What is Transaction Banking?
Transaction banking (also known as Transactional banking) can be defined as the banking services that has a significant role to play in the functioning of a corporate or a banking institution by enabling the safe flow of money from one country to another (also known as cross-border payment transactions), trade financial deals, mitigation of risks, cash flow management services, and even offering security services for improving relationships between banking institutions, clients and partners.
Roles of Transaction Banking
Transaction banking has gained a lot of significance in recent times, and it will continue to do so in the coming time too. The most important function is it offers treasury solutions and allows a safer, secured, and effective flow of cash and financial securities across the international financial system.
TB helps in the facilitation of trade financeTrade FinanceTrade Finance is the funding of trade transactions (both domestic and international). It is conducted in the presence of both buyer and seller and can be facilitated with the help of various intermediaries like banking and financial institutions.read more deals and offers services pertaining to cash flow management and securities for not just public entities but private too. The roles are provided and discussed in details as follows-
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#1 – Cash Management
It assists companies in identifying the best possible way through which they can manage their cash inflows and outflows and provides appropriate solutions to the problems that come their way while managing the cash flows.
#2 – International Trade
Transaction banking works nationally as well as globally and makes sure that all the international statutory requirements are followed and fulfilled by the parties to a transaction during the execution of international trade.
#3 – Security Services
It offers security services in order to improve relationships between banking corporations, clients, and partners. This type of banking values the protection of financial assets in any businessFinancial Assets In Any BusinessFinancial assets are investment assets whose value derives from a contractual claim on what they represent. These are liquid assets because the economic resources or ownership can be converted into a valuable asset such as cash.read more transaction and ensures that the same is abided by the parties to the transaction.
What Transaction Bankers do?
Transaction bankers in TB will need to work in areas like cash managementCash ManagementCash Management refers to the appropriate collection, handling, & disbursement of cash for ensuring financial stability & avoiding insolvency risk. read more, securities, and international trade. However, the bankers might also need to specialize in other segments of banking as well. It needs to conduct/ attend or both business meetings with business clients, team liaison, attend company meetings, development meetings, discuss new projects or products, overview documents, and so on.
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Example
Transactional banking services include liquidity, payment, as well as commercial trade finance deals. Companies, government institutions, financial institutionsFinancial InstitutionsFinancial institutions refer to those organizations which provide business services and products related to financial or monetary transactions to their clients. Some of these are banks, NBFCs, investment companies, brokerage firms, insurance companies and trust corporations. read more, public entities, corporate and commercial entities, MNCs, or multinational entities are the types of clients in transaction banking. Corporate clients make use of transactional banking services for supporting their business operationsBusiness OperationsBusiness operations refer to all those activities that the employees undertake within an organizational setup daily to produce goods and services for accomplishing the company's goals like profit generation.read more like management of cash inflows and cash outflows.
Services of Transaction Banking
Following are the typical services offered by such banking institutes-
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- Cash Management Services: It offers cash management services to entities that are looking for appropriate solutions and guidance concerning effective management of their cash inflows and cash outflows.
- Online Services: Transaction banking services provide online services to corporate, institutions, and small-medium enterprises by providing them a single point of access pertaining to cash, trade as well as securities services, which help them in streamlining their workflow processes.
- Trade Finance Deals: The services offer a huge range of global trade finance deals that includes both import and export services, buyer and seller financingSeller FinancingSeller financing is an agreement between the buyer and seller of the real estate in which the seller manages the mortgage process and provides a loan; the buyer makes an initial down payment of the principal amount and pays the remaining amount through monthly payments with interest.read more, management of open account receivables, and so on.
- Securities Services: It offers security services for enhancing relationships between banks, clients, and partners.
Transaction Banking vs. Corporate Banking
Transaction banking can be referred to as trade financing and cash management services that are offered to companies, government institutions, financial institutions, public entities, corporate and commercial entities, and MNCs or multinational entities. It can be regarded as a segment of corporate banking.
This is why transaction banking, in comparison to corporate banking, can be stated as a narrower concept and it includes services like trade finance deals and cash flows management whereas the latter offers trade financing services like factoring, insurance, export credit, etc. and that too on a regular basis to clients participating in executing international business transactions.
Advantages
The advantages are provided below-
- Transactional banking services help in the generation as well as efficient execution and management of international trade and commerce.
- TB helps in the optimization of working capital for commercial activities by providing investment options that are short-term in nature and a wide variety of liquidity management tools.
- TB helps the clients in managing their cash inflows and outflows in an appropriate manner by providing them short-term cash management solutions.
- TB helps in the flow of payments from one country to another, i.e., it facilitates trade between nations.
- Transaction banking is less risky as compared to other types of financial services. It is because of the fact that trade finance deals in TB are self-liquidating and short-term in nature.
- Trade financing liabilities are secured and backed-up by commercial agreements that help in the documentation of arrangements between the parties to a transaction.
Importance
Transaction banking helps in the facilitation and management of payments, short-term cash, financial securities, trade finance deals, and international trade for clients like government institutions, financial institutions, corporate, public entities, corporate and commercial entities, MNCs, or multinational entities.
It offers a variety of tools through which liquidity can be managed and investment options that are short-term in nature for the purpose of optimizing working capitalWorking CapitalWorking capital is the amount available to a company for day-to-day expenses. It's a measure of a company's liquidity, efficiency, and financial health, and it's calculated using a simple formula: "current assets (accounts receivables, cash, inventories of unfinished goods and raw materials) MINUS current liabilities (accounts payable, debt due in one year)"read more requirements used for commercial purposes. Transactional banking helps in the initiation and proper execution of international tradeInternational TradeThe trading or exchange of products and/or services across international borders is referred to as international trade. It frequently includes other risk factors such as exchange rate, government policies, economy, laws of the other nation, judicial system, and financial markets that impact trade between the two.read more and commerce. TB is even less risky in comparison to other financial services due to the fact that it is short-term and self-liquidating in nature.
Conclusion
TB is the short form used for transaction banking or transactional banking. TB helps in the facilitation and management of international trade, mitigation of risks, cash flow management, securities, trade financial deals and even offers security services for building strong relationships between banks, partners, and even clients like government institutions, financial institutions, corporate, public entities, corporate and commercial entities, MNCs or multinational entities, etc.
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