The FINANCIAL — Corporate banks must reinvent themselves to adapt to a new climate in which digitally enabled business models are redefining the movement of data and money and challenging banks’ traditional advantages, according to a new report by The Boston Consulting Group (BCG).
The report, Global Corporate Banking 2016: The Next-Generation Corporate Bank, is being released on December 12.
Drawing on insights from BCG’s most recent Corporate Banking Performance Benchmarking survey—involving 300 small-business, midmarket, and large corporate banking divisions from around the world—the report explores the current state of the industry, the growing need for cutting-edge digital capabilities, and the scenarios in which next-generation corporate banks will likely have to operate. The report further offers clear steps that players can take to begin their digital transformations and best position themselves for the future.
“Our benchmarking data confirms the hazards of clinging to traditional credit-centric revenue models and static, inflexible operating practices,” said Carsten Baumgärtner, the global leader of BCG’s corporate banking segment and a coauthor of the report. “Incumbent banks must embrace deep, systemic digitization to stay relevant, open up new paths to economic profit generation, and overhaul all key levers.”
The State of the Industry. According to the report, relatively few corporate banking divisions—less than one-third in North America and Asia and less than half in Europe—reported positive and growing economic profit from 2013 through 2015. In addition, while these top players achieved returns above the hurdle rate, bottom-quartile performers fell below the hurdle rate in almost every region and segment. (BCG’s methodology uses a 16% pretax hurdle rate and assumes that regulatory capital is 10.5% of risk-weighted assets.)
The survey revealed some favorable developments as well. The economic profit of around 70% of corporate banking divisions in Western Europe improved during the same period despite ongoing economic challenges—a marked contrast to BCG’s 2011–2013 study, when economic profit improved for just one-third of Western European divisions. Conversely, the economic profit of more than half of North American corporate banking divisions shrank during the 2013–2015 period, a worrying trend that has been somewhat camouflaged by the fact that many divisions in the region still post relatively high returns on capital compared with those in other parts of the world. In Asia, meanwhile, some banks reported improved economic profit—but two-thirds suffered declines.
Digital Capabilities. The report says that corporate banks are being disrupted by digitization whether or not they are fully ready—and most are not. With the contours of the next-generation banking environment already taking shape, the only way that corporate banks can stay relevant is by adapting their operating models swiftly and aggressively. But they have a narrow window of time in which to free up resources and develop the capabilities needed for the sweeping transformation that is required. Leading banks, for their part, are already well on the way to digitizing the traditional enablers of value. In the process, they are overhauling their client strategies, revenue models, cost approach, and risk management. Banks must start by addressing pricing—usually the single biggest source of untapped funding for digital investment.
The Next-Generation Corporate Bank. Although the exact nature of the industry in 20 years is impossible to predict, the report discusses three possible evolutionary scenarios: Industry 4.0, ecosystem banking, and the Internet of Things.
The rise of Industry 4.0 shows how technology can alter the nature of specific industries and the financial services they use, the report says. 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. These capabilities will also fundamentally change traditional relationships among banks, suppliers, producers, and customers.
In ecosystem banking, the report says—noting that digital leaders in many industries are often also platform leaders (such as Amazon)—corporate banks would be able to serve not only the platform leader itself but the many individual suppliers and distributers that operate on it. The result would be a powerful ecosystem that allows corporate banking divisions to support a diffuse network of companies in a particular industry-specific value chain.
It is also possible to envision an even more ambitious future built on the Internet of Things and blockchain-enabled smart contracts, the report says, citing a hypothetical example of trucks that are not only self-driving but also operate as autonomous business units. A truck could be programmed to join an Uber-style system for shipping containers, and when empty could log on to a platform and sign up for whichever shipping container journey was identified as optimal by its profit-maximizing algorithm. One result would be far more payments that are fully digital. The bank would increasingly be seen as a trusted provider and fraud risk manager, potentially generating new service opportunities and revenue streams.
Beginning the Transformation. According to the report, although all corporate banks have taken at least tentative steps down the path to digitization, launching a long-term strategic transformation can be daunting. Rather than focusing on specific projects or products, it is important to identify a transformation path that keeps options open while building digital capabilities and generating near-term cash to fund the ongoing journey. This path comprises five imperatives:
Determine the bank’s digital aspirations and future strategy
Review client journeys and redesign the most important ones
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
“Corporate banking divisions have emerged from the financial crisis only to be hit by a massive digital disruption,” said 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.”