Transaction banking – opportunity abounds but so does competition

Yesterday, BCG published its annual report on the payments industry, Global Payments 2013: Getting Business Models and Execution Right, which can be accessed here

It paints a mixed picture for the industry.

On the way hand, transaction banking is one area of the banking industry that is experiencing strong growth (for a comprehensive breakdown of payments volumes by type and region, see Capgemini’s world payments report – Buoyed by structural drivers such as the increasing levels of banking inclusion and the growth in electronic payments, BCG estaimates that transaction  banking revenues will grow at a CAGR of 8% through to 2022 – albeit with a strong divergence between emerging markets (12% CAGR) and mature markets (5% CAGR).

On the other, however, there are multiple margin pressures facing in the industry coming especially in the form of new regulation, such as SEPA, and increased competition from other banks and non- banks alike (see, for example, the announcement today about PayPal moving into corporate banking –

As a consequence, while revenues are growing, fees per transaction are falling. In addition, the industry as a whole is failing to extract economies of scale: a 2012 BCG report ( found that between 2007 and 2011 operating costs rose as fast as payments volumes (both at 24%), meaning that margin expansion was negligible. So, for most players, investment in transaction banking is failing to yield the hoped-for boost to profitability.

But, for those banks that do get it right, the rewards are great. BCG refers to these banks as “Transaction-banking champions” and they display higher margins than peers (enjoying higher volumes as well as higher pricing) and also lower funding costs (thanks to attracting large, sticky deposits).

Becoming and remaining a transaction-banking champion requires that banks develop deep relationships with their customers; that they successfully marry the twin and often conflicting objectives of driving scale economies and giving high-touch, personalised service; and that they innovate and hold off the competition and risk of disintermediation posed by non-bank competitors.

Central, therefore, to becoming and remaining a transaction-banking champion is technology. For a discussion of the different technology options open to aspirational transaction banks, see Amanda Gilmour’s Making payments pay; building a winning business case –