Banks should look beyond the fintech threat to modernize
Banks that believe fintech firms are their primary threat should look instead at how their internal processes are hampering competitive growth.
Banks are very concerned about how emerging fintech firms will take a slice of their business, according to Misys’ white paper 'Digitization in corporate banking – new rails for revenue growth', which assesses the rate of development across the business.
SME lending was considered under threat by 68% of banks, with 61% believing supply chain finance was being pressured by the new entrants.
Having updated platforms is becoming a key aspect of winning business. Of the global corporate banking customers questioned, 72% stated that assessing digital capabilities was among their top considerations when evaluating their banking providers. While this might appear to point to a favourable environment for fintech, in reality many large corporates still eye such firms with caution.
Tim Tyler, Misys
Tim Tyler, head of corporate digital at Misys, says the threat of the fintechs is not as aggressive as once feared. In part, this is down to corporates and their counterparties not having the same degree of trust in these providers as they do in banks.
“For banks, the stages of adaptation are not so difficult," he says. "It is a far steeper curve for the fintechs, who need to build up trust in their services and their staying power before many corporates will be comfortable handing their processes over to them.
“It needs to be an integrated relationship, with each party in the transaction process working together to build trust and deliver the risk certainty and speed of execution that corporates need and desire.”
Banks nevertheless need to look at the wider landscape to understand how to evolve their processes to meet their customer needs. This might require refocusing their attention internally.
Tyler notes that corporates are increasingly making specific demands for software in their RFPs. However, the need to show where revenue growth will be made from investing in systems is slowing down the process of modernization for many financial institutions.
“We’ve recently been speaking with four major international banks and they all are impacted by their budget cycles,” he says. "They are being pushed to show which changes deliver real value benefits and we increasingly help build business cases based on our experience with other banks.”
Some banks have been willing to make the first move.
Jurgen Vroegh, ING
Jurgen Vroegh, global head of payments at ING, says they are already seeing investments they have made paying off, adding: “We see that with each improvement we offer our customers that customer satisfaction is rising. That will be our main driver for the coming years, to keep investing in digitalization.”
Chris Barker, head of digital and engineering services at RBS, adds there are varying speeds of benefit to making investments.
“Some returns are almost instant and some by design have a longer payback period," he says. "Typically speed of investment is linked to clarity of opportunity and an articulation of commercial viability.
"It’s somewhat flawed to assume a lack of immediate return slows down the investment opportunity as this is just one dimension of our investment decision.”
Where successful developments have been made, these initiatives often come from the top of the institution, rather than from within the transaction banking business.
ING’s CEO Ralph Hamers stated last week the bank will be investing a further €800 million in updating digital operations.
“More and more the digital strategy from banks is coming from the top down as the C-level is looking end-to-end at how to get high performance corporate banking,” says Misys' Tyler.
“Digital strategy is being elevated above the lines of business. This is a more bullish approach enabling real transformation in corporate banking.”
Where they are choosing to make their investments can impact the client relationship. Front-office systems are receiving the most attention, with 32% of respondents to Capgemini’s 2015 Banking Executive Interview Survey stating this part of the business was advanced.
Rate the digital capabilities of your front-office, middle-office, & back-office
Source: Capgemini 2015 Banking Executive Interview Survey
By comparison, just 15% stated their back-office systems were to the same standard. However, the lack of work to update these platforms was also found to be a cause of problems for customers.
The white paper points out that no institution has yet completed a full front-to-back overhaul of their systems. Updating systems in an increasingly commoditized product space could create competitive advantage.
Vroegh says: “For ING, updating our front-to-back systems is of the utmost importance. Therefore, we will keep investing an enormous amount of money over the next years to enable our customers to have even better insight in their position.”
Building internal bridges
Selling a range of products can bring considerable benefits. Breaking down the internal communication silos could create another revenue stream.
Enrico Camerinelli, senior analyst at Aite Group, says: “I would recommend cross-business insight for executives and relationship managers to make smarter risk and service decisions, as it opens the possibility for the bank to provide advisory services, which appear to be in great demand by corporate users.”
The understanding that banks have of their clients should not be underestimated, as the companies themselves are often not operating in the most efficient way.
Camerinelli says his assessments have found corporates are most concerned with how well their banks can serve their needs, adding: “My research suggests that speed of execution is the most requested capability by corporates. Understanding corporate needs effectively is a difficult task given the scarce propensity of corporate people to clearly articulate their needs in an integrated way. Corporate silos still exist.”
Misys' white paper shows those with advanced technology platforms have a greater earning potential. Platforms that cover real-time payments and FX rates could see a 3% to 6% increase in cross-selling compared with less-sophisticated platforms.
Tyler adds: “There needs to be greater streamlining in what remains a dysfunctional landscape. It frees up time in the bank and enables revenue-generating activities, while reducing the cost of doing business.”
Fintech firms are not yet set to dominate corporate business and the benefits for banks of collaborating with them should not be overlooked. Banks should consider partnering where possible, with the white paper cautioning them that “nothing should be off the table” when it comes to working with fintechs.
Indeed, 68% of respondents stated that working with partners could be a strong driver for growth.
Paul Thwaite, head of transaction services at RBS, says: “We are seeing more fintechs adopt a more collaborative approach recently, where they look to work with more established players for mutual benefit.
"For example, banks come with an established brand, customer base and infrastructure, whereas the fintech could come with new ideas and a more agile operating model to deliver new services quickly.”