Digital transformation of commercial and corporate banking





It seems much of the Fintech action in recent years has been in retail banking and for the casual observer, the digital transformation of commercial and corporate banking still appears to be stuck in the analog world. However, if one looks closely at the strategy and execution of digitalization efforts across many banks, the commercial and corporate banking segments are in the throes of disruption and digital transformation is underway.  While the pace of digitalization and the unbundling of the banking services affected the retail sector a lot more, today corporations and small businesses are seeking similar digital capabilities and seamless interactions as on the consumer side of the house.

Indeed, a corporate exec is a consumer of many digital services – from digital banking to ride-hailing, from music streaming to big-ticket e-commerce.  So when they look for commercial and corporate banking services, the current experience is manual, siloed, convoluted and complicated.

In an interview with BCG, Vish Jain, First Executive Vice President and Head of New Business and Operating Models at Siam Commercial Bank, says: “The pain of these processes when done manually can have a serious effect on net promoter scores. Today, a manufacturing company CFO might be investing her money through a smartphone using a robo-advisor, but when it comes to business transactions for her company, she has to sign a paper form in triplicate!”

In an American Banker article, Edward Achtner, the head of digital banking for HSBC’s U.S. commercial banking division echoes the same sentiment: “{Corporate Customers are} asking for more digital services, and that is particularly informed by their daily experiences in the retail space. A corporate treasurer, for example, is thinking about moving money, and five minutes later might be on Amazon, and it’s only natural for them to ask the question of why their commercial banking digital experience isn’t similar.”

The rationale for Digital Transformation of Commercial and Corporate Banking

Similar to their brethren in the retail banking world, the corporate and commercial bankers were forced into action as a new wave of Fintechs offered niche but highly profitable services where the brand loyalty and size of the firm’s franchise did not matter as much as the ease of use, low price, and speed of execution. Examples galore such as international money transfers, supply chain financing, and commercial lending.

It is imperative that large corporate and commercial banks heed to this well-heeled segment as nearly 56% of the revenues – or approximately $1.85 trillion – come from the corporate clients, according to a McKinsey report.  Many of the relationships are rather large, and a loss of a significant account will have a material impact – unlike on the retail banking side where most accounts are relatively small.

Corporate customers are consumers of various services from digital natives – Uber, Amazon, Spotify, et al. – and hence their expectations are not shaped by another bank, but the exceptional experience of products and services in their life interactions.

Last but not the least, some banks have taken a strong lead in digitalization of commercial and corporate banking and hence the competitive dynamics are forcing the laggards to shape up their digital transformation of banking services in the commercial and corporate banking world.

Vish Jain, First Executive Vice President and Head of New Business and Operating Models at Siam Commercial Bank, says: “The pain of these processes when done manually can have a serious effect on net promoter scores. Today, a manufacturing company CFO might be investing her money through a smartphone using a robo-advisor, but when it comes to business transactions for her company, she has to sign a paper form in triplicate!”

Typical Challenges Impeding the Corporate and Commercial Banking Digitalization Efforts:

Mindset and Culture: Many in the corporate and commercial banking world remain tied to the traditions of the past and think that relationship trumps technology. Indeed, relationships with the clients are important and need to be nurtured; there are several misconceptions in this regard.

It is not about high touch or high tech but finding a right calibration based on the size and complexity of the relationship.  Even the clients don’t want to rely on a relationship manager for routine tasks.

Typically, most commercial bankers can serve the top tier or their book which leads to uneven experience and advice.  With more self-service digital models corporate banks can reduce the burden on the relationship managers leaving them to focus on large and profitable relationships and indeed step in and provide point advice on an as-needed basis to the rest of the client base in their book.

Operating Model Complexity:  Many banks have grown organically and inorganically over several years, if not decades. Many services and segments are siloed, and hence there is no consistency in pricing, go to market, business models, service models, and banking advice.  Given these inherent challenges, banks often find it difficult to generalize and provide a unified digital front to the corporate and small business clients.

Legacy IT Landscape:  The core banking systems in many banks are antiquated with antiquated software, multiple systems spanning similar capabilities, which consequently lead to a set of convoluted processes. Real digitalization in banking involved both outside in and inside out transformation and given the aging application landscape and a patchwork of disparate systems; banks are concerned about the burdens of embarking on foundational change.

Piecemeal Initiatives:  Owing to the complexity of the IT landscape, the challenges due to operating models, and the lack of leadership, many corporate and commercial banking institutions choose to tread the surface, akin to putting lipstick on a pig.  These piecemeal initiatives may provide some reward, but it is fleeting and does not result in long-term optimization.

The Scope and Pervasiveness of Digital Opportunities in the Corporate and Commercial Banking Arena:

Commercial and corporate banking institutions are investing across the spectrum from core infrastructure to customer experience, from product customization to analytics supported decision-making.  Here are the areas where banks are focusing their investments and transformation efforts.

Bringing Backoffice and Middle Office Functions out of the Dark Ages:

Banks are digitizing services such as trade finance, merchant financing, cash management, transfers, and commercial loans. For many of these services streamlining account opening and eliminating repetitive tasks is a win-win for the banks as well as the corporate and small business customers.

For example, Bank of America has expanded its payments capabilities with the launch of Multicurrency Netting. The new solution centralizes inter-company payments, enabling large companies that operate across multiple borders to reduce both the number of payments and the total value of payments made between companies that regularly invoice one another.

“The Multicurrency Netting solution introduced today is in response to direct input from our corporate and commercial clients who want greater visibility and control over their inter-company and vendor payments,” said Liz Minick, head of Global Cross-Currency Product and Strategic Client Capabilities in Global Transaction Services. “We are pleased to add this powerful cross-currency solution to our suite of FX payment tools.”

In a similar vein, Commerzbank launched Global Payment Plus, a cash management application for corporate customers. Global Payment Plus is based on the Electronic Banking Internet Communication Standard (EBICS) for remote data transmission and offers the following:

  • Central administration of all accounts, including from third-party banks
  • Facilitates transactions worldwide
  • Access to all types of payment in national and international payment transactions
  • Allows money transfers or releases by the second signature

Leaning into Lending Marketplaces:

Initially, the lending marketplaces have started out as a venue for peer/crowdfunding of small loans. However, in recent years institutional participation on both sides, as well as in the secondary offerings has begun to increase. In addition to involvement in these lending platforms, which have grown from small loans to include business lending such as equipment leasing, working capital, merchant finance and the like banks are partnering or launching white label lending platform that relies on technology to ease the application to issuance process.

Marcus by Goldman Sachs is an example of a new generation platform by an established Wall Street giant.  JP Morgan Chase, on the other hand, has a partnership with OnDeck to provide a lending platform where JP Morgan Chase funds the loans, but the processing is managed by OnDeck.

Given the nature of the online lending platforms, commercial banks hope to lower the operating costs of the smaller dollar, higher volume loans, and the lending operations.

Blockchain Forays:

While the transformative underpinnings of the Blockchain technology, the underlying ledger for cryptocurrencies, are undeniable, the real usage in commercial banking has been slow with baby steps underway across the world.

For example, seven of Europe’s leading banks have launched we. Trade, an offering of the digital trade chain consortium. (The banking partners in the consortium is now up to nine.) platform is a one-stop digital shop for trade. The platform built on the IBM Blockchain Platform using Hyperledger Fabric and it offers banks’ customers access to a simple user-interface, leveraging innovative Smart Contract and opening up potential new trading opportunities.

Similarly, another group of banks has launched a joint offering called LenderComm. Developed in close collaboration with some of the world’s top global banks including BNP Paribas, BNY Mellon, HSBC, ING and State Street, Fusion LenderComm is a platform for the syndicated lending community which is underpinned by Corda, R3’s distributed ledger technology.

Fusion LenderComm intends to reduce the cost and burden of agent-to-lender administration and enables lenders to see accurate information on-demand so they can optimize syndicated loan portfolios.

While the banks are still trying to solve the issue of liquidity, proof of stake versus proof of work and other matters in Blockchain, it seems the benefits of the technology are making bankers take a serious look at using the distributed ledger technology across KYC, Supply Chain Finance, Cross-border loans, and syndicated loans.

Intelligent Automation:

Commercial banks’ Achilles heel is the cost of loan operations from the processing of new applications to underwriting with too much paper and too many processes wasting countless hours of human effort in data entry and pushing things from one step to the next.

Commercial banks are using robotic process automation to automate routine tasks. Similarly, machine learning based solutions are helping bankers in extracting data from unstructured documents. Other corporate banks are launching chatbots and conversational AI to engage the customer without the bottleneck and expense of relationship managers intervening in every step of the commercial banking process.

Additionally, corporate banking institutions are leveraging digitalization to ensure better risk management, compliance, and internal management reporting including real-time dashboards.

And it seems the next frontier is the “platformification of banking” through APIs (Application Programming Interfaces).

Commercial and Institutional Banks don’t have to do it alone:

In today’s complex business environment, the difference between competitors, friends, frenemies, collaborators, and partners is rather thin.  The advantage that commercial and corporate banks have is that they can follow the example of their retail banking peers who have had to embrace digital transformation earlier.

To help in their pursuit of the digital transformation of commercial and corporate banking, firms can use a combination of acquisitions, buy, partner, and build solutions.  In essence, the Fintech that competes with you may also be a ripe target for acquisition or partnership.

Some banks realize this reality and are open to Fintechs disrupting a part of the value chain. In a fireside chat with TechCrunch, Naveed Sultan, global head of treasury and trade solutions for Citi, opined, “Therefore if Fintech can come and pick up a part of a value chain which we believe they can execute better than us, at better economics and scalability, the banks have inherent incentive to pass that activity on to Fintech and move on to the value-added space.” He continues, “Contrary to the common belief, I think there is more opportunity for collaboration with Fintech than disruption, particularly on the institutional side.”

The Benefits of Digitalization in Commercial and Corporate Banking Sector:

  • Discover New Opportunities: Data science and predictive analytics will uncover better prospects
  • Improved Margins: Reducing operating costs and streamlining and digitizing operations will provide a boost to margins
  • More Smiling and Dialing: Bankers and relationship managers who nearly three-quarters of their time in routine non-client facing activities can start focusing on engaging the corporate customers.
  • Reduce Customer Churn: Corporate and commercial banks can reduce customer churn by offering a better experience and strive to increase the share of wallet as most large corporates have multiple banking relationships.

Higher Customer Satisfaction:  Needless to say, the digital transformation of commercial and corporate banking processes will yield higher customer satisfaction

Have you embarked on the Digital Transformation of Commercial and Corporate Banking in your bank? If so, what has been your experience? What areas of the commercial banking value chain have you transformed?