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Transaction Banking Dynamics

February 22, 2014 | IRIS

The growing interest in India as a banking market is inspiring a bunch of M&A deals and increased fund allocation by global players. Factors such as an expected surge of infrastructure investment, regulatory changes, increasing sophistication of products and solutions are playing their part in this growth story.

According to industry reports, India’s banking sector is currently valued at Rs 81 trillion (USD 1.31 trillion). It has the potential to become the fifth largest banking industry in the world by 2020 and the third largest by 2025, according to an industry report. The face of Indian banking has changed over the years. Banks are now reaching out to the masses with technology to facilitate greater ease of communication, and transactions are carried out through the Internet and mobile devices.

The transaction banking services industry is continually changing, as are the needs of treasury departments. Commercial banking in India is poised for a sharp growth riding on increased focus of infrastructure; MNC’s expanding operations in India and of course Indian corporate winging out to global shores. This will lead to greater focus on standardization, personalization, centralization and automation. India has always been at the centre stage of the Asia-Pacific cash management and the transaction volumes processed by banks (local as well as foreign) are a testimony to it. Being a regulated economy, the constraints put in by various statutes leads to banks coming out with varied transaction banking products and services to meet the growing needs of the corporate; whose needs are no different from any other corporate functioning across the globe.

Traditionally, having a paper-based clearing system involving not only high processing cost but security risk, cash management in India has certainly undergone a paradigm change. From a product-centric approach, the focus for almost all banks today has shifted emphatically to the customer. And success is all about bringing the maximum possible delivery channels to the prospect's doorstep. The Reserve Bank of India (RBI) has placed an emphasis on upgrading technological infrastructure; electronic banking, cheque imaging, enterprise resource planning (ERP), real time gross settlement (RTGS) are just few of the new initiatives. Growing trade volumes has necessitated the need for a more sophisticated payments infrastructure. The growing focus on automation, cutting down of float cycle and financial inclusion has led to creation of innovative offerings such as Interbank Mobile Payment Service (IMPS), National Automated clearing house (NACH- operated by National Payments Corporation of India (NPCI), Cheque Truncation system, adopting ISO20022 payment messaging standards, Aadhar Payment services and not to mention its innovative unique identity verification scheme (To empower residents of India with a unique identity and a digital platform to authenticate anytime, anywhere)  - means that India now has the robust platforms it needs for sustained growth and on-boarding a large nation onto one, consistent and highly advanced financial system. 

Despite having the greatest diversity in language, culture, and hence, business practices in the world, India provides a wide array of opportunities to the banks to have transformational growth outside their traditional strongholds. Transaction banking revenues in India account for close to 30% of total banking revenues, though as a global business it has largely remained under-leveraged despite being one of the most resilient businesses during financial crisis. Despite shrinking margins, significant revenue growth of approximately 170% or a compounded annual growth rate of roughly 11% is expected from 2011 to 2021 (Source: BCG, Transaction Banking advantage, 2012). With right focus, proper positioning and alignment with customer preferences, we believe that transaction banking will continue to deliver value and be a front runner for being the shining and guiding star for banks.