Transaction Banking: Thriving Amid Volatility, Technological and Regulatory Shifts

With geopolitical shocks, AI disruption, and shifting regulations reshaping the landscape, transaction banks must embrace strategic investment and smarter risk management to stay ahead.

Sweeping new tariffs from the Trump administration are a major concern for the transaction banking industry. While geopolitical turmoil, including conflicts in the Middle East and the Ukraine war, remains significant, the impact of tariffs and retaliatory measures may be an even bigger challenge.

The World Bank projects these tariffs could negatively impact US GDP by 0.9%, while global growth could slow down by 0.3% to 0.4%. According to Tod Burwell, President and CEO of BAFT (Bankers Association for Finance and Trade), these tariffs will lead to higher costs and lower volume, which will have a ripple effect on the payments industry. But emerging markets could turn out as winners amid this volatility.

“Data suggests that by the late 2030s, the BRICS economies could surpass the G7 economies, and geopolitical volatility and disruptions could further accelerate this trend,” Burwell said in the Trade and Treasury Now (TTN) podcast. “These are likely to lead to shifts in trading alliances and partnerships. As certain markets become more challenging to navigate, businesses might turn to others, possibly speeding up the ongoing economic shift from developed to emerging markets.”  

This volatility is expected to continue as the economic landscape evolves. The increasing involvement of new players in the financial system, including neo-banks and payment service providers, will lead to new sources of volatility in the global economy.

Technological Shifts: AI’s Expanded Role in Transaction Banking

Volatility aside, technological shifts will also have an impact on transaction banking.

The artificial intelligence (AI) market is expected to grow to almost $1 trillion by 2027, according to Bain and Company.

AI's ability to recognize patterns makes it particularly valuable for tasks like anti-money laundering (AML) compliance and fraud detection. As transaction banking systems become more complex, AI will help institutions improve precision and reduce operational burdens.

However, it’s worth noting that the rise of instant payment systems necessitates the use of AI for tasks like account validation and anomaly detection. As AI continues to develop, its role in enhancing transaction banking operations will expand.

While AI can be a powerful tool for fraud prevention, Burwell says that banks must also stay ahead of criminals using AI for illicit activities.

“I believe AI could be the new frontier where national security becomes very much focused on the capabilities of AI, and you could start to see export controls that come into place between certain countries,” added Burwell.

Regulatory Shifts: ISO 20022’s Impact and Evolving Capital Rules

ISO 20022 readiness continues to dominate industry conversations as financial institutions scramble to modernize their payment infrastructures.

"There are questions around readiness, with under 35% of institutions prepared for ISO 20022," Burwell noted, suggesting that institutions that fail to adopt the standard may face higher costs and operational disruptions.

Industry experts highlight two strategies – leveraging tools like Swift’s Unique End-to-End Transaction Identifier (UETR) and Unique Transaction Identifier (UTI) in the securities space, which will boost transparency as banks prepare for ISO 20022.
On the capital regulations front, the industry will be closely watching the Basel III framework as it still remains in flux.

Burwell pointed out that the delay in US implementation, and changes in the administration, may lead to a revised Basel proposal with lower capital levels. Other jurisdictions like the UK and emerging markets might adjust their capital requirements to remain competitive. Overall, there’s an expectation for a more favorable regulatory framework this year, with potential pro-growth adjustments in both payments and trade regulations.

Staying Ahead in 2025

The transaction banking industry is poised to navigate a landscape marked by volatility, technological advancements, and regulatory changes. Burwell believes transaction banks should focus on two critical strategies to position themselves for success in this dynamic environment.

“Effective risk management will be essential in the coming year, as geopolitical uncertainties and economic volatility continue to pose challenges. Companies will need to carefully balance risk and expense management, considering both external disruptions and internal business decisions,” said Burwell.

The second critical strategy is prioritizing strategic investments, especially in technology. Burwell emphasized that focusing on growth and technological advancements will be key. By making these investments, businesses can better adapt and thrive in the ever-evolving transaction banking landscape.