8 minute read 9 Nov 2020
reframe your future market city static

How will banks transform to build the next generation of businesses?

Authors
Matt Cox

EY Americas Corporate, Commercial, and SME Banking (CCSB) Consulting Leader

Large-scale transformation leader and strategist focused on Wholesale Credit and Transaction Banking. Husband. Father of two. Nomadic traveler.

James Sankey

Director, Banking and Capital Markets, Ernst & Young LLP

Focusing on corporate, commercial, and small, medium enterprise (SME) banks. Passionate about nature, sustainability, innovation, music and his family and friends.

8 minute read 9 Nov 2020

Seven hypotheses that will define the future of the corporate, commercial and small and medium-sized enterprise banking industry.

In brief
  • Banks’ incremental transformation has only partially addressed shifts in client expectations for richer digital experiences.
  • The global economic slowdown, ongoing low-interest rates, and lower asset quality have made growth opportunities harder to come by.
  • Our hypotheses highlight the pace and scope of change coming to the corporate, commercial, and SME banking market in the dynamic decade ahead.

During the past five years, banks serving corporate, commercial, and small and medium-sized enterprises (SMEs) have made incremental transformation investments that only partially addressed shifts in client expectations for improved service offerings and richer digital experiences. Other efforts addressed specific operational challenges and helped streamline compliance activities. Banks have adopted emerging technology, but typically in a siloed fashion, with a small number of fit-for-purpose use cases. Likewise, most large banks have focused on cost optimization.

Yet, the case for a fundamental transformation of the industry is stronger now than ever before. That’s true in spite of the market challenges caused by the COVID-19 pandemic. Traditional products are no longer relevant, and clients demand more value-adding services and richer experiences. The many disruptions already underway signal what’s to come and confirm that tomorrow’s leaders will need to define and execute on a bold vision. That will include defining a purpose and developing offerings aligned with that mission, as well as becoming relentlessly client-centric through harnessing data and analytics to provide easy-to-access digital products and services.

Tomorrow’s leaders will need to define and execute on a bold vision. They will focus on defining a purpose and developing offerings aligned with that purpose, as well as becoming relentlessly client-centric through harnessing data and analytics to provide easy-to-access digital products and services.

Corporate, commercial and SME banking, circa 2030: Seven hypotheses

From widespread self-financing to popular subscription models and ecosystems, to sustainability leadership, the following seven hypotheses describe how corporate, commercial, and SME banks can move from the challenges of 2020 to growth in 2030. They speak to the most compelling opportunities for tomorrow’s market leaders and the biggest challenges for tomorrow’s laggards.

1. As more large companies self-finance operations and offer credit to suppliers, tech giants and large platforms expand their banking services.

Traditional revenue streams and client relationships will be threatened as surplus liquidity and credit proliferate. Clients expect their banks to do more than just provide credit when they ask for it; rather, the best banks will know precisely when and exactly how much credit their clients need, based on a clear understanding of current performance and growth opportunities. Leaders will develop diversified offerings for all types and sizes of businesses and are deeply integrated into their clients’ supply chains. Laggards will lose market share to large self-banking corporates; access to cheaper deposits will be the only thing keeping them in the game.

  • Key questions for banks:

    • Are we ready to invest in capabilities for proactive and tailored financing?
    • How can we succeed as a niche financier for larger players?
    • Which products can drive deeper integration with clients’ supply chains?
    • Do clients understand the value of increased integration and data sharing?
2. Banks redefine client-centricity in a segment-less world.

Leading banks will adapt their organizational structures and operating models to provide clients with the products and services they choose – with a serious focus on digital offerings – regardless of where they fit within traditional segments. These banks will also solve the age-old SME conundrum with a set of solutions tailored to their lifecycle and rich, seamless experiences for all clients. In comparison, lagging banks will stick with rigid segments based on revenue and employee counts, limiting their ability to react quickly to changing client needs. Their inability to streamline client movement between segments will undercut relationships with fast-growing SMEs that develop more sophisticated needs.

  • Key questions for banks:

    • Are current organizational and operating models ready to support faster movement between traditional segments?
    • How differentiated are solutions by type of clients? What’s the best way to efficiently deliver a baseline experience for all segments?
    • Can we accurately measure profitability at the level of individual clients?
3. Banks evolve to become trusted advisors, leveraging data to play an active role in shaping clients’ future business strategies.

Over time, clients expect their banking providers to understand what they need to advance their business strategies and connect them to growth opportunities. Leaders will respond to that expectation by serving as matchmakers, connecting like-minded and complementary clients, as well as a curated network of third-party service providers (e.g., attorneys, accountants, and real estate professionals). They are able to monitor and track the progress of their clients over their entire lifecycle – it’s just about sales. Lagging players will struggle to predict which products and services their clients might need now or in the future. Thus, they can only react to incoming client requests and remain stuck in their traditional banking lane.

  • Key questions for banks:

    • Are we collecting the right data from clients today? How much of it is digital and structured?
    • Do we know where clients are in their lifecycle today and where they will be tomorrow?
    • What capabilities are necessary to predict the right products and services for clients based on their lifecycle and likely events?
4. In the age of ecosystems, banks organize integrated networks of trusted providers to facilitate client growth.

Many businesses currently maintain relationships with multiple banking providers, because no one bank offers an integrated platform or a comprehensive range of services. In the future, the convenience of a unified experience or a single interface for all banking needs will become a baseline. Tomorrow’s top-performing banks will be integrated, open, and secure at the same time. Leaders win by creating and operating their own platforms or by “going niche” with a differentiated offering integrated with, and delivered through, multiple platforms. Laggards focus on a narrow set of transactions and a shrinking number of client relationships.

  • Key questions for banks:

    • What will be our core capabilities 10 years from now? What non-core functions are best handled by others?
    • What partnerships are necessary to develop and scale an integrated ecosystem for clients?
    • Are we strategically and holistically examining transformation priorities, scope, and investments?
5. The subscription revolution comes to commercial banking, as clients pay a set fee to access tailored products and services.

Just as consumers have grown comfortable with subscription models, so too corporate and commercial banking clients want the ability to add or remove products and services quickly. Leading banks will provide customized solutions, comprised of interchangeable products driven by business flows and forecasts, for a set fee based on cost-effective and operationally efficient delivery. Subscription offerings align with clients’ baseline needs and promote add-ons and enhancements. Laggards will struggle to move beyond product bundles, which are less customizable, cumbersome to price, and even harder to deliver cost-efficiently.

  • Key questions for banks:

    • What is the cost to serve by the client segment and product?
    • Which are the most likely products and services clients would buy via subscriptions?
    • How quickly can product management teams design and test subscription models with clients?
6. As banks expand beyond banking, more clients embrace sophisticated corporate treasury, legal, risk management, and other services.

Clients are increasingly looking for help with non-core activities, especially relative to key growth milestones. It’s all about enabling them to focus on the business, bringing legal, advisory, risk management, and other financial management capabilities to clients in a coherent and accessible manner. Leading banks harness the power of ecosystems to develop and launch integrated services, carving out niches in specific areas, such as infrastructure project finance, healthcare, and travel and hospitality. Lagging banks are forced to satisfy larger corporate clients’ ever-rising expectations, even as they try to catch up on supply chain integration. At the same time, they lose market share because of the challenges inherent in providing enhanced services cost-efficiently.

  • Key questions for banks:

    • Is today’s operating model designed to scale for partnerships and ancillary services?
    • Which niche services can be monetized as solutions to clients?
    • Are we making the right technology investments and the right operating model changes to enable future market leadership?
7. Banks provide leadership on sustainability, inclusive capitalism, and other critical issues, creating stronger markets and more interconnected communities.

Reduced trust in financial services is a serious threat. Articulating a clear social purpose is the first step to making a credible and high-profile commitment to helping businesses and communities. Leaders will realize that their performance is tied to sustainability achievements and broader measures of value than traditional financial metrics – particularly in the areas of environmental, social and governance (ESG) matters. Laggards will view ESG and inclusive capitalism like a public relations exercise and struggle to think beyond outdated modes of “corporate social responsibility.”

  • Key questions for banks:

    • What is our vision and purpose for sustainability?
    • How can we help with sustainability and other ESG-related issues? What products and services do clients need in these areas?
    • Are we investing in a roadmap to operationalize the vision?

Recommended actions

While every bank will undertake a unique transformation journey, the way forward starts with a strong purpose and vision, a clear and client-focused strategy, a strong and flexible operating model, and sophisticated technology.

  • Gear the business strategy for what’s next: Define strategic priorities, and clarify the value proposition
  • Define client centricity in a segment-less world: Develop client-focused solutions and new digital capabilities
  • Future-proof the operating model: Break down product silos, and build ecosystems in line with client expectations
  • Invest in data and technology to accelerate transformation and deliver quick wins: Identify the right partners, and develop a plan to monetize data and analytics

Summary

For corporate, commercial, and SME banks, the next decade looks very different. Traditional revenue streams will be under threat and the competitive landscape will shift. Companies will self-finance and tech giants will expand their banking services.

In response, banks must reimagine and rethink their business models – from the products and services they offer clients to how they articulate their purpose and value proposition. The banking leaders of tomorrow will embrace transformation and emerging technologies to meet rising client expectations.

About this article

Authors
Matt Cox

EY Americas Corporate, Commercial, and SME Banking (CCSB) Consulting Leader

Large-scale transformation leader and strategist focused on Wholesale Credit and Transaction Banking. Husband. Father of two. Nomadic traveler.

James Sankey

Director, Banking and Capital Markets, Ernst & Young LLP

Focusing on corporate, commercial, and small, medium enterprise (SME) banks. Passionate about nature, sustainability, innovation, music and his family and friends.