In the wake of the global financial crisis of 2008, governments the world over have attempted to reign in the potential consequences of too-big-to-fail banks by imposing higher capital requirements for lending. In the US, this effort has taken shape in the form of the Federal Reserve’s stress tests.
Indeed, back in April, four out of the 18 banks that were tested according to the provisions of the Dodd-Frank Act had their share buyback and dividend payout plans rejected either partly or completely. Those four banks were JPMorgan Chase & Co. (JPM) and Goldman Sachs (GS), whose plans were conditionally accepted, along with Ally Financial (ALLY) and BB&T (BBT), whose plans were rejected on the spot.
Citigroup (C) is one bank that found a means of circumventing the negative effects of increased capital requirements. Citi’s transaction services unit has come to account for one-third of its profits since the financial crisis rocked markets and nearly brought down big banks in the process.
Transaction services cover a number of financial services, all of which are based on the collection of deposits and the transfer of money, and all of which are transactions from which banks can collect processing fees.
Citigroup moves some $3 trillion daily through its transactions services for banks, governments, and companies alike, and enjoys a very low overhead in this section of its business, with little capital required. But with even more increases in capital requirements a distinct possibility in the very near future, it is becoming clear that other banks are seeking to get in on the action.
Over the past two years, for instance, both JPMorgan and Bank of America (BAC) have increasingly prioritized transaction services. Both banks have hired former senior Citigroup executives, and there is some preliminary indication that they are gaining ground. Citigroup’s income for transaction services, prior to taxes, dropped some 8 percent during the first quarter of 2013, while the number of corporations that use the bank to manage and move cash has decreased in the US and Europe.
That said, Citi is still ahead of its rivals. Last year, revenue from treasury and trade services hit $8 billion, with JPMorgan at $6.7 billion, and Bank of America at $6.2 billion. And while the latter two have vowed to take their time in building up their transaction services, Citi already has well established global networks that it thinks will be difficult to catch up to. In the meantime, the increased competition in the field is driving the price of transaction services decidedly downwards as more banks like DBS Group Holdings in Singapore, BNP Paribas, and Societe Generale get in on the game.
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