What is Transaction Banking?
Transaction banking (also known as Transactional banking) can be defined as the banking services that have 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.
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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. 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. deals and offers cash flow management and securities services for not just public entities but also private. The roles are provided and discussed in detail as follows:-
#1 – Cash Management
It assists companies in identifying the best possible way to 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 and 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 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. 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 cash managementCash ManagementCash Management refers to the appropriate collection, handling, & disbursement of cash for ensuring financial stability & avoiding insolvency risk. , securities, and international trade. However, the bankers might also need to specialize in other banking segments as well. For example, it needs to conduct/ attend business meetings with business clients, team liaison, company meetings, development meetings, discuss new projects or products, overview documents, etc.
Transactional banking services include liquidity, payment, and 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. , public entities, corporate and commercial entities, MNCs, or multinational entities are the types of clients in transaction banking. Corporate clients use transactional banking services to support 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., such as managing cash inflows and cash outflows.
Services of Transaction Banking
Following are the typical services offered by such banking institutes-
- Cash Management Services: It offers cash management services to entities 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 of 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., 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 offered to companies, government institutions, financial institutions, public entities, corporate and commercial entities, and MNCs or multinational entities. Therefore, it can be regarded as a segment of corporate banking.
This is why transaction banking, compared to corporate banking, can be stated as a narrower concept, and it includes services like trade finance deals and cash flows management. In contrast, the latter offers trade financing services like factoring, insurance, export credit, etc. Regularly to clients participating in executing international business transactions.
The advantages are provided below-
- Transactional banking services help in the generation and efficient execution and management of international trade and commerce.
- TB helps optimize 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 manage their cash inflows and outflows appropriately by providing short-term cash management solutions.
- TB helps flow 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 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 document arrangements between the parties to a transaction.
Transaction banking helps facilitate and manage 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 to optimize 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)" requirements used for commercial purposes. Transactional banking helps initiate and properly execute international tradeInternational TradeInternational Trade refers to the trading or exchange of goods and or services across international borders. and commerce. TB is even less risky than other financial services because it is short-term and self-liquidating in nature.
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.
This article has been a guide to transaction banking and its meaning. Here we learn the roles, examples, and services of transaction banking and its advantages and importance. You may refer to the following articles to learn more about finance –