Banks serve consumers and corporates. (Banks don’t know how to service small business, but that’s another story). In this post, I want to focus on corporates (Global 2000). This includes:
- Debt (and maybe equity, but that’s more the domain of high-growth ventures). Banks lend from their own balance sheet and are the conduit to the capital markets.
- M&A – Last week, I looked at disruption hitting M&A, but the conclusion was that this was restricted for now to the mid-market.
- Treasury – Management services.
- Foreign Exchange.
This is a hyper-competitive market. Corporates have a lot of clout, so they get good prices and service by getting banks to compete. This is the opposite of what has traditionally been true in consumer and small business markets, where the banks have had all the clout (and abused that clout), which is why emergent fintech ventures are doing so well in those markets. In corporate banking, there are three possible plays:
- Provide technology to banks, which banks use to service corporates. This is traditional fintech and it’s a huge and mostly consolidated market, but the banks are always on the hunt for 10x better, faster, cheaper solutions enabled by new technology.
- Provide technology to corporates that help them get better prices and service from banks. An example of this is 360T, which does this with great success in Foreign Exchange.
- Provide technology to corporates that enable them to bypass banks. This is the bleeding edge. There are few examples as yet. It’s difficult because banks offer bundled deals that are a disincentive to corporates who look to cherry-pick a better price from some disruptive venture. These C Suite golf course relationships are powerful because the ability to pull all the threads together to make something big happen quickly is so valuable to corporates, and today only big banks can deliver that.
However, nothing withstands Moore’s Law forever and the disruption may come from a mix of regulation (for example Dodd-Frank mandating transactions via exchanges versus over-the-counter) and blockchain systems. Blockchain systems are natural for cutting out intermediary costs in complex inter-enterprise processes where no institution needs to be trusted.
Smart contracts can be programmed to whatever level of functionality is needed. Escrow agents that are distributed autonomous corporations can hold money until conditions are met. This means that an enterprise doesn’t need to trust any other enterprise or any institution – they trust in code, which they can review to their heart’s content. Corporations like being in control, and blockchain systems put them in control rather than having to trust to intermediaries.
– This article is reproduced with kind permission. Some minor changes have been made to reflect BankNXT style considerations. You can read the original article by Bernard Lunn of Daily Fintech here.