Transaction Banking: The catalysts of growth

The lifeblood of any company is its working capital. Starting with procurement to manufacturing, stockholding, selling and finally collecting receivables, a business is as efficient as its working capital management. This is where the transaction banking team of a bank can step in to support clients.    

In my 18 years of experience in transaction banking, I have seen how properly structured and digitally enabled solutions help clients manage their daily cash, trade and working capital operations and drive their profitability. Having witnessed first-hand how an ideal transaction banking team can boost the growth of clients, I am sharing my insights here, so that corporates and banks can also benefit from my experience.

An ideal transaction banking team should comprise experts and specialists, who develop, implement, sell and manage a wide range of products and solutions, including cash management, international and domestic trade services, supply-chain finance, working capital and treasury advisory and structuring. Clients can then use these products and tools to make their overall working capital process more efficient.

The future of trade and cash management holds vast opportunities. The role of transaction banking is to leverage these opportunities. A good transaction banking team can catalyse the future growth of clients

Managing cash, payments and collection is a core activity of corporates. It often becomes cumbersome for large corporates to collect their receivables, make multiple payments and reconcile their balances at the end of each day. A good cash management team of a bank can help any business do these activities smoothly. If we look at the collections of receivables, a client may sell goods across the nation.

Wherever the distributor or wholesaler of the client is initiating a payment against the sales of the client, the expectation is that it should be reflected in the client's account on a near real time basis, because very often, a client's goods delivery is dependent on the payment by the distributor.

Another core activity for clients is paying their suppliers, tax authorities and various other government entities. The expectation here is that the banking system should be able to make payments to multiple parties at the click of a button.

There are also organisations in the microfinance industry, who may need to disburse multiple loans to various borrowers. In an efficient environment, all these payments should be initiated from the bank's online platform, or even from the client's own ERP system, through host-to-host integration. 

Finally, the clients should be able to reconcile all the payments and collections made throughout the day and get customised reconciliation reports at their chosen frequency. 

If we talk about trade, the key goal for the clients is to ensure that the process from procurement to receivables collection is fastest and most efficient. The transaction banking team can support this goal by working closely with clients to structure trade transactions and play an advisory role for them in their day-to-day international and domestic flows. An important aspect in the design of trade products is that it should ensure transparency.

We see that the general practice is to provide simple overdrafts or short- term loans to clients for the majority of their lending requirements. Usually there is no end-use monitoring of funds, no supporting documents are submitted to document the movements of goods. This gives rise to the risk of money-laundering and also increases the chance of fund diversion and non-repayment of such loans.

Trade loans, on the other hand, are backed up with proper documentation. These specific purpose loans make it easy to monitor the end-use and restrict any accommodation trading.  Being self-liquidating in nature, trade products attract lower risk weightage, making them capital allocation friendly, while keeping the bank safe from losses and ensuring higher returns.

Offering the right trade products ensures transparency in clients trade flow and improves their risk grading. Ultimately as transactions become more financially disciplined and transparent, its aides in the growth of the economy as well.

As the world strives towards meeting the sustainable development goals, transaction banking supports clients with products that recognise the sustainable practices at the client's end.

Bangladesh is a leading exporter of ready-made garments (RMG) in the world. That makes our garments industry a strategic playground for promoting sustainable cotton sourcing. At Standard Chartered, we were able to capitalise on this opportunity and executed the first-ever sustainable trade finance transaction in the country, between two of our RMG clients, thus building and deepening sustainability in the financial supply chain of the clients.

Another key driver of employment and income generation in the country is the growth of small and medium businesses. Transaction banking contributes to lifting participation of this priority sector through banking the ecosystem of the larger clients.

At Standard Chartered, we provide fully automated and collateral free loans for the distributors and suppliers of our clients. These are mostly small and medium businesses, who not only enjoy the benefits of a collateral free, low-cost funding, but also learn financial discipline, proper record keeping and reconciliation through their experience with us. 

Over the last decade, we have introduced many digital solutions to clients, who have seen the benefits of these solutions and gradually moved more towards digitalisation. We have seen a peak in the interest for digitalised services during the Covid-19 lockdown situation. Clients appreciated our readiness to serve through our online platform.

In today's scenario, clients know that in order to remain competitive, they must streamline their working capital operations to minimise turn-around times and increase cost-efficiency. It has become imperative for commercial banks in the country to develop a robust transaction banking department that can support this goal.

We are seeing fundamental shifts in technology that will reshape the finance and banking industry. Clients have an increased demand for real time commerce. Banks' operating systems must be ready to support real time transactions, and this can only be done through digital initiation. 

Application Programming Interfaces (API) are becoming a standard method of exchanging information between different applications/systems on a real time basis. While we launched the simpler host-to-host integration formats in cash management from 2010 and saw it gain immense popularity over the last decade, clients are now more inclined toward the more secure and much more customised API connectivity for transaction initiation and reconciliation.

We are witnessing fintech companies provide new services and new market platforms. Transaction banking teams should be ready to collaborate with fintech to capitalise on the innovations brought into the industry by these companies. We work with different fintech globally. Through one such partnership, we were able to transmit the first-ever Letter of Credit on blockchain in Bangladesh.

The culminating impact of these practices can bring in several accolades for the banks, as evidenced by our recent wins as country's best transaction banking service providers given by the Global Finance magazine, the Euromoney, Asiamoney polls and the Assets Awards.

The future of trade and cash management holds vast opportunities. The role of transaction banking is to leverage these opportunities. A good transaction banking team can catalyse the future growth of clients.

This team works as digital working capital optimisers for clients. Transaction banking plays the roles of deep, proactive risk managers, strategic business partners and financial technologists for their clients to ensure a thriving future and shared prosperity. 

    The author is the country head of transaction banking at Standard Chartered Bangladesh