Transaction banks have had to adjust to a new normal in recent years, including adapting to higher for longer interest rates. Yet the overall 2025 economic picture is relatively positive: inflation has reacted little to tariffs, consumption and earnings are strong, credit spreads are tight, and equity markets remain buoyant despite global tensions. 

BAFT and TTP hosted a roundtable following the BAFT Global Councils Forum on September 27 in Frankfurt to discuss the state of play for transaction banks globally. 

The discussion started by examining whether the banks’ balance sheet strategy had changed in the new environment. Many highlighted an increased focus on managing and conserving risk-weighted assets (RWAs), as required under the Basel framework. 

“While banks [in my region] want to accelerate growth, the challenge we face is that a large amount of RWAs are stuck with longstanding guarantees that remain on our books,” said one contributor. “The policies are quite rigid because we are servicing government entities, which stops us from releasing liquidity.”

“Regulatory capital, in particular, is crucially important for banks to manage,” added another. “Banks are also keeping a close eye on return on capital employed (ROCE). The discussion isn’t just about managing RWAs, but reducing the denominator and increasing the numerator in the ROCE equation. But we are all living in an environment where spreads are tight, so there’s not much flexibility to improve profitability.”

While just charging more for transaction services isn’t a realistic option, some are looking at addressing the RWA challenge through credit enhancement structures, such as synthetic securitisation and collateralised loan obligations. Many agreed that trade as an asset is a structure that lends itself to RWA optimisation measures.

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Optimising liquidity

Roundtable members agreed that the convergence of trade and cash is an emerging trend. “Despite talking about it for the past 15 years, I think it’s actually going to happen,” said one participant. “We’re looking at trade plus cash and how trade finance can assist cross-selling, attracting operating accounts and liquidity deposits.”

Participants underlined the importance of optimising liquidity. One pointed out how payments is a source, as well as a use, of liquidity. This was put into the context of various countries’ moves to modernise their high and low value payments rails, as well as roll out real-time payments. 

“We’re looking at the new payment rails emerging, but also the advance of everything related to real time and instant payments, which necessitates 24/7 liquidity management,” said a contributor.

Banks need to be able to choose the most efficient route, lowest cost, fastest, etc, to make payments, as well as help them preserve and optimise liquidity. “This would lead to a leaner balance sheet, and help avoid having to park liquidity in fragmented pockets,” they added. 

Profitability concerns

The severe margin compression facing transaction banks, which limits revenue growth, is a common concern, as is the disruption in payments driven by fintechs. Banks are grappling with ways to protect margins and drive profitability. 

Yet many regional players are reportedly moving into the transaction banking business, including trade finance. The growing competition has put pressure on the pricing side of trade finance, with a lot of money chasing fewer assets. “We’re losing deals in ways that doesn’t make sense,” said one participant. 

When thinking about growth, banks have to look at both sides of the balance sheet: assets and liabilities. “It’s almost a perfect storm – you’ve got pressure on the liability side and on the asset side,” said another contributor.

Despite the headwinds facing the transaction banking business, growth targets are rising year on year. This means that the revenue being lost on interest rates has to be found elsewhere, either by growing deposits or assets. 

One participant reported growing the trade asset side by cross-selling cash and foreign exchange. They are also moving up the value chain by looking at the value add, more structured trade where the returns are better.

“In terms of traditional trade, we are able to gain a slightly better return in more niche markets where not everyone can operate and the risk profile is different. That is where we are able to generate margin on the trade side,” they explained. 

On the payments side, they have been able to grow their volumes and underlying deposits. However, it’s now becoming a bigger challenge due to the uncertainty around rate movements.

Some banks are also looking at targeting customers outside their historic range. “We’re not going after just any customer, but those with more cross-border flows or who are expanding,” reported a participant.

There appears to be greater focus on driving primary banking relationships and growing wallet share. 

“Facilitating payments is fine, but you want to ensure the deposits come too – in particular operational deposits, such as salaries and supplier payments – because they’re stickier,” said a contributor. 

Changing business model

Transaction banking is going through a technology transformation, which is driving a historic shift in the correspondent banking model, according to a participant. For example, stablecoins may facilitate a wholesale shift to tokenisation. 

“What used to be called global transaction banking is now being called GTX, where X is an unknown factor,” according to one participant. “While it used to take three or four days for money to change hands, now it will be instant with tokenisation. We’re looking at shorter turnarounds and higher turnover.” 

Many agreed that collaborating with fintechs has the potential to drive revenue. “We have to be the partner to do the FX, ensure that cross-border trade, cross-currency payments are happening on a regular basis. But fintechs can make one leg of the transaction faster, which will help increase our liquidity,” said a contributor.

“To make a quantum leap to the liquidity services of the future, we’re making investments now with a different view from what transaction banks were investing in 10 years ago. How the big banks set up their liquidity business before is different from how banks are doing it today – we’re investing in partnerships,” agreed another. 

Key takeaways

• Credit enhancement structures are being used to address the RWA challenge
• The convergence of trade and cash: trade finance can attract liquidity deposits
• Severe margin compression, fintech disruption and increased competition in trade finance is creating a perfect storm
• Digital transformation is driving a historic shift in the correspondent banking model
• Collaborating with fintechs has the potential to increase revenues