In a recent article, I discussed why it looks like the B2B financial services industry is immune from obsolescence or transformative shifts. It is a sector where personal relationships with corporate customers have been the key focus, changes are complex to implement and customer interest in advanced digital services remains relatively subdued. Moreover, the high level of regulation is a barrier against external threats.
In this context, it is easy to be fooled by the apparent inertia, especially when other financial institutions exhibit a comparable lack of initiative. However, even though the complexity related to B2B is slowing down the pace of change, it is in no way stopping it.
I now reflect on the risks of disruption in the B2B financial services industry and in which form they may concretise. By financial services industry, I refer to commercial banking, capital markets, leasing, insurance and investment management.
Understanding disruption
In the realm of financial services, disruption signifies a profound transformation that significantly impacts a company’s business model. It can be triggered by various factors, such as new technologies or innovative applications of existing technologies (APIs, blockchain, IoT, AI, cloud computing, asset tokenisation, driverless vehicles). It could also result from shifts in the competitive landscape with the emergence of new players (Fintechs, Bigtechs), alterations in the strategies of existing players (other financial institutions, ERP providers), new regulations (Basel IV, MIFID II, PSD2–3), societal considerations (increased focus on ESG) or major geopolitical and economic shifts (war in Ukraine, exceptionally high interest rate volatility).
Potential sources of disruption
Predicting disruption is inherently challenging as it can originate both within the industry and externally, often arising from a combination of the aforementioned factors. In addition, its impact can be progressive at first and seen as benign, and then suddenly become a game changer. So, where should we direct our attention?
I list below a few trends that in my opinion could significantly impact the B2B financial services sector.
Disintermediation
The ways to reach customers (also called go-to-market or channel strategy) is perhaps the area where B2B financial institutions will be most affected in the years to come. In particular, disintermediation, whereby financial institutions lose the relationship with their traditional customers, is for me an inevitable trend with possible massive consequences.
In banking, it is best illustrated by the multi-bank platforms which have spread from initially foreign exchange to bank guarantees, letters of credit, supply chain financing and receivable discounting. So far, they have mostly handled the bidding process, and the transaction has been settled separately between the bank and its corporate customer. However, sooner or later, they will be connected via APIs with banks and integrated into the corporate customers’ back-office system, allowing a straight-through processing. The next step will likely be the creation of marketplaces where all daily banking products will be on offer. When this happens, the risk is that transaction banks will become invisible and they will be turned into infra-providers.
Embedded finance, which happens when a non-financial company offers a financial product or service to its customers, is also bringing a radical change to the go-to-market strategy of the traditional financial service providers. For instance, embedded insurance integrates seamlessly insurance products into a customer’s buying experience, and embedded banking currently includes the offering of bank accounts, credit cards and consumer financing. As a result, embedded finance is akin to switching from B2C to B2B since the main customers are no longer the retail clients but instead the companies that embed those financial services into their own offering. It can be seen as a threat to the retail unit of a given financial institution, and as an opportunity for its corporate unit.
Generally, the role of intermediary, which is the essence of a financial institution, will evolve in the future and may turn to be the demarcation line between the winners and the losers, around issues like trust (identification, security) but also the integration and smoothness of processes (APIs, modularity).
One should also bear in mind that blockchain, by bringing a new form of trust, challenges the intermediary role of financial institutions. The hype of a few years back has gone, but new versions of the technology, by being less energy voracious, faster in processing and easier to implement, will broaden its use.
Commoditisation and unbundling
Commoditisation removes the uniqueness of a product so that it becomes interchangeable with other products of the same type, allowing competition on price only. For example, the harmonisation of the payment infrastructure has largely turned single payments into a commodity. Foreign exchange has been another clear example for a while and trade finance products are fast joining this category.
A consequence of commoditisation is unbundling, i.e. the process of breaking down traditionally bundled products or services into individual components that can be purchased separately. This happens for instance when it becomes easy for a corporate treasurer to cut a cash management proposition into pieces and buy the different elements from different banks and even change the provider on a case by case basis.
As in the retail market but probably to a lesser extent, re-bundlers will be needed to reduce the “cost of search” resulting from the buyers having too many options. They will do that by offering a more complete solution, for instance “Business-in-a-box” for merchants. However, re-bundlers will more likely be fintechs, platforms or marketplaces, and not financial institutions in the traditional sense since it would require them to enter into a new business model going beyond financial services only.
Like disintermediation, this will greatly affect the traditional go-to-market approach based on personal relationship with corporate customers.
Data usage
Since the financial services industry is essentially about sourcing, processing, analysing and storing data, we can anticipate that it will continue to be greatly affected by advances in computing power, cloud services and AI, as well as new sources of data.
One example is the use of alternative data in investment management, from traditionally structured financial data to new types of data such as satellite images, social media posts, geolocation data, credit cards transactions and mobile application data.
In an earlier article co-written with Bernardo Antunes, we also speculated that if banks could make sense of all their proprietary data, starting with payments data, enrich it with data available in the market and process it with sophisticated AI, they could really gain a unique and powerful role in society. This in turn could be converted into a lucrative business, especially in the B2B segment.
Generally, the use of AI on large data sets is radically changing how risk management is done at banks and insurance companies (including fraud, compliance and credit risks).
New regulations
An example of a game changing regulation is Basel IV which made banks hardly competitive any more in delivering bank guarantees since private insurers are under a more lenient capital regulation. However, in my opinion, regulatory environments are generally more protective than disruptive. Regulatory authorities are keen to keep market stability and although from time to time they seem to be challenging the incumbent players, the last thing they wish is to disrupt them and create systemic risk.
In fact even Open Banking regulations (PSD2–3) that are supposed to level the playing field for new Payment Service Providers, have had a really limited impact on banks. API banking, based on commercial APIs and hence driven by market offer and demand, will instead have a much larger effect.
Automation
I posit that everything that can be automated will ultimately be automated, as advances in technology bring ever more simple and affordable solutions. This means that only the financial service solutions that allow automation will be acceptable to corporate customers.
For a corporate treasury, it means that its operations will over time be automated, from payments to reconciliation, cash and liquidity management as well as risk handling. For instance, guarantees will be “automatically” requested and delivered by one of their banks (subject to a credit decision algorithm), auto FX rules and account transfers within virtual cash pools will be left to an AI and working capital management will be integrated into logistics with automatic dynamic discounting, payments and account reconciliation.
In the asset management and insurance sectors, automated execution will allow propositions like the fully invested check account (also for companies), on demand insurance and more generally, customised solutions at scale.
Another consequence of automation is that it leads to a near “zero-interaction” model between financial institutions and their corporate customers, at least for daily transactions. In turn, this will question not only their traditional relationship model based on human interaction but will also make their digital customer interface obsolete.
Digital customer interface
Financial institutions are presently polishing their digital interface with corporate customers by combining their scattered portals and making their use easier and more comprehensive. However, over time, everything that can be handled directly through the corporate customer’s own system or portal will likely be handled from it, for the same reason as related to automation, i.e. simpleness and affordability brought by technological advances.
For instance, the corporate treasurer will be able to follow, in real time, her cash, liquidity and risk situation as well as initiate transactions on her own multi-bank dashboard. Hence there will be hardly any need to log into the banks’ respective digital portals. The reduced use of digital customer portals will in turn accelerate the disintermediation trend described above.
Employee productivity
Generative AI is expected to boost productivity in the B2B financial services industry, especially in the front office side, in particular by doing an increasing part of the work of associates in gathering, analysing and producing reports. For instance, ChatGPT is being embedded into the Microsoft 365 suite of tools under the brand name “Co-pilot”, which is akin to an AI personal assistant having access to all the work-related data, from emails, business chats, documents, calendars, contacts and CRM. As such, it brings the context into play, putting together connections and insights in a way that has been so far out of reach.
If handled properly, the quality of the output will be lifted in a very visible way to customers. In addition, by dramatically increasing the productivity of employees for cognitive tasks, fewer of them will be needed and the overall cost will go down. This is disruptive to the extent that it will differentiate those financial institutions that are early adopters at scale from those clinging to older tools.
Changes in corporate customers’ industry sectors
New technologies are affecting entire industry sectors in a way that the services and products provided by financial institutions to their corporate customers may need to be re-invented or else become obsolete.
An example is the coming-of-age of driverless vehicles, especially fleets of cars and trucks, which demands a new approach by insurance companies. In particular, it requires them to review the concept of liability and to change the way they view risk.
Another is the new business models adopted by equipment manufacturers under the Equipment-as-a-Service business proposition that requires a more flexible form of equipment financing. My experience is that leasing companies are totally missing this opportunity, mostly due to stiffness in their internal systems. If this trend expands and they continue to only offer traditional equipment finance products, they may quickly lose market shares to new players.
Preparing for disruption
This overview is just a snapshot of potential disrupters in the B2B financial services industry. In my next article, I will delve into strategies to navigate disruption effectively.
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