To appreciate the full dimensions of this potential transformation, it is useful to review the basics of the transaction banking ecosystem. Transaction banking, at its most elementary description, is the provision of payments, trade and securities services. In this discussion, the focus will be on the payments function with the caveat that virtually every trade of security transaction – the other pillars of transaction banking – start and/or end with a payment.
The current transaction banking ecosystem dates back centuries, fundamentally to Italy and the Italian merchant class of the Renaissance. Goods and services were sold from one party to another with those sales requiring payment from buyer to seller. Rather than moving physical currency or precious metals for payment, as in the past, the merchants established offices in the main centers of trade and commerce, and moved money by entering debits and credits on double entry ledgers which were also a new invention of the time. Goods and services moved in the physical world; payments moved on books.
It is striking that transaction banking today shows remarkably little change from that original 14th century design. One of the few changes was produced by the introduction of the telex after World War II. This fundamental “disruption” of the transaction banking operating model created multiple product lines where there had only been one. Prior to the introduction of the telex and the realization that money could be moved by telex faster than the underlying details of the transaction (it a simple payment, a trade or securities transaction), there had been one business line, commonly known as the international business. But with the new technology separate payments, trade and securities businesses were created. These three business lines grew in size and management hegemony until recently when some of the major transaction banks have tried to reintegrate them, if not as one unit, at least under one central management structure.