By Mike Wallberg, CFA | 15 September 2016
If you’re in charge of transaction banking and you’re looking out five years, you can be forgiven for imagining a future where the Great Fintech Uprising has banished banks to grim money exchange-and-lending outposts, a dim, dystopian pall cast over the landscape. But it needn’t be so. Sure, some slow-footed financials will stumble as they invest scarce IT budgets in patching old technology and blowing themselves up on large-scale core replacements.
By packing these four key strategic arrows in their quiver, though, cash management businesses can position themselves to thrive through 2020 and beyond.
Arrow #1: Do the basics well
Though you may be tempted to run, arms flailing, down the blockchain / virtual reality / robo-advisor hallways, take a breath. There are a number of areas where you can improve the “bread and butter” of your GTB business for both your clients and yourself, and to do it simply and effectively.
First, define your key business drivers. Every bank will prioritize these differently, but they often include:
- Revenue enhancement
- Operational efficiency
- Client experience
Defining these priorities will provide an anchor when debating competing capital projects.
Next, look at your key players: In simple terms, what help do they need, to do what they need to do? Here are some common pain points and priorities for the three key players:
Product Managers: “I need help building product propositions tailored to the needs of different types of customer, supporting pricing for individual and bundled products, and simplifying this mess of charge codes. Oh, and I want to organize my product shelf by product and pricing hierarchies. Go!”
Relationship Managers: “I need help acquiring and retaining customers, and building tailored offers that reflect the depth of my customer relationships. I want a hand evaluating product fit for my customers and monitoring their performance, including pricing reviews.”
Customers: “I want an efficient onboarding process and the ability to compare how my bank stacks up to its competitors. I want to be confident my bank is helping me to use the most appropriate products at all times. I want a personal relationship with my manager, and to be rewarded for the business I bring to the bank. I want billing that’s accurate, detailed, and consolidated. And I want transparency into how prices are set and charges levied.”
Take control of your data. By establishing a centralized product and pricing repository, you can take control of your data – and in doing so, overcome legacy system constraints and manual processes. From a clean, organized data set, product managers can construct and define product hierarchies, portfolio managers can execute relationship pricing, and customers can enjoy transparent, accurate billing.
Arrow #2 Make changes on your terms
You love your IT team but when it comes down to it, you would rather do scenario analyses, launch products, and execute price changes in real-time and on your own. The key to this arrow is time and flexibility. By developing capabilities that enable you to easily model and execute changes without IT intervention, you can cut time-to-market for new products and enact price changes substantially faster. That means better competitive differentiation, more nimble strategic and tactical moves, and faster price realizations – enabling better revenue growth and operational efficiency. In discussing its recent Model Bank Award with Celent, CIBC reported they’d reduced time to market by 50 percent and saved millions per year in change management costs by doing just this: making changes on their own terms.
Arrow #3: Leverage technology as a proactive tool
Two great things about computer code are: it doesn’t play favourites and it never forgets. Pair these characteristics with clean data and clear objectives, and banks have the potential to consistently delight both their customers and their shareholders. It’s about ensuring clients are getting the products and services that match their needs, not just what’s for sale. Better sales, better customer experience, and better profitability will emerge when banks recognize that – and invest in the technology that informs it.
A couple of scenarios in which automated alerts could improve a cash management business:
Provide proactive client service. Imagine a corporate client that acquires a competitor and absorbs the target’s treasury function, effectively doubling the size of their daily business. The spikes in volumes or anomalous regional activity could then trigger an alert to the portfolio manager – who could then construct an updated offer to reflect the client’s changed circumstances. Data-driven better pricing, higher service levels, and the personal touch could all help to retain the (bigger) business.
Plug revenue leakage. As discussed in this month’s article about revenue leakage, a smart system that monitors condition fulfillment and issues proactive alerts can be a powerful – and highly profitable – capability in which to invest. An example: in exchange for promising to maintain minimum balances, an SME was granted a fee waiver. But the bank has no way of tracking if the balances are being maintained (they’re not), and the review process is infrequent and data-starved. So the bank leaks revenue year in, year out. By configuring the conditions, tracking their fulfillment, and being alerted when they’re offside, banks can plug the leak. And they can be proactive with clients by flagging or pre-empting dips in volumes or balances along the way. “You may want to boost your balances over the next couple of weeks or you’ll lose that fee waiver” is a client-centric approach that is possible when your technology can keep up.
Fintech doesn’t have to mean Banking Armageddon
Arrow #4: Enable your digital strategy
As the innovative might and platform agnosticism of virtual banks and fintechs meet bank-industry structural changes (like PSD2), it becomes increasingly clear: whatever battles they may think they can win along the way, banks should not try to win this war this alone.
The ultimate victors will be those banks that adopt a certain humility in recognizing that when it comes to identifying ways to do things smarter, faster, and cheaper, others may be able to do it better than they can. And embrace it.
The Boston Consulting Group (BCG) dug into this thesis in their terrific article, Fintechs May Be Banks’ Best “Frenemies.” In it, the authors argue that for all their advantages, fintechs will in fact have difficulty fully unseating “[e]xisting players [that] hold sizable structural, economic, and relationship advantages.” Instead, corporate banks should look to their left and right, and be fearful of the ones that are partnering up with these upstarts.
“Some corporate banks have already begun to parlay their investment in fintech partnerships, acquisitions, and internal incubators into big gains,” they write, “by launching attractive new services, reaching underserved segments, and differentiating the client experience—at competitive price points and lower operating costs.” To remain in the game, banks need to identify where their shortcomings are and boldly buy or partner with fintechs that can turn them into advantages and differentiators.
Figure 1 shows BCG’s finding that about half of the $78 billion in fintech dollars have funded projects in corporate banking, with about half of that again focused on payments. Corporate bankers are certainly not starved for choice.
Figure 1: Fintech investment since 2000
Source: The Boston Consulting Group (BCG).
BCG sees a few areas where successful corporate bankers are focusing their partnerships. They include:
- “Owning” one or more links in the value chain through best-in-class specialized services like payments or electronic invoicing;
- Leveraging low cost service models;
- Developing digital enhancements to existing offerings like real-time loan approvals;
- Using scalable tech to serve previously underserved (smaller) segments; and
- Employing data analytics to offer relationship pricing and tighten up credit analysis.
A bank can then rank its strategic priorities – Revenue growth? Client experience? – against its own capabilities to focus on the areas where partnerships can have the most relevant and material impact.
Making it happen. When it comes time to make the decision about how to make it happen, banks can consider alternatives to the traditional build, buy or partner models. Some banks like JPMorgan Chase are incubating fintech startups, Citi built a new in-house team, and many are just becoming clients directly by – in the case of LendingClub – buying up the loans they originate (over a third of the $2.8 billion it lent in 2015 were snapped up by traditional banks).
Banks may be better off reimagining themselves as organisms within an increasingly complex banking ecosystem. The many fintechs that are populating the system – with which they can develop symbiotic relationships – offer one nice feature: flexibility. Banks that want to “plug in” to their solutions need only get an API playbook and get to work building a two-way bridge from their core systems.
While apps’ API credentials enable easy flow of data, however, banks will need to invest in getting their own data cleaned up and organized first to avoid a garbage-in, garbage-out result. This includes centralizing pricing and product data, and aggregating client-level data across products within the bank.
By extension, banks may consider “API’ing” their own data flows – their payment nodes, pricing nodes, client account data, etc. – and crowdsourcing secure tools to manage them. In effect, a bank with this capability could modularize the various elements of its business and choose which elements to self-manage and which to sub-contract out. Don’t want to spend millions figuring out how to make Apple Pay work? Connect your clients’ credit card accounts to an API and partner with a fintech that lives and breathes this stuff – and give your clients a superior client experience in the bargain.
By arming yourself with these four arrows – getting the basics right by creating a central product and pricing repository with enhanced design and execution features, taking control of your data so you can make changes on your own terms, leveraging technology to help you proactively serve your clients, and embracing fintechs as partners and not enemies to drive your digital strategy – you can help your bank thrive through 2020.