EY’s recent report on the state of the corporate, commercial, and SME banking market points to a number of problems in the sector, before providing several solutions. Treasurers interested in moulding the future with their key partners should get involved in the discussion now.
EY’s report, ‘How will banks transform to build the next generation of businesses?’, shines light on the need for banks to change in the face of increasing client expectations. It even goes so far as to suggest that the future of banking hangs on the abilities of the institutions to expand their services beyond core offerings, citing, with not a little menace, Bill Gates who once said: “Banking is necessary, banks are not.”
While the report states that “the global economic slowdown, ongoing low-interest rates, and lower asset quality have made growth opportunities harder to come by”, it believes that the industry’s response to changing client needs to date has been somewhat tame. Indeed, it argues that “banks’ incremental transformation has only partially addressed shifts in client expectations for richer digital experiences”.
This may at first glance read like the last rites for banking as we know it. But the report delivers seven hypotheses highlighting the pace and scope of change coming to the banking market “in the dynamic decade ahead”. These are largely positive.
The full report can be read via the link above but TMI spoke to one of its authors, Matt Cox, EY Americas Corporate, Commercial and SME Banking Consulting Leader, to dig a little deeper and see what’s in store from the perspective of the corporate community.
The precise nature of future bank offerings will depend on the strategies and objectives of corporates and their treasurers, says Cox. He adds that “it will come down to how much corporate treasurers want to redefine their role and the expectations of their function”.
Some larger corporates may wish to leverage their balance sheets and explore how their treasuries can become revenue-generating functions. Many are already self-financing operations and offering credit to suppliers, and this will increasingly have an impact on how treasurers select and use banks, notes Cox.
That said, corporate relationships with banks are still primarily transactional, with a relatively high level of integration required to make payments and exchange key data. For corporates to become more self-sufficient, it could require significant investment in their own custom in-house banking functions if they are, for example, to further extend credit to customers. But more likely, says Cox, most taking this pathway will select a bank offering modular and customisable banking components as they seek to build their own ecosystems.
However, he notes, in five or ten years’ time, there will likely only be a small subset of banks that have transformed themselves sufficiently to be able to offer such flexible banking capabilities to corporate treasurers “in a way that enables them to build robust and enhanced banking functions at speed and scale with a relatively low cost”.
Given the potentially limiting options, the impact that corporate redefinition will have on bank selection therefore could also see them choosing banks with the most valuable ecosystems on offer. “Treasurers will want to work with the banks that enable them to connect more readily with their buyers and suppliers, and which help them achieve their sustainability goals, for example,” he suggests. “The primary corporate driver for selection will be which bank it is easiest to work with to achieve its business strategies.”
Disruption is already taking place across the banking world, especially around the digital agenda as the adoption of artificial intelligence (AI), blockchain and Open Banking solutions progress. The report nonetheless highlights that most disruption is still in its infancy and “still a world away from industry-wide adoption for some of these capabilities”, says Cox.
Even for much talked-about concepts such as subscription pricing, ecosystem sharing, and sustainability, the change is only just starting, he feels. With subscription pricing, for example, many banks offer ‘bundles’ of specific products such as deposit accounts, payments, and foreign exchange (FX), or even link together payroll and tax services. For the most part, Cox notes these are still underpinned by traditional products priced on volume.
“True subscription pricing is going to provide corporates with a suite of products and services for a set regular fee,” he explains. “This will provide more consistent and predictable revenue streams for the banks, but also a more predictable expense model for the corporates.”
Intelligently bundling services may also provide corporates with the opportunity to use banking products and services that they might otherwise not have used or had access to. This will drive more volume for those banks demonstrating a better understanding of their clients’ business activities and current strategies by tailoring products and services to meet time-specific client needs.
A corporate looking to grow overseas might be offered a targeted international expansion subscription bundle, offering deposit accounts and payments, local liquidity, cross-border cash concentration or a virtual account structure, suggest Cox. A business seeking to expand its manufacturing base might be offered a bundle that includes loans for plant construction or research and development (R&D) alongside inventory financing or factoring.
“The disruption we envisage in this space is really about creating better partnerships, where the banks are trusted advisers,” says Cox. Of course, all banks claim this status now, but he feels this is about genuinely understanding and helping clients drive forward their strategies.
“Banks need to consider how they can leverage data to play an active role in shaping the corporate client’s future business strategy, and how they can create tighter integration models to better support the needs of corporate and their own clients.”
The extent to which banks are currently offering an effective response to corporate needs through fluidly connected services is itself “not where it needs to be”, suggests Cox. There is some investment in disruption in this space, he notes, “but there is quite a way to go”.
Typically, if a corporate client fits neatly into a segment that the bank focuses on, there is usually a targeted offering that meets most of its traditional needs. But even here “the corporate may not always feel it is getting the best experience”, comments Cox. Indeed, burdensome paperwork, time-consuming processes, insufficient transparency, and multiple and confusing points of connection are commonly voiced complaints, he reports.
Partially in their defence, banks often struggle when clients are aligned to sectors they (the banks) do not focus on. It is also the case when clients span multiple industries, or when they are either growing rapidly and are moving between bank-defined revenue segmentations and coverage models, or are not of sufficient wallet size to be offered certain products.
To overthrow the old models, the future could (or maybe should) see banks organised not by their traditional segmentations but by how they can support businesses and deliver the right products and services based on the corporate client’s present goals and needs, suggests Cox. “This may require banks to re-engineer their client coverage models, developing products in a componentised way so that they can start delivering the simplest products to their largest clients and the most complex to the smallest.”
EY’s report puts forward the notion that the leading banks of the future will still own the client relationships but will oversee and build their own ecosystems. “As the responsibilities and expectations of treasury functions expand, so treasurers will play a key role in defining and participating in the development of those ecosystems,” suggests Cox.
This is not advocating the creation of an alternative monolithic bank ecosystem, into which every stakeholder will plug in and participate. Rather, it will be the interconnection of multiple ecosystems, each targeted at solving problems vertically for an entire industry segment, across which diverse stakeholders can share information.
As an example, trade is seeing a slow movement towards this ‘system of systems’, creating a broad cross-industry ecosystem. Participants in various innovative digital platforms (such as Contour and CargoX – explore TMI’s Innovation Lab for more information) include shipping companies, port authorities, insurers, logistics firms, customs agents, corporates on both sides of the transaction, and their banks.
All participants exist within their own ecosystems, but by bridging these, using new technologies such as smart contracts, AI and blockchain, it starts to solve pain points for all, says Cox. For banks, participation means delivering open solutions and software that clients can embed within the services they provide to their own clients, such as real-time payment on delivery and supplier finance.
“The bottom line for banks is that they need to decide what their role is as this world evolves,” says Cox. “Each must decide if it is to invest heavily in changing its structures and systems to be able to provide a positive client experience across the board, or if it wishes to become a specialist.” As key stakeholders, the answer should interest every treasurer. It’s on its way.
Indeed, there is no doubt that the pandemic has forced the acceleration of commercial digital adoption. The time has come for bland banking statements about ‘going digital’ to be turned into action and investment if they are to meet corporate expectations, warns Cox. “Those banks that don’t commit now may soon find they’ve become little more than a commoditised cash window, when they could have been a valuable corporate partner.” It may be time for treasurers to have a quiet but frank chat with their banking partners because much depends on the outcome.