Wholesale banking? Transaction banking? How they are related to cross-border payments

What is wholesale banking? What is transaction banking? How are wholesale banking and transaction banking related to cross-border payments.

Intro

I am passionate about cross-border payments. As a fintech nerd and working on international trade with SMEs, I know that cross-border payments is a space that we will soon see disruption. This is another primer for my cross-border payment and B2B payment discussion.

Wholesale banking

The area in wholesale banking that’s related to cross-border payments is wholesale payments. But doesn’t hurt to know more of the basics.

What is wholesale banking?

To put simply, wholesale banking is regular banking, but done at much larger scale.

Its termed “wholesale” because the services are typically reserved for very large scale. Hence, the price of these services are typically cheaper than the price offered to the individuals.

Typically reserved for government agencies, pension funds, institutional banks, and or very large corporations.

Though some place has a stricter definition as it refers wholesale banking exclusively to banking transaction between 2 banks, or between a bank and other types of FI (broker-dealer, money services business).

What are services provided by wholesale banking?

The major function of wholesale banking is lending and borrowing (liquidity) between 2 large institutions

Primary:

  1. Lending: provide loans or advances of high value to large scale business entities
  2. Deposits: receive deposits from big companies and provides high interest
  3. Credit creation: when dealing with the government, wholesale banking can increase flow of funds by borrowing from the government by selling loans on its book

Secondary:

  1. Underwriting: raises capital for projects of large business by issuing debt to investors
  2. M&A: wholesale banking participate in M&A through operations like currency conversion for international M&A
  3. Fund management: manage funds deposited by clients

Note that fund management is the area within wholesale banking that deals with cross-border money movement. The fund management or also called treasury management would typically offer the following financial services:

  1. Liquidity management across different countries
  2. International trade finance
  3. International Payments, also known as wholesale payments

Transaction Banking

What is transaction banking?

Services provided by the bank to corporate customers in their trade or day-to-day transactions. Mostly targets treasury function of the corporate. Focused on liquidity and payments for corporate, and integrates with ERP, treasury management services, and procurement software.

Transaction banking can be divided into 3 major categories:

  1. Trade finance
  2. Cash management
  3. Escrow services

Trade finance:

Mostly applies to international trade finance. provide financing for trade. For buyers, there is typically at least 1 to 3 month time from when products are purchased to the when products are sold. Trade finance allows buyers to access capital for daily operation, marketing or other needs during this gap. In the same token, suppliers may not get paid until products are delivered. Trade finance will provide suppliers access to capital during this gap.

Cash management:

A set of financial solution that help business manage their cash. A broad term comprises solution for: billing, payments, liquidity, electronic banking, risk mitigation, and working capital.

  • Working capital: Mostly categorized under cash management. Solution designed to address business needs’ to manage their liquidity and circulating capital in the short term.
  • Payment: include domestic and cross-border payments

Securities Services

Services for customers that issue, sell, or manage financial assets. Provide depository, custodian, settlement and clearing, and other related services.

Wholesale banking and transaction banking in cross-border payments

As can be seen above, the fund management services within wholesale banking is very similar to services in transaction banking. In essence, both are serving the B2B payments needs for their clients, including international B2B payments.

My initial intent was to understand the landscape before I deep dive on cross-border payments. But here are a few thoughts after going through wholesale and transaction banking, which are services reserved for the largest clients:

  1. There is international payment demand in the SME sector as cross-border commerce is not exclusively for the largest companies. For example, most of the Amazon sellers get their supply from China. This has created creates opportunities for fintech companies like Payoneer and Airwallex, but we are just started in the revolution of cross-border B2B payments for SMEs.
  2. On the larger scale side, I can see why solution like Visa B2B connect will target the wholesale payments or transaction banking area of their financial institution clients.

passion for #fintech #payments #RTP real time payment #Banking as a Service #digital strategy #blockchain