Modernizing Transaction Banking (A FinTech Survey)

Modernizing Transaction Banking (A FinTech Survey)

Regulatory burdens, disruptive technologies, changing customer expectations, and innovative competitors are all signalling that the banks need to catch up.

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The turbulence in the financial sector connected to regulatory burdens, disruptive technologies, changing customer expectations, and innovative competitors are all signalling that the banks need to adapt.

According to a recent analysis carried out by consultancy company Deloitte, service externalization and the right mix of technology can help banks retain transaction banking profits, while keeping customers happy.

Service Externalization in Transaction Banking

Transaction banking has long been a source of revenues for traditional banks. However, the changing customer expectations, the regulatory updates, as well as the new technologies and competitors have made it mandatory for banks to consider modernizing their business models.

As the analysis suggested, “banks should seize a new opportunity to rethink how work is done and empower clients to gain more control of service delivery.” Deloitte called this new model “service externalization.” Also, the analysis lists four components of service externalization:

  • A digital front end designed for maximum user-friendliness and efficacy
  • A core infrastructure built for agility and resilience
  • Cognitive technologies for intelligent automation and scalability
  • APIs (application programming interfaces) to expand banks’ strong connections with the ecosystem

These four components often work best when applied together. For instance, a digital front end needs cognitive technologies to meet the needs of customers; it should connect with APIs to customers, counterparties, and vendors for speed and responsiveness; and it typically needs a robust backend to support these technologies and the performance that customers demand, as Deloitte`s research stated.

They added that this modernized transaction banking infrastructure could lead to better customer satisfaction, as well as competitive advantage.

“And since customers will likely own many processes that banks currently do internally, banks’ costs and risks may fall.“, as the analysis explained.

Service Externalization in action in payment processing

International banks are processing payment files and often find it time-consuming and costly to do that. Giving an example with a particular international bank, Deloitte`s study pointed out that on a typical day the bank received hundreds of payment instructions from clients, usually in random fashion. Then, they were reviewed, mostly manually, and entered into the bank`s processing platform. As a result, error identification was often delayed, and whenever the data for a client had errors, the bank usually had to manually intervene and stop the process for all batches for all clients, as Deloitte elaborated.

“The overall result was high costs, frequent delays, and a broken user experience.“, as the analysis concluded.

Nevertheless, the bank implemented service externalization. After doing so, the bank`s clients became more engaged in the service delivery process, resulting in lower costs and clients who receive faster and more streamlined, and personalized service. In particular, Deloitte provides an overview of the improvements in the delivery process:

  • Clients upload payment files through an API into the bank’s platform through a portal, enabling the client to review transactions in real time.
  • Cognitive technologies instantly check for errors, notify the client, and offer options for resolution—all through APIs.
  • The client chooses from among the resolution options, issues instructions through an API, and owns the choices.
  • The front end provides clients with the data and cognitive-technology-powered tools to perform reconciliation.
  • When reconciliation is complete, the client receives a customized report, which cognitive technologies help produce using historical patterns and templates.The entire process is usually complete within minutes.

Blockchain in trade finance

Blockchain technology has been pointed out as an alternative that could manage transactions with an immutable audit trail.

The report gives an example with The Digital Trade Chain (DTC) initiative, a collaborative venture undertaken by seven European banks that launched it in January 2017, with the goal to digitize the trade finance process for small and medium-sized enterprises (SME).

“DTC uses blockchain to record a trade finance transaction, eliminating the need for paper-based documentation.”, as written in the analysis.

“With each bank bringing its pool of SME clients, who have already gone through KYC documentation and AML checks, the collaboration aids in building ‘trust’ between counterparties, thus addressing one of the most important challenges for SMEs when transacting across borders”, Deloitte added in their research.

As part of the project, a DTC app is planned to launch for late 2017. It will mitigate risk and expand trade, whereas benefiting fom blockchain technology.

“And blockchain, combined with other technologies such as the Internet of Things and GPS, could help verify how goods match contractual requirements”, as Deloitte`s analysis claimed.

To wrap it up, Deloitte suggested that service externalization would require investments and a new way of thinking. Still, it might be beneficial for banks to look into the possibilities of applying it to their businesses. It can help them advance in a highly competitive sector, where the most innovative financial companies and organizations are leading the race.

The full analysis is available here.