By Ankit Shah, Head of Digital Banking, Apex Group
Consumer banking has gone irretrievably digital. But what about corporate banking? Given that corporations and financial-services firms are also transitioning to digital processes and systems, the banks that serve them must follow. And they are—gravitating toward becoming elegant single-source solutions, partners that can offer the products and services their corporate customers need under one roof while coordinating digital servicing across their businesses.
The events of 2020 drove the banking sector to accelerate its digitalization plans rapidly. Banks joined forces with third parties and worked to deliver online and mobile services to their retail customers as quickly as possible. As the pandemic forced branches to close due to lockdown and social-distancing measures, it supercharged existing trends within banking. Digital-payment adoption accelerated even faster for retail-bank customers. Many of these changes are set to be permanent.
The corporate-banking story has received less attention, with two key elements deserving more focus: digitalization of operational performance and user experience.
Operations
With or without digital banking, broad digital transformation is underway on the corporate side, as well as for managers of capital. The changes are dramatic, permanent and concrete.
Across financial services, firms are pushing through to the subsequent stages of the COVID-19 pandemic with plans to continue slashing spending and cutting costs. More than half of investment managers on the private-capital side intended to reduce costs by as much as 20 percent, according to a Deloitte survey. But those cuts don’t necessarily apply to technology. In fact, the opposite is true, as investments in technology are enabling those cuts.
Deloitte found that asset managers expected to increase their annual tech spending from 10 to 20 percent of operating expenses by 2023. That’s $51 billion worldwide in 2019, increasing to a projected $84 billion in 2023. This is spurring the rise of solutions such as Allvue, Fund Recs, Yardi, Harmonate and Investran, as well as the ability to coordinate them cohesively. This last point is crucial.
The expectation for digital operations doesn’t stop when it meets banking services. And while there is a proliferation of solutions, executives are looking for better ways to coordinate the transformation. And it’s not just about cost savings.
As of 2019, only 41 percent of financial-services companies reported having “very good” data-driven insights into customers, according to EY (Ernst & Young). At that time, before the pandemic, only 36 percent of firms expressed interest in exploring artificial intelligence (AI) and machine learning (ML) technology. That’s despite 76 percent of investors saying they believed it was important for fund managers to use next-generation data to inform investment decisions.
But reluctance has now flipped to enthusiasm, and if 2020 was the year of digital acceleration, the next few years will be defined by digital differentiation as tech-savvy firms break away from the pack. According to Gartner, digital platforms, fintechs (financial technology firms) and other new competitors could replace 80 percent of today’s financial-services businesses by 2030. While the honor of being the first to show the way to digital transformation may not have been sufficient motivation for many firms, feeling the presence of predators on their heels is a different experience.
That being said, despite all this progress, banking continues to be a relationship business that requires the human touch. But being a relationship business and being digital are no longer mutually exclusive. That takes us from operations as a driver, where the numbers are clear, to the experiential side, where the changes are more subjective.
Digitally amplified human touch
The boundaries between professional and personal lives have eroded as millions have taken their professional lives into their homes. In many cases, there is no longer a commute standing between work, colleagues and the office on one end and preparing a meal and settling home finances at the kitchen table on the other end. This trend is accelerating on every front, enabled by Zoom and Microsoft Teams. Flexible working was already the norm in some sectors, such as software development. It’s likely to creep into becoming the norm in many more industries on an escalating basis.
Consumers not only expect digital access to their personal bank accounts but are also asking why the same can’t be true for their business banking. Business banking is more than a user-friendly, well-designed website. A true digital-banking platform offers greater flexibility and efficiency for corporate operations, multi-currency holding and payments, reducing the costs and time involved in traditional banking and enabling remote working in a post-COVID-19 world along with the highest level of security.
But there are reasons why the digital-banking experience is only now coming to business banking. Digital-banking services for corporations and financial-services firms have been woefully inadequate at scale, primarily because these entities can be tough customers to serve. They lend themselves to being catered to with professional services more than standardized software…at least that used to be the case.
Tough customers
Corporate banking is highly regulated and high stakes. Multinational financial-services firms, funds and investors have serious concerns about security, compliance and data privacy, including data storage and protection. They operate in multiple jurisdictions, balancing complex and sometimes contradictory regulatory environments. This makes simple user interfaces difficult.But well-executed online-banking platforms can bring together a broad range of useful tools in a single-source solution. Consider the onboarding process. Corporate onboarding involves know-your-customer (KYC) and anti-money-laundering (AML) rules along with other regulations. Falling afoul of these can be costly. Banks in the United States absorbed $14.2 billion in fines in 2020, mostly from AML violations.
This results in an incredibly painstaking, paper-based process involving highly confidential material. Many of the rules and processes are a decade old or more, relying on outdated processes. But now, technological advances—including next-generation artificial intelligence and other financial technologies such as facial recognition, automation and digital checks—are making it easier to share and authenticate information securely.
Blockchain and distributed ledger technology (DLT) are poised to offer new opportunities, from financial transactions to automated contractual agreements. This new technology will require greater oversight, auditability, regulation and strengthening of existing regulatory regimes. Again, coordination within a single-source solution becomes imperative.
Challenger corporate banking
Even before the pandemic—in fact, spurred by the fallout from the global financial crisis (GFC) of 2007-08—challenger banks had sought to find and exploit blind spots in consumer banking. This had been in turn fueled by the Revised Payment Services Directive (PSD2) and Open Banking in Europe, where digital banking had taken the lead ahead of North America with its more fragmented jurisdictions.
Now, with the pandemic, these disruptors have seized the initiative. They’ve deployed new technologies and marketed themselves as competing against traditional banking institutions that depend on legacy systems and approaches.
Challenger banks have started turning their attention to small and medium-sized enterprises, including boutique asset managers and family offices, which may feel that larger banks don’t value their businesses and see them as unprofitable. Areas of that market that were underserved by traditional banks because they were deemed unprofitable are getting the hungry attention of more technologically nimble companies.
Fund-management leaders now see that doubling down on tech is the only way to make serious gains in operational efficiency, transform business models and create new, robust approaches to distribution. Banks are following that lead.
It’s not a question of if digital banking is coming to corporate banking. It’s rather: Who will define the future of this space? We may get the answer sooner than many of us thought.