For over five years, I promoted business innovation in a Nordic corporate bank, experiencing some success stories but being too often confronted with a resistance to change. This led me to reflect on the root causes of why corporate banking innovation is so slow
In this context, corporate banking innovation means the development of new or enhanced financial products and services to large corporate customers, with a focus on transaction banking (as opposed to investment banking).
The potential for business innovation in corporate banking is huge.
Corporate banking innovation is primarily about offering new or improved services to the treasury department of corporate customers. This is the core of the bank relationship and when asking treasurers about the ideal bank offering, they have indeed a long wish list. It starts with helping them save time and complexity, like facilitating and speeding up the onboarding process, providing self-service functionalities, an easy access to their data at the bank and automatic reporting. Ideally, they would prefer to have a single integrated multibank dashboard to handle routine tasks with their multiple banking partners. Those who are progressively building a more automated treasury are looking for the direct exchange of data and the bank’s integration into their internal systems and supply value chain. Many treasurers are also welcoming all the extra data, market intelligence and insights that a bank can provide.
Another part of the corporate banking business is about facilitating the commerce of corporate customers, an area which also offers a large potential to innovate. It has traditionally been about counterparty identification, risk management and payments. However, the move from off-line to on-line commerce requires a new set of financial services, mostly around the concept of banking-as-a-service, like providing platforms to accept all forms of digital payments, or ancillary services such as consumer financing, loyalty programs or data analytics about the end consumers’ behavior. In addition, traditional banking products facilitating commerce are progressively being re-invented to adjust to the digital era. For instance, when Trade Finance will be moved from an archaic, paper based process, to a digital one, it will be possible to also embed it into the commercial flows so that it becomes largely automated and invisible.
Moving from off-line to on-line, together with the advance of so called “Industry 4.0” technologies, is often a trigger for many companies to launch themselves new business models, and an opportunity for their banks to facilitate those new businesses. One example is for equipment manufacturers to build a comprehensive service & maintenance concept on machinery sold, based on all the data generated by IoT sensors located on the piece of equipment. Another, bolder example, is about re-inventing the concept of sale, promoting to the end customers a pay-per-use model instead of the ownership or leasing of the equipment. The role of banks includes the identification of machines as economic entities, the facilitation of automatic payments triggered by smart contracts feeded with IIoT data, and can extend to trusted data management.
It therefore looks like business innovation in corporate banking, especially the part related to daily banking, should be a priority for banks.
The technology, the data and in many cases the products are available.
All the ingredients enabling business innovation in corporate banking are mostly there, ready to be deployed and used, whether it is about technology, data or even product offerings.
APIs are a good example of a disruptive technology. By connecting directly the company’s systems to that of the bank, they offer a myriad of opportunities. Thanks to the implementation of APIs, customers can have access to their data (for instance instant reporting of their account balance), they can also take action directly from their systems (for instance initiating a payment) and they can even reoffer bank’s products and services directly to their customers (for instance consumer financing). APIs are also a key element to the creation of multibank aggregator platforms.
The data is also in principle available and banks have lots of it about their customers. In addition to facilitating the delivery of transparent, up-to-date and structured data to them so as to avoid multiple inquiries and manual work on their side, banks could also in principle build on the commercialisation of non-financial assets, like customer data insights service to retailers based on the bank’s card transaction anonymised data. It is a well known fact that
incumbent banks are struggling with old and tangled systems, and the task of extracting, organizing and making sense of the data they have may seem daunting. But my personal experience is that it is feasible.
All kinds of sophisticated financial products and services have also been developed, often by fintechs, from smart solutions based on virtual accounts, AI powered cash-flow management or automatic micro payments triggered by IoT data.
However, despite the demand, the availability of the enablers and the obvious benefits it would bring to both the bank and its customers, innovation in corporate banking is surprisingly slow.
The inhibitors to innovation in corporate banking are many
As Clayton Christensen wrote in his book “The Innovator’s Dilemma”: ``The reason why it is so difficult for existing firms to capitalize on disruptive innovations is that their processes and their business model that make them good at the existing business, actually make them bad at competing for, or against disruption.”
And indeed, the traditional corporate banking business is doing fine, with no immediate threats in sight. For instance, neobanks have not entered the market of medium to large companies, and niche players like Klarna have only eaten a small part of the pie. As a result, all corporate banks are still traditional players with the same culture, business model and handicaps. They all seem to believe that banking will be about what they have always been doing. Hence their strategy is about optimizing the current business model through cost and efficiency initiatives and there is little reflection on what the successful bank of the future will be about. In particular, new revenue generation opportunities are greatly underestimated, especially if the benefits are expected to come several years down the road.
All corporate banks are also struggling with their legacy systems with a corollary being the “fix the basics first” syndrome. Many argue that the basics need to be fixed first in order to get a good foundation in place before starting to truly innovate and transform. I agree that it is difficult to innovate when the core platform is weak, processes are manual and data access and quality are poor. But there will always be something to be fixed first.
Risk aversion is also a substantial inhibitor to innovation. Banking is a risk management business with a focus on avoiding or mitigating risks related to credit, reputational, cyber or regulatory issues. Any business innovation initiative has to go through a tight screening where the voice of the timorous ones will prevail.
This timidity also applies to how banks consider development partners, especially if those partners are small fintechs. Common sense would dictate that, in the dilemma of Build versus Partner or Buy, the last two options are more attractive, especially when looking at developing a larger scale solution and when short time-to-market is of essence. It should therefore be a routine issue to enter into partnerships with both technology companies and Fintechs that have developed an attractive tech proposition. However, in practice, the process of onboarding new partners is long and cumbersome, especially for smaller fintechs which are easily overwhelmed by the extensive due diligence process.
As a result, the list of stumbling stones to business innovation is long, starting with the lack of development budget or resources, to the lack of management attention, the difficulty to integrate external partners and the absence of a business unit with the genuine interest to host the innovation if it differs markedly from the existing range of products and services.
My experience is therefore that corporate banks themselves are primarily responsible for the lack of business innovation, but the fault is also on their corporate customers.
Despite their appetite for better banking services, the mindset of corporate treasurers is often conservative. They have to deal with the same issue of legacy technology in their own systems, which raises the bar to integrate technological innovation. Generally, they tend to be followers waiting for innovation to become mainstream, a quite understandable attitude since the finance function of a company has primarily a support role. Hence they should be risk averse and take on new models only when well proven elsewhere. A company’s innovation efforts should instead focus on its core offering and core processes.
In fact, the best discussions I experienced were with company treasurers who had a genuine curiosity to look into new things. Some are making great strides in building an automated treasury or supporting the launch of a new business model by their company, but in most cases it is more about their personal interest than the interest of their employer. As a result, promising initial discussions too often led to nowhere.
As the saying goes, “the future is already here, it is just not evenly distributed”, and in the case of corporate banking, it persists on remaining elusive, like a rainbow you would try to catch.
In my next blog post, I will look into ways to break the curse.
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