Just as with retail banking, corporate banking is facing substantial changes as they move towards the new digital era. Collaboration with Fintechs might be the best way for corporate banks to reduce the costs and risks involved in this transformation.
The rapid transformation of Retail Banking is well underway. The creation of various forms of Internet or Neo Banks is drawing an increasingly clear path for the future of this business. Some factors are still developing, but it’s safe to say that those banks, who do not have an answer to the changing needs of e.g. Millennials will soon be out of business before long.
New generations have a radically different expectation of ‘where’, ‘when’ and ‘how’ services covering their financing and wealth management needs should be delivered. Once they choose a new provider they’re unlikely to turn back, and eventually inherited assets and associated business will follow them.
Old school wealth management, for example, is making way for on-demand, 24/7 services that can be easily understood and come with transparent fees. A digital, but still human offering that makes a client feel special is the flavor of the day.
Updating Corporate Banking’s Legacy to the Digital Age
Corporate banking has, thus far, not seen such a radical change.
The transformation of Cash Management and Trade Finance from paper-based to online transactions has been ongoing since I entered banking over 30 years ago. Many banks are still struggling to move away from clunky paper-based processes in corporate banking. This is especially true for the client onboarding process. Value-added services, such as introducing clients to new business opportunities, are by and large manual, and rely on Relationship Managers by chance becoming aware of corresponding needs. The perceived high cost of failure (reputational and regulatory) has also contributed to making this change more of an evolution than a revolution.
More recently, blockchain, AI, and other technological developments have led to an accelerated pace of change, especially in trade finance targeted to SMEs. Many of these changes are being brought about by Fintech’s. In order to avoid losing lucrative bread and butter fee business, banks will have to embrace this change and deliver new efficient solutions for theirits clients that help manage risk.
Corporate banks are caught in a difficult spot: Consistently low-interest rates, despite being in a favorable economic environment, and the tendency of corporate clients to shun structured and less-transparent products, has put significant pressure on revenues. Despite relentless efforts to reduce costs, they have remained persistently high. Inefficient legacy brick and mortar structures and increased regulatory requirements are just two reasons why. Adding to the woes, is the fact that credit costs are expected to rise due to cyclical economic weakening.
In summary, banks are struggling to generate enough profits to invest in a forward-looking digital offerings.
In addition to the financial ability to invest in this change, a significant change in mindset is also required. Banks will need to embrace the fact that technology is not only a conduit to reduce costs, but a core means to enhance the client experience.
Creating significantly enhanced client journeys, which lead to quicker turn-around times and holistic solutions instead of individual product offerings, will generate improved revenues. When designing efficient processes for a revamped offering, cost reduction opportunities will present themselves automatically. Therefore, client-centricity should be at the core of any digital strategy, and not cost reduction.
Transitioning Towards Digital Transformation
In view of the above, i.e. the immediate need to innovate, the increased cost of BAU (business as usual) operations and the reduced income, it’s obvious that not every established bank will be able, bold enough, or even willing, to do the transition to the future of banking on its own.
In a recent study from Finextra, 81% of bank executives surveyed said that collaborating with partners was the best strategy to achieve digital transformation. This goes well with my opinion: The need to collaborate is front and centre and cannot be ignored. Collaboration can come in various shapes and forms, but I would like to focus on two options:
1. Bank partnerships (similar to airline alliances) to create scale.
2. Partnership with collaborative Fintech firms, such as Opportunity Network, that can change the way banks operate and can provide a broader reach than a single bank can have alone.
These options can also be combined to amplify an outcome. Established banks typically have strengths in a specific geography and creating bank partnerships can deliver significant client value by giving access to better local and regional solutions, as well as to a wider network.
Creating these partnerships is not as easy, as revenue and risk considerations need to be carefully worked out. Maintaining them can be even more tricky as it takes time and a lot of engagement to build a deep level of trust required to cross refer clients and get clients across banks work with each other.
Photo by rupixen on Unsplash
This is where partnerships with collaborative Fintech firms can help by developing, deploying, and even running state of the art network platforms for clients to connect in a safe and controlled environment. Information sharing can be calibrated and managed in line with the respective compliance needs of each participating bank.
Another argument for such collaboration lies in the ‘war for relevant talent’. Banks may find it challenging to attract and retain talent with the required technical skill set and disruptive mindset. This is much easier, and typically more cost effective, for Fintech firms, who offer a more modern working environment that most banks are willing to provide.
To accelerate the transition into a digital age, commercial banks have been increasingly partnering with Fintechs in pursuit of adding direct value to clients. It’s becoming more evident that, for corporate banking to survive in the new era, banks will need to follow the same path and embrace the new world of banking in a faster, more agile and client-centric manner.
Collaborating with select Fintechs is a strategic leap towards reducing the cost and risk involved in this change. What’s more, it presents the strongest potential of a client-centric transformation being successful.
Founder & Owner at TK Asia Consult
Senior consultant on mid-sized companies focused on ASEAN and Japan. Torsten is also Country Director Japan, Singapore & Thailand at Opportunity Network.