing due to increased competition
  • corporate clients are demanding significantly betters levels of service, more effective and efficient use of the latest technologies, and, at the same time, reduced margins and prices.

He then went on to describe how, as a global universal bank, Deutsche Bank had reacted to this tough environment by re-organising and rationalising the bank into four divisions:

  • Corporate Banking & Securities, the Group’s investment bank, offering corporate finance and sales & trading.
  • Global Transaction Banking (GTB), which houses Institutional Cash & Securities Services - headed by Singh - that offers cash management, custody and other administrative services for capital market instruments - and Cash Management Corporates & Trade Finance, headed by Michael Spiegel.
  • Private and Business Clients, which includes the Group’s retail operations and business clients
  • Asset & Wealth Management, the division that houses all of the Group’s asset and wealth management capability. 

He pointed out that, amongst global universal banks, having a major division focused on transaction banking is unique to Deutsche Bank. “This gives Deutsche Bank an advantage as it enables us to get support of long-term investors and senior management -  this focus helps delivering innovation and client centricity.”

Future of transaction banking business

Singh explained that, “To survive and prosper in this ’perfect storm’ we have ‘put the client first’. With a new structure (ICSS) we can focus our efforts and bring together the expertise and facilities across the bank to provide practical useful solutions for corporates and financial institutions. This requires long-term investment in people, leading technologies and infrastructure, and in the balance sheet, so that we can provide the solution based services and support clients need. It is only then that clients will really believe that the bank is committed and will repay this with their business.”

Profitability

In this perfect storm the profitability of transaction banking is declining dramatically. Even in the medium-term, this will have an impact, which should alarm those corporates who are demanding ever better services from their transaction banks at even lower prices. It is difficult to feel sorry for banks, but their services need to be profitable to ensure continuity of the current services and to provide monies for investment and improvement of the service.

Deutsche Bank are, like some banks, declining to cut their charges because retaining profitability is essential to be able to continue to invest in and improve their services. 

Fewer players 

Already we are seeing the results of the pressures from this ‘perfect storm’, as some banks have exited specific types of business (with more to follow), and/or have set up partnerships and other arrangements to enable them to continue to offer services. Singh believes that, in the long-term, there has to be a significant consolidation of the transaction banking business, but declined to go into detail. 


CTMfile take: This was a fascinating and important insight into how a global universal bank is surviving and prospering in the transaction banking business. It showed, yet again, how important it is for long-term suppliers, including banks, to be your partners ‘through good times and bad times’. It is just good business to look after (but not feather bedding) the economic health of all parts of your supply chain, and this includes banks. 

And it also showed that a serious rationalisation of the players in the transaction banking business, and their makeup is going to happen sooner rather than later.

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Cash & Liquidity Management
Partner Banking & ICM Solutions