Pity Europe’s banks. For years, they have been in retreat, losing business in their own back yards to Wall Street rivals. Now the battlefront is shifting – but what looks like an opportunity to gain ground may be just the opposite.

In wholesale banking, the pursuit of growth has moved away from the dealing floor – where revenue has been shrinking and will, at best, remain flat – to the less glamorous business of helping companies with their day-to-day transactions. The higher returns available from helping corporates manage their cash piles and make faster payments are luring everyone from Goldman Sachs Group Inc. to fintech entrepreneurs.

It’s easy to see why. By 2020, the fixed income market, for years the big money spinner for the securities industry, will be overtaken by transaction banking, according to projections by Oliver Wyman and Coalition. Managing cash, payments and trade financing for corporates could bring in $102 billion in revenue next year, compared with $101 billion from the trading of bonds and currencies, according to their estimates. That gap is expected to widen further.

Shackled by sluggish economic growth at home and record-low interest rates that are crushing margins, European firms have been unable to compete with U.S. rivals in trading and capital markets. Those same dynamics look set to play out again in transaction banking.

Take one key indicator of a bank’s likely success in maintaining and gaining business in this area: technology spending. While detailed (let alone fully comparable) data are hard to come by, the metrics that do exist are hardly encouraging.

European banks allocate about 11% of revenue to IT, according to data compiled by BCG, BCG Expand and Rubin Worldwide. While that looks to be in line with U.S. firms, European lenders have seen sales contract, unlike their rivals over the Atlantic.

Group-wide revenue at the top three U.S. firms in transaction banking has climbed at anything between 3% at Citigroup Inc. and 13% at JPMorgan Chase & Co. over the past two years. In Europe, revenue fell by 2% at BNP Paribas SA and 16% at Deutsche Bank AG. The exception among the region’s big lenders is HSBC Holdings Plc, which saw revenue rise 12%, buoyed by its Asia business.

Scrape below the surface, and the signs are even more alarming. European firms are devoting a smaller chunk of money to adding new services and platforms, the data show. The difference in the amount U.S. lenders spend on investments for the future as opposed to just keeping the lights on – the so-called change-the-bank ratio – stood at 41% in 2018; the average for European banks was about 30%.

That kind of gap will hurt. Leadership in the industry will increasingly be established with the fastest technology and cheapest platforms.

Displacement and disruption are already under way. In cash management, the largest component of transaction banking, as much as 10% of the revenue pool could be up for grabs by 2021 as innovation will lead to better offerings for customers, research by Oliver Wyman and Morgan Stanley shows.

With the top 10 firms controlling just 30% of the pie, the opportunity to gain market share is substantial. From Credit Agricole SA to Standard Chartered Plc, European banks large and small are keen on growing. But clients tend to be sticky, and don’t want to switch systems too often. Miss out on those customers in the next round, and it could be a while before the business is up for grabs again.

U.S. banks have multiple advantages: for a start, their home market uses the world’s reserve currency and their margins benefit from a higher interest-rate environment.

In Europe, traditional banks are being hobbled by regulators seeking to encourage new entrants. Under the so-called second payment services directive, or PSD2, lenders will have to provide third-party payment providers access to data on their accounts.

Some relief may be in sight. Under the latest batch of European Union banking rules, lenders should get capital relief on the intangible value of their software. The extent to which firms will benefit will depend on technical standards being drafted by the European Banking Authority.

European banking executives have said it’s too early to quantify the effect the capital boost may have, and transaction banking is only part of their digital spend. But it’s clear if Europe wants to seize a global lead in this pocket of wholesale banking, the battle will be tough and the odds are currently stacked against it.

--Elaine He contributed graphics.

To contact the author of this story: Elisa Martinuzzi at emartinuzzi@bloomberg.net

To contact the editor responsible for this story: Edward Evans at eevans3@bloomberg.net

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Elisa Martinuzzi is a Bloomberg Opinion columnist covering finance. She is a former managing editor for European finance at Bloomberg News.

©2019 Bloomberg L.P.