Other parts of this series:
This series of blogs looks at commercial banking in the Asia-Pacific region, and explains what actions this sector should take in order to stay competitive in a digital era.
An Industry in Flux
Few industries have been as affected by the digital revolution as banking. The once-staid world of retail banking, for instance, has been upended by rising customer expectations, fintech-driven innovations and instant payments – forcing operators to reinvent themselves as digital, always-on, mobile ventures. This digital wave has also reshaped the trading world, primarily through intense automation.
Yet oddly, it has largely bypassed the world of commercial banking (which for our purposes refers to banking for businesses with a turnover between US$0.5 million and US$1 billion). Our experience tells us this is largely because of a lack of pressure to change and the relationship-managed nature of the business, but it is also because most commercial banks don’t know how to go about improving what they do.
For a start, many of the transformative ideas that now permeate retail banking, for example, are new to decision-makers in commercial banking. And, although those decision-makers understand the concept of offerings like artificial intelligence (AI) and big data, they are less certain how those advances can help their business.
The purpose of this series of blogs is to explain exactly that – and not only to outline how commercial banks can reinvent their business in a digital age, but to explain why it’s crucial that they do.
A Fast-Paced Decade, But Few Changes
The past ten years have made obvious the need for better digital products in banking, with the following factors upping the pressure on commercial banks to reinvent their offerings:
- Changing customer expectations: corporate clients are becoming far more demanding, specifically around digital services, with two-thirds of small- and medium-sized enterprises (SMEs) in the UK, for instance, looking outside their bank for services they need. Most corporate banking offerings are designed to mirror a bank’s product hierarchy and structure (such as payments and liquidity). That approach is flawed. Instead, they must be relevant to the client’s usage – for example, meeting their need for foreign exchange to settle an invoice in China.
- New customer segments are emerging: the digital age has created new use cases and personas for whom traditional corporate banking products and the old-fashioned, rigid way of segmenting by turnover aren’t a good fit. Instead, they should consider, for example, the need to segment commercial customers by their responsiveness to products, their CEO/owner personality or simply by their business model – something other industries have been perfecting for years.
- The increasing influence of fintechs, which are continuously devising new, standalone offerings (such as with supply chain financing solutions) among a wave of digital innovations: new platforms, AI and blockchain offerings, and product and service enhancements that meet clients’ “always-on” expectations. Fintechs have moved into areas like lending, merchant acquiring, corporate payments and commercial account management, and are eyeing others.
- The changing role of relationship managers, who are central to commercial banking. Banks are being wrongfooted when it comes to how they handle SMEs, which are starting to benefit from fintech-driven offerings that don’t require a relationship manager, and that can be structured and delivered digitally.
A related point is that while banks have seen massive digital transformation, so too have their clients’ industries. To excel, banks must both harness innovations in financial services – as well as advances like 5G that allow massive real-time data flows – and marry those with innovations in their clients’ sectors.
Finally, it’s important to clear up a common misconception: digital banking no longer means having an internet banking platform or an app that allows customers to see their bank accounts – that was what it meant over the past decade. Today, it’s about being a data-driven and agile organisation that is obsessed with the customer experience across business ecosystems and leveraging next-generation operations. This requires a radical change from many of the banks, and a far greater one than those first steps they took when building an internet banking platform.
“Truly digital commercial banking is about being a data-driven and agile organisation that is obsessed with the customer experience across business ecosystems and leveraging next-generation operations.”
Cash is King
While some more advanced commercial banks have started down the digitisation and big data road, many of their peers have not. Those that are lagging must act fast to reinvent themselves and stay competitive, not least because Big Tech players from Silicon Valley and, increasingly, China are adding to the threats posed by first-movers, and are leveraging their strengths to take market share in APAC.
The good news is that there are plenty of small wins out there that can keep customers happy while banks reposition themselves. One of the most promising areas is in providing digital services to SME clients. Why? Because larger clients typically have the scale and sophistication to manage such services themselves, whereas SMEs don’t.
The most important service to offer SMEs is cashflow management. Many SME owners are inexperienced in financial management and banking, lack the resources to invest in financial management software, and need to spend the limited time they have developing their business. At the same time, they know cashflow is their biggest concern.
That’s why banks should first look to offer a cashflow analysis tool. Doing so should be straightforward: banks are experts in this field, have the necessary data, and can provide a central, automated forecasting tool. It needn’t require bottom-up development: off-the-shelf options are available, including those that can automate forecasting using algorithms that are sensitive to aspects of each SME (such as industry and geographical location).
Such a tool could look 4-6 months ahead by incorporating a range of data sources (see Figure 2). If cashflow is forecast to be negative, it could prompt the bank to offer credit by extending an overdraft or suggesting a loan. And if the forecast is positive, then the bank could be prompted to offer suitable deposit products.
Offering such a service would boost customer loyalty, while the data generated would allow for the cross-selling of products. SMEs could also choose to integrate other services with their banking, like invoicing or accountancy software, which would further increase accuracy and generate more data.
As commercial banks get more familiar with providing innovative digital services, they will find SMEs need help in a wide range of areas – from business modelling and finance to human resources, for example. There is no reason why a commercial bank can’t provide such services across SMEs’ value chains, and there are compelling business reasons to do so. After all, many of today’s business giants were SMEs once. It’s also the case that if banks don’t provide these services – by incorporating into their ecosystem those fintechs that have the requisite expertise – others will.
Our next blog will look more closely at the impact of COVID-19 and what commercial banks can do to ensure SMEs get the funding they need.
 SME Banking 2020: Changing the conversation (and capturing the rewards), Accenture (2016). See: https://www.accenture.com/t20160505t043700__w__/gb-en/_acnmedia/pdf-16/accenture-unlocking-revenue-sme-banking.pdf