A great wave of change has been breaking over the financial services industry for some time now. When it finally recedes, we can expect a fundamentally transformed market infrastructure to be left behind in its wake. Driven by unprecedented speed and adoption of new technologies and business models, and accelerated by game-changing regulatory directives such as PSD2 and GDPR, this new world of banking will be one of open architectures and broad, integrated ecosystems.
Banks need to act now to be ready for these changes, or risk being caught in the swell. Unfortunately, while some areas of banking are adjusting, others haven’t kept pace with the new currents of digital transformation. This is certainly the case with corporate banking.
Many corporate banks are saddled with outdated legacy technology that’s expensive to maintain, limiting what they can offer. Services tend to be splintered across multiple channels, making for a disjointed customer experience. Wildly different technologies and formats stand in the way of convenience and interoperability. Under these conditions, corporate banking clients can feel underserved, especially compared with what’s available in other industries – or even in retail banking. This is bad for the clients, and is dangerous for the banks.
Out in the cold
We see two main areas of concern:
- Digitisation has made it easier for non-banks to enter financial services. While the fintech threat hasn’t been as severe in corporate banking as in other areas, there are companies looking to disrupt corporate banking on any number of fronts. If banks don’t up their game, clients may increasingly look to nontraditional alternatives.
- Digitisation is also changing how businesses operate. Enterprises and whole industries are digitising along the full value chain, moving towards large-scale, interoperable ecosystems. Those banks that cannot or will not become integral parts of these new digital ecosystems may find themselves out in the cold.
To avoid this fate, we strongly believe corporate banks must pursue full-scale digital transformation. Among other things, we believe they should:
- Think ecosystem. Corporate banks should start thinking in terms of platforms and ecosystems, just like their clients do. Today, digital leaders are often platform leaders, and in future we will see industry-specific value chain platforms become the norm in many parts of the economy. Banks will want to be ready to serve such platforms.
- Exploit the strengths of incumbency. As incumbents, corporate banks have many strengths. Chief among these is the wealth of data they have about customer needs, preferences and behaviours. This data can be the oxygen to breathe life into their transformation efforts, but only if banks can liberate the information from the silos in which it currently resides. Corporate banks also have strong personal relationships with their clients, of the kind most fintechs dream of. These relationships are likely to remain important even in a digital world. Banks should work hard to maintain them.
- Innovate relentlessly. Corporate banks need to innovate to lower risks and costs across the whole organisation. There is no end to opportunities, from improving the end-to-end client journey, enabling radical automation and process streamlining, and more efficiently managing capital, to using advanced analytics to increase share of wallet, or big data to pursue pricing excellence.
- Be ready for next-generation business models. Most importantly, we think banks must prepare for next-generation business models. In Industry 4.0, technology will connect buildings, vehicles, sensors and machines that will significantly increase productivity. At the same time, the internet of things will generate new types of clients and processes as our machines become autonomous agents: self-driving trucks, for example, which, thanks to smart contracts, can enter into their own agreements and spend and receive their own money. Banks must be ready to service these clients and this way of working, too.
Riding the wave
This brave new world will open any number of possibilities for those banks that can adapt. In a world of trillions of nanosecond micro payments and smart contracts, we think banks will increasingly be seen as trusted providers and fraud risk managers, for instance. This could generate new service opportunities and revenue streams, particularly for banks that have developed industry-specific capabilities.
We think digitisation will also allow banks to move from a one-to-one model based on traditional products to a one-to-many approach featuring new digital products and services. That’s good for clients, but also banks, as many of these new digital services can be offered at scale while still being easily customised.
There are a host of other possibilities we might name. While corporate banks may have been hiding their heads in the sand up to now, we think they can no longer avoid the wave of digital disruption. Those that dive into the water now should be able to ride this wave to new heights. Those that don’t may very well sink.
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