DIGITAL INNOVATION

Corporate sophistication – the gloves are off!

Not a week goes by without another news headline announcing that yet another manufacturing or services corporation is expanding their business and moving into financial services as a lender or using a Fintech’s service to lower its own operating cost. For example, Trumpf, a manufactures of machines for factories who process, weld, or cut sheet metal or tubing, has created Trumpf Finance, an internal bank-like system that provides more flexibility to the company’s customers—providing delayed payment leases, seasonally adjusted leases, buyout leases, and loans. Trumpf is not alone. Other companies, too, have jumped aboard the corporate financing bandwagon. On the business-to-consumer (B2C) side, auto manufacturer Ford’s “captive” company, Ford Credit, has catapulted into the lending industry with its full slate of financial services.

 

Should traditional banks be worried?

Once the sole province of banks, sophisticated financial services, such as lending, have become the secondary business of corporations worldwide. At first glance, it appears that this development might pose a significant threat to banks. In fact, the facts seem to bear this out. In Western Europe, more than 50% of ‘corporate banking divisions’ suffered a dip in their profits, according to a recent BCG report. Yet instead of buttressing their defences, banks would be better off if they would look at this increased financial sophistication in their former customers as a genuine, revenue-generating opportunity. To seize this opportunity, banks need to toss their stodgy presuppositions in the trash – and discover new approaches and strategies that will make their former customers stand up and take a second look at what they have to offer.

In other words, innovation. To achieve—and surpass the level of corporate sophistication that these non-bank firms have achieved, banks need to innovate—and start now. If they fail to find the golden ring of innovation, non-banking companies will continue to usurp many of the banks’ traditional roles. For example, captive financial subsidiaries and payment factories have, in many cases, already taken over the banks’ once-exclusive grip on:

  • Payment processing
  • Letters of credit / open account payments to reduce counter party and transaction risks
  • Managing inter-regional cash accounts
  • Forex services
  • Financing business extensions
  • Commodities trading and risk hedging
  • Investing excess cash into short term facilities (where possible in times low interest rates)

These corporate entities and their financial subsidiaries have benefited from advancements of treasury management systems (TMS) and enterprise resource planning (ERP) technologies. With the help of sophisticated software and IT companies like Oracle, SAP, and many others – what once would have been a complex endeavor became doable by themselves.

 

Time to get sophisticated: financially sophisticated!

So doable, in fact, that not only the pioneers – multinational corporations (MNC) all – have developed in-house operational and financial sophistication, but so have mid-sized corporations and even some larger small-to-medium enterprises (SMEs). At first, this development boded well for banks, since even though these in-house financial operations became more sophisticated, most of these corporations formed a bridge between their in-house technological operations and their bank. Doing so allowed them to fully automate their transactions. Many still retain this bank-dependent system, such as the relationship Lufthansa has with Deutsche Bank. Together with Lufthansa’s system provider, Hanse Orga, the airline established a host-to-host connection for their participating group companies’ integrated account. With a central interface transmitting account information every day, payment orders can come in through a global format for processing. The system allows “on behalf” payments, so long as they fall within tax regulations, so the processes can be better optimised and standardised. This ensures that payment flows are managed from one central location and assures the system’s liquidity. With such an updated system, banks can predict corporate transactions and credit business from these linked companies. As technology evolved, bringing with it 24/7 automated online banking, bank-to-bank connectivity, and even the SWIFT system for handling funds in multinational transactions, corporate financial sophistication evolved with it. 

Yet there was another factor – the 2008 financial meltdown – that caused corporations to turn inward for financial security. As banks fought to survive the crisis, they turned down corporate business they normally would have welcomed. The reforms that followed the 2008 crisis caused banks to cut risks at all cost, even if it meant losing corporate business. Risk aversion was the rule of the day. Bank loans dried up, so corporations had to scramble to find other solutions for lines of credit.

 

How to survive?

Suddenly deprived of credit, with limited access to capital markets, corporations had to come up with a new approach on the spot. Using their own operating cash flow to fund their investments and grow their business, these companies developed internal capabilities to process, plan, and engineer their financial transactions. These strategies created a huge impact on the banking industry’s relationship with corporations. Once a key intermediary between a corporation, its customers, and its suppliers, the bank’s role dwindled – or in the case of some – disappeared altogether. The growth of technology that made these strategies easier to implement created an even more decreased role for banks in corporate financial transactions.

Today, corporations and other non-banking entities are now able to provide services and processes formerly limited to banks. Banks should not limit their watch on their old traditional competitors – other banks – but rather need to be paying attention to the “new kids in town,” who are tearing up the playing field with their new capabilities. Sensing that there’s money to be made, non-bank financial companies have piled on in the growing competition with banks to be financial services providers. 

 

Here are just a few of the areas in which non-bank financial services companies have increased their presence:

Lending &  creditFunding circle, Zopa, iwoca, and many others platforms, has brought business-to-business (B2B) bank-alternative financing to companies – on either traditional own balance sheet or peer to peer lending basis. Trumpf, of course, as well as Ford’s aforementioned Ford Credit, also finance purchases for their customers.
Foreign exchange Oanda, Kantox and TransferWise to offer foreign transaction services to companies at near-interbank rates.
PaymentsEurope has a plethora of payment services, including the Netherlands-based Adyen, the Finland-based PSP Holvi, China’s Alipay, and many more, all providing end-to-end payment services for companies, all without the drag of expensive legacy systems.

Face it—corporate business is the brass ring every financial services company wants to grab. As one can see, even the corporations themselves have gotten into the game with their in-house financial services.

 

The answer? Become – and remain – relevant

How do banks compete with such multiple challenges? Banks must become relevant to their customers’ needs—and move quickly to do so.

 

Educate customers

Banks who teach their corporate customers how to use new features and services, such as Cybersecurity and fraud prevention in banking, will earn the respect—and the business—of these companies. Services are of no use unless a company can use them efficiently to boost their revenue and streamline their overhead or simply hedge a potential risk.

 

Discover and offer the services corporations expect

Delve deep into your target customers’ data – such as their cycles of service uptake and banking behavior patterns – and ask them questions to learn what financial services they need. When you learn what services they need, execute them well. Automate your services yet provide superb technical support to eliminate frustration on the customers’ end—24/7. Make sure your customers’ journeys are seamless from end to end and that corporate customers can access their banking information from wherever they are—both in-office and with mobile devices. Having both an app and an efficient mobile version of the website is a must-have for today’s corporate banking.

 

Greater innovation for corporate customers

When corporate customers see a bank moving toward innovation—as did Lufthansa with Deutsche Bank—the corporation will be more likely to give that bank a shot at their business. Banks can incorporate e-trade finance standardised communication into their online banking services for corporations. Banks must find ways to provide useful services to SME customers, such as providing links to online government registries for taxation, commercial registration, and similar bureaucratic entities. Several Nordic banks have already implemented these adjacent support services.

 

Partner and outsource

Find capable financial technology companies to which your bank can outsource processing and product capabilities, such as financial supply chain management and mobile payments. As technology evolves, make sure that the bank evolves with the latest developments with an effective, forward-thinking technology partner. In a recent move France’s Groupe BPCE partners with TransferWise offering its low-cost money transfer service to the lender’s customers. Today, innovation isn’t a solo entrepreneur, but rather a team effort. Learn to partner with your customers to customise your services to their needs.

 

The bottom line

When you bring your bank’s level of services up so that it exceeds the services non-bank financial services companies can offer your corporate customers, they will choose you. When your bank provides all the services that corporations need – seamlessly – they will have no need to set up an in-house financial services subsidiary. When you become the go-to financial services provider for your corporate customers, they will become not only satisfied customers, but also brand evangelists for your bank: active advocates that provide word-of-mouth testimonials about your sterling, cutting-edge service.

That’s innovation—and it is what banks will need to stay ahead of the game, given the keen competition from non-bank financial service providers. Continuous regulatory induced de-regulation of banking services (e.g. PSD2 with access to accounts through APIs) as well as democratization of technology are advancing and will keep lowering entry hurdles (regulatory, economical, technical, etc.) for corporates, (fin)/x-techs and neo-banks to target parts of the traditional financial services value chain – to build on this for their benefit.

Strengthen these key service areas well ahead of your competitors and your bank will be well set to conquer this and all other challenges that face it in the future. It, too, will achieve the level of corporate sophistication that will set it above its competitors. A transformative innovation strategy that can deliver change quickly and in co-creation with corporates will surely a challenge to take as the gloves are off now – for good.

 

References:

https://news.thomasnet.com/companystory/trumpf-finance-offers-flexible-funding-options-824796
https://www.forbes.com/sites/jimhenry/2012/10/31/most-car-companies-want-their-own-finance-company-so-they-have-a-place-to-go-home-to/#a9d089c673b9
https://www.bcg.com/publications/2018/global-corporate-banking-2018-unlocking-success-through-digital.aspx
http://cib.db.com/solutions/case-studies/Payment_factory_for_a_complex_company_structure.htm
http://www.aon.com/switzerland/en/risk/publications/global-risk-management-survey-2017.pdf
https://www.treasury-management.com/article/1/363/2998/lufthansas-flight-to-payments-quality.html
https://www.db.com/newsroom_news/2018/deutsche-bank-pilots-game-changing-payments-solution-with-iata-en-11574.htm
Published by: Bernd Richter