A new report urges banks to hit fast forward when managing digital innovation.
By Susan Muldowney
It’s a tough time for corporate banks, and the Boston Consulting Group (BCG) suggests things are about to get a lot trickier.
Digitally powered business models are redefining the movement of data and money. They demand that banking leaders commit to ongoing transformation – at the same time as they’re grappling with increasing competition, waning revenue, and growing loan losses and regulatory costs.
It’s time for a radical shake-up, declares a BCG report.
Digital disruption is not new to banks. However, BCG’s most recent Corporate Banking Performance Benchmarking survey – which included 300 small business, mid-market and large corporate banking divisions across Asia, the US and Western Europe – shows rising costs and falling margins in corporate banking, and highlights the hazards of banks clinging to traditional credit-centric revenue models and static, inflexible operating practices.
“Incumbent banks must embrace deep, systemic digitisation to stay relevant, open up new paths to economic profit generation and overhaul all key levers,” writes Carsten Baumgärtner, global leader of BCG’s corporate banking and co-author of the report.
Rise of the fintechs
Economic profits between 2013 and 2015 were reported by less than one-third of survey participants in North America and Asia, and less than half in Western Europe. The next generation banking environment is beginning to take shape, pressing corporate banks to swiftly adapt their operating models.
Predicting exactly what future banking will look like is difficult, but indications are coming from new players, such as financial technology (fintech) companies, which have used new digital capabilities to re-engineer traditional banking practices.
A recent report from Accenture shows global investment in fintech ventures reached US$5.3 billion in the first quarter of 2016, up 67 per cent on the same period in the previous year. The report also showed the percentage of investments going to fintech companies in Europe and Asia-Pacific nearly doubled, to 62 per cent.
The impact of fintechs on the banking industry has been debated for some time.
John Shipman, partner, Asia FinTech, and consulting lead at PwC, told INTHEBLACK last year that alternate fintech lenders appear to pose little threat to traditional banks in the short term but the long term may be a very different story.
“I think these [fintechs] have the ability and opportunity to disrupt the market once the right ingredients are in place between the regulator and the governments to create a sort of perfect storm,” he warned.
Business of banking value pack. This value pack includes two courses with topics covering the business of investment and retail banking.
Talking about evolution
Singapore’s central bank is testing a single blockchain system for bank-to-bank payments. Leading Australian banks are also pushing towards digital transformation.
Commonwealth Bank, for example, has spent more than A$1 billion in recent years updating its core banking platform. Westpac recently partnered with fintech lender Prospa to promote small-to-medium enterprise lending. With former Google Australia boss Maile Carnegie as its digital banking group executive, ANZ is relying heavily on the cloud to partner with other organisations to deliver innovative software.
At the time of her surprise appointment last August, Carnegie promised to draw on her Google toolkit, not only to bring on an innovation culture change at ANZ but to explore artificial intelligence, blockchain technology, the growing influence of data, and how the bank should better collaborate with fintech start-ups while remaining competitive. Success will come from mastering “the art of external collaboration”, she told the Australian Financial Review.
“... banking divisions have emerged from the financial crisis only to be hit by a massive digital disruption.” Carsten Baumgärtner, BCG
The global banking community is exploring evolutionary scenarios such as ecosystem banking, where corporate banks will have an opportunity to serve not only the platform leaders (such as Amazon, for example) but also the individual suppliers and distributors that operate within them.
Another scenario includes the rise of Industry 4.0, which focuses on data exchange and improved automation. This looks set to fundamentally change relationships between banks, suppliers and customers and lead to radically new business models.
However, banks have a narrow window of time in which to free up resources and develop new capabilities for a sweeping transformation, says the BCG report.
“Corporate banking divisions have emerged from the financial crisis only to be hit by a massive digital disruption,” notes Baumgärtner. “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.
“The example of early movers makes clear that the next-generation bank is around the corner. The only question is which banks will be among them,” he concludes.
5 imperatives for banking transformation
Rather than focusing on specific projects, banks should keep options open while building their digital capabilities, advises the Boston Consulting Group (BCG). They should:
Determine the bank’s digital aspirations and future strategy.
Review client journeys and redesign the most important ones to better service customers.
Consider which potentially game-changing disruptive businesses to invest in, and at what level.
Develop a comprehensive plan to fund the journey.
Commit to a rigorously executed change-management program.
What's the cost of changing government regulation