Corporate Banks At A Critical Moment

Corporate banks around the U.S. are at a fork in the road. While profits have remained relatively strong, the last few years have challenged these FIs in the areas of innovation, disruption and technological progress, and unless they can revamp their efforts to stay ahead, corporate banks may find themselves in trouble.

A new report released by The Boston Consulting Group (BCG) this week drew these conclusions and highlighted the need for corporate banks everywhere to adapt to a new climate of disruption.

In its report, “Global Corporate Banking 2016: The Next-Generation Corporate Bank,” BCG analyzes the results of its latest Corporate Banking Performance Benchmarking survey to assess how well-prepared corporate banks are to enter what’s called Industry 4.0.

“Industry 4.0 will connect buildings, vehicles, sensors and machines, enabling faster, more flexible and more efficient processes that, in turn, will generate significant increases in productivity and radical new business models,” the report noted. “These capabilities will also fundamentally change traditional relationships among banks, suppliers, producers and customers.”

In recent years, corporate banks have shown that they can be profitable. Western European banks in particular have revealed positive and improving economic profit, BCG said, especially when compared to corporate banks across North America and Asia.

In North America, for instance, 32 percent of corporate banks have not only shown negative economic profits between 2013 and 2015, but those profits were shrinking — compared to only 20 percent of Western European corporate banks.

Changes Across The Ecosystem

In 2016 and beyond, there are signs that point to which banks will be able to evolve within Industry 4.0. But there are also warning signs ahead for the banks that may be unable to adapt.

“Corporate banks are being disrupted by digitization whether or not they are fully ready — and most are not,” the report declared. “With the contours of the next-generation banking environment already taking shape, the only way that corporate banks will be able to stay relevant is by adapting their operating model swiftly and aggressively.”

Some of the strongest technological disruptors in the corporate banking space are predictive risk modeling, Big Data pricing, digitally enabled relationship managers and real-time visibility of the client journey via tools like insights and digital apps. Data analytics play a key role in many of these disruptors, the report suggested.

And while many of these tools are already shaking up corporate banking, more disruption is ahead, and it’s impossible to predict what those changes will entail.

In addition to Industry 4.0, the rise of Ecosystem Banking has forced corporate banks to reevaluate how banks service their clients. Today, corporate banks service various clients and their various needs in isolation, the report said. But there is demand for banks to service the entire ecosystem, meaning services like transaction banking, payments, invoicing and other processes are all intertwined.

It’s a tactic deployed by banks and non-banks alike, the report noted, and not only services clients the way they want to be serviced but can enable banks to access troves of data with the ability to assess corporate clients in new ways.

“It would be able, for example, to identify certain small businesses as excellent credit risks because of the steady volume of revenue it received from blue-chip companies,” BCG concluded.

The Internet of Things also plays an integral part in Industry 4.0 and can overhaul a bank’s approach to corporate clients. “Today, a bank might lend money to a trucking company to finance a truck, then process the checks and electronic payments made from customers to the company and from the company to fuel card providers and maintenance shops based on paper or email invoices to the company’s finance department,” the report explained. “In the future, there will be exponentially more payments that will all be fully digital. The bank will increasingly be seen as a trusted provider and fraud risk manager, generating new service opportunities and revenue streams.”

Following Corporate Clients

With corporations embracing the Internet of Things, electronic payments and a demand for real-time, mobile services, corporate banks must follow suit. BCG offers a roadmap for how corporate banks can begin to adapt to these changes across the ecosystem.

According to BCG’s corporate banking unit global leader, Carsten Baumgärtner, who also coauthored the report, banks are facing a fork in the road: to carry on with the status quo or to embrace market changes alongside their corporate clients.

“Our benchmarking data confirms the hazards of clinging to traditional credit-centric revenue models and static, inflexible operating practices,” the executive stated. “Incumbent banks must embrace deep, systemic digitization to stay relevant, open up new paths to economic profit generation and overhaul all key levers.”

Corporate banks have survived the global financial crisis, Baumgärtner said. But now that they’re coming out the other side, they face an entirely new challenge due to technological disruption.

“To stay viable, they need to understand the client journeys that matter most, invest in continual client-centric innovation, adopt agile ways of working and create more effective and collaborative sales cultures,” he continued. “The examples of early movers make clear that the next-generation bank is around the corner. The only question is which banks will be among them.”