Bank revenues from trade finance are set to decrease by 8% this year, with returns from cash management services predicted to decline even further at 12%. However, a relatively rapid rebound in transaction banking revenues is expected in 2021, finds a new report.

The report titled Banking after Covid-19 by data analytics provider Greenwich Associates, finds that over the past decade, banking revenue from global transaction services grew 2% (CAGR), reaching around US$400bn last year. This year, however, revenues from transaction banking are expected to decline by 6% compared to 2019.

“The transaction banking industry has been in steady growth mode for the better part of a decade. In 2020, the global pandemic has brought that to a screeching halt,” reads the report.

When it comes to global trade revenues, the 8% decline is both good and bad news, reveals the report. Despite the pandemic causing a huge disruption to the global trading system and banks’ trade finance activities – the World Trade Organization forecasts a drop in global trade volumes of up to 32% this year – “the bottom didn’t fall out of the business entirely”.

“The bad news – from a broader economic perspective, at least – is that the worldwide disruption of supply chains was the main factor offsetting the underperformance in traditional trade finance, fuelling an increase in corporate demand for supply chain finance.”

As reported by GTR earlier this month, proprietary data from HSBC found that there was an uptick in the number of supply chain finance (SCF) transactions in Asia in June, particularly across Thailand, Vietnam and Indonesia. This demand for SCF has played out across the globe. San Francisco-based SCF provider Taulia, for one, told GTR earlier this year that early payment volumes across its platform increased by more than 200% month-on-month in March.


Core product rethink

In the short term, the report from Greenwich Associates predicts a relatively rapid bounce back in revenue from cash management, estimating a 6% increase in 2021 from 2020 levels. Meanwhile in trade, it forecasts that the situation will start returning to normal next year. But the report adds that as corporates reposition themselves, SCF will continue to outpace traditional trade finance as a driver of revenue.

Amid the pandemic, banks and governments were forced to roll out financial support measures in order to stave off a deeper economic crisis, in the form of ultra-low interest rates and debt moratoriums. Even if an effective Covid-19 vaccine is made and distributed and the global economy begins to recover quickly, the fiscal and monetary policies imposed during the crisis will take years to loosen, says the report.

It points to the need for financial institutions to rethink the economics of their core products. “Eventually, banks will have to hit the reset button on business practices created for a ‘normal’ interest rate environment, even if that comes as a shock to clients. Case in point: cash management. In many or even most cases today, banks have been providing waivers on fees, expecting to earn on liquidity.”


Banks “cannot go it alone”

Before the pandemic took hold, financial institutions’ margins were already under pressure and at risk for several other reasons: regulatory pressure, climate change, and a major technological shift saw banks need to increase their investments and step up their digitalisation efforts.

When it comes to digitalisation, banks have been gradually adopting digital tools in trade, such as e-signatures, completing transactions on blockchain networks, and streamlining compliance procedures. The pandemic kicked this into high gear. “Banks will no longer have the option of going slow or waiting to see how big tech investments play out for rivals,” says the report.

“For many years, the Holy Grail for banks was the goal of capturing the entire ‘ecosystem’ of their clients, meaning that a bank would provide all the services needed by a company.” This, the report says, has been “fractured” by innovation and the proliferation of new players.

In trade, several blockchain consortia have emerged over recent years, aiming to digitise processes in supply chain and trade finance. Banks have joined as members and shareholders, working alongside fintech companies. Moving forward, the report suggests that this will be key as banks “cannot go it alone”.

Blockchain trade finance network Contour, which focuses on digitising letters of credit (LCs), is backed by major global trade banks such as Standard Chartered and HSBC, for example. Elsewhere, the Marco Polo project for open account trade finance has rapidly expanded its number of bank members since its launch in 2017.