Digital has reduced the barriers to enter into new markets. It has enabled corporates to grow at speeds that defy the conventional definitions of scale and complexity. In order to manage their increasingly complex financial structures, many corporations have gone ahead and developed their own in-house banks capable of offering complete banking solutions.
This trend, initially prevalent in large multinational organizations, is also gaining prominence among midsize and small enterprises. The in-house bank has helped corporates to gain better control over their liquidity and foreign exchange. Corporates are now able to meet their day-to-day financial planning and operational requirements, reducing their dependency on banks.
So what does this mean in practice? In essence, many corporates have de-risked their banking relationships. Banks are no longer guaranteed the steady flow of transaction revenue that enabled them to remain profitable, even when financial markets were not faring too well. The question has now become: why are banks missing the bus when it comes to corporate banking?
In essence, corporates need real-time and personalized solutions—whether it is real-time payments, liquidity or credit—enabling them to undertake global business operations efficiently. Since banks are not providing enough support to meet their increasingly sophisticated financial needs, corporates have started building their own in-house banks. Consequently, banks are losing their inherent central role, which they once strongly held, of managing key financial aspects of their corporate customers’ business.
Regaining control and remaining relevant.
Banks can get back in control of this situation by building expertise and establishing themselves as key enablers of new age corporate-banking solutions. To accomplish this, banks need to incorporate the following principles into their agenda:
Enable a hyper-connected corporate-banking ecosystem.
Banks should look to enable a hyper-connected corporate-banking ecosystem that closely integrates the corporate’s subsidiaries, suppliers, buyers, fintechs, correspondent banks and market systems. This environment provides the corporate enough visibility and control over its liquidity to manage working capital effectively. It will also allow the bank to embed optimal financing solutions at every stage of the business lifecycle and offer real-time payments to help the corporate to invest in new business opportunities and undertake global trade smoothly.
Focus on industry specialization.
The main concern of corporates is that standard products and services offered by banks are not sufficient to meet their financial needs. In order to address the unique financial challenges of each corporate, banks need to specialize and gain domain expertise in different industries.
For instance, an agricultural co-operative supplies cranberry juice to a big-box retailer that uses a vendor-managed inventory (VMI) model. Here the agricultural co-operative has to manage the inventory planning and ensure that the retailer always has sufficient supply and is well-stocked. Understanding the agricultural co-operative business enables a bank to provide differentiated VMI financing solutions that allow the co-operative to maintain sufficient inventory. By gaining further understanding of agriculture businesses, the bank can also create an ecosystem to provide specialized financial solutions to farmers, logistic providers and agents who are part of the agricultural co-operative’s supply-chain network safeguarding the business of the co-operative.
Co-create innovative products and services.
According to Ernst & Young, most corporate executives look to their primary banks as important “thinking partners”. Corporates are expecting their banks to take time and understand their unique financial needs and partner with them to co–create innovative products that solve their complex financial challenges. The benefits with this approach are much more than one satisfied corporate because in many cases the bank acquires the corporate customer’s suppliers and buyers as customers as well.
Operational excellence through automation.
With automation, repetitive non-value-added manual tasks can be eliminated, increasing staff productivity and enabling them to focus more on value-added tasks. Automation simplifies the bank’s operating model, enables it to deliver superior performance, makes processing more customer-centric and reduces costs. The timeline for processes can be reduced from several weeks and months to just a few days. For example, corporate-customer onboarding takes about 100 days to six months due to the inherent complexities involved, and this time can be reduced to a few days with a high level of automation and straight-through processing.
Bring greater precision to pricing.
According to the Boston Consulting Group, banks should move from “pricing as an art” to “pricing as a science”, with relationship managers utilizing the right tools that enable them to price products and services based on the business needs of the customer.
Of note, corporate customers might have relationships with up to 20 banks across geographies to de-risk their banking relationships and are constantly switching their primary banks based on price and transaction capabilities, so it becomes highly competitive for a primary bank to stay in its current position. In order to maintain its primary position, a bank should constantly re-evaluate its pricing based on various factors, such as customer’s business, industry, size, price sensitivity and growth potential, and price products and services accordingly.
Digital has enabled corporates to transform into hyperscale businesses and are growing at speeds that defy the conventional definition of scale. The global network of suppliers, buyers and other entities the corporates have built has increased their financial complexities to such an extent that they cannot be addressed by traditional corporate banks. Distraught that the financial solutions offered by banks are not sufficient to meet their financial planning and operational needs, many corporate customers have resorted to building their own financial solutions, in-house. Consequently, banks have had to step back from supporting the financial needs of not only corporate customers but their suppliers as well.
In order to regain their central role, banks need to offer solutions that enable a competent hyper-connected corporate-banking ecosystem. It all comes down to digitization of processes and superior pricing that enables a bank to offer quality products and services at competitive prices.
Successful Corporate Banking, Focus on the fundamentals, E&Y
The Seven Deadly Pricing Sins of Corporate Banks, 2015, BCG, http://on.bcg.com/2ewj4py