It’s all about the relationship, stupid!
Looking into the intricacies of the B2B (Business to Business) financial services industry reveals a noticeable lag in digitalisation compared to its B2C (Business to Consumer) counterpart. It appears that the sense of urgency and motivation for management to overhaul the existing, often analog operational model is lacking. While the retail side of financial institutions is all about the digital interface with individual customers and the automation of processes, making it fully anchored in modernity, the corporate side seems stuck in a bygone era, akin to a scene from a Kaurismaki film.
During my tenure driving the streamlining and digitalisation of processes at the large corporate unit of my former employer, I frequently encountered an implicit sentiment by customer-facing colleagues when proposing radical changes: “But don’t you understand, it’s all about the relationship!”. Their perspective was that while simplifying daily administrative tasks was welcomed, altering a working formula was unnecessary. They believed that success hinged on personal relationships with corporate customers, relegating the rest to behind-the-scenes logistics.
Having been a client executive, I empathise with their viewpoint. Long-term business relationships are pivotal for establishing mutual trust and securing the large mandates. Moreover, transactions with corporate clients involve larger sums, making the costs associated with selling, delivering and administering financial products smaller in relative terms. It also means that tailor made solutions are not prohibitive and in fact often the norm. Consequently, efforts to streamline and digitalise processes often take a back seat.
Another deterrent to modernising the operational model is the daunting nature of the task.
Digitalisation poses unique challenges in B2B
Selling products and services in the B2B realm fundamentally differs from B2C, evident in the methods of reaching customers, the relationship dynamics, decision-making rationale, process complexity, and delivery methods.
This disparity amplifies when financial services move online, accentuating issues of trust and risk management as physical interactions between service providers and buyers diminish. In particular, the seller not only needs to authenticate the person representing the corporate buyer, but also to understand what their rights to act on behalf of their company are.
Furthermore, as transactions increase in size, the process becomes inherently more intricate. For instance, the granting of a large loan to a corporation requires the writing of a credit memo and a formal review in a credit committee. While the workflow leading to the credit decision may be greatly improved, complete automation remains elusive, unlike the streamlined processes in consumer financing.
If these challenges weren’t sufficient to deter well-intentioned initiatives, the final blow may come from corporate customers themselves.
Lack of corporate interest
On the customer facing side, there is less demand for a top notch portal backed by automatised processes. While employees in corporations ideally seek the same digital touch and service in their professional lives as in their private ones, they acknowledge that, on their side too, systems are predominantly outdated.
For instance, most corporations are not ready to integrate external APIs proposed by financial institutions, although it would allow system-to-system integration as a basis for automation. In fact, the main risk for process innovation in B2B is its premature introduction. If corporate customers show no interest, promising solutions will fade into oblivion. This has been well exemplified by the fall of basically all the new platforms like we.trade or Contour that were reinventing how trade finance can be done: companies were simply not yet ready to change their trade finance processes.
Financial institutions focus on their existing operating model
As highlighted in a previous article, efficiency gains have predominantly driven efforts to streamline and digitalise business processes in the financial industry. Building an internal business case is simpler when measurable parameters like cost reduction, time savings or fewer errors are involved. This means that projects often have short term goals, they focus on specific issues only, and hence they tend to be scattered around the organisation without a common perspective. As a result, the benefits are under optimised.
The other issue is that even when projects go beyond the short term cost-cutting route and instead aim at smarter execution and improved customer experiences, they tend to address only the existing operational and business model. Little reflection is devoted to potential future models that financial institutions could or might be forced to implement to stay relevant. And there is even less back casting efforts to determine what types of enablers should be built today in order to acquire the needed agility and in that way keep options open to enter some of those future models.
For instance, transforming processes into plug-and-play modules with real time connections could provide the interoperability necessary for sustained agility. But even this argument seems to fall on deaf ears, especially since the prevailing sentiment is that incumbent financial institutions are resilient to newcomers and show no sign of obsolescence.
Sparse signs of disruption in B2B financial services
The importance of long term customer relationships, the complexity to provide fully digitalised financial products, corporate customer reluctance to adopt them and the high level of regulation explain the limited entry of new players into the B2B financial services arena. While fintechs offer point solutions, improving a small part of the value chain, scaling remain a challenge for them.
In this context, procrastination is easy, especially when short term profitability takes precedence over transformational projects that are initially cost-heavy and yield benefits only years down the line.
I however wonder how long can a given organisation remain antiquated in a world that seems to be accelerating with the implementation of new technologies, exemplified by the leaps in generative AI.
In an upcoming article, I will explore this anachronism further by examining the risks of disruption in the B2B financial services industry.
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