Might there be a future without banks? Perhaps. But what we do know is that the banks of the future will look and act very differently from how they do today. This article looks at the forces that are transforming banking, what banks are doing in response and what this all means for the corporate treasurer.
Back in 1994 Bill Gates famously said that “banking is essential, banks are not”. He might turn out to be right: over the past decade a combination of factors has begun to transform the financial industry. These forces have given rise to a plethora of non-bank players that are disrupting the incumbents and shaping a new vision for financial services.
This is happening right now. In China, for example, Alibaba processes hundreds of millions of transactions and owns one of the largest money funds in the world. Alibaba is a technology company, not a bank.
Across the world, there are numerous other examples of how technology companies have disrupted banking, especially retail banking. In the corporate space, however, the impact has been less pronounced. As custodians of their companies’ cash, treasurers are generally not in a hurry to ditch their long-standing and trusted banking partners for a small fintech – no matter how innovative the solution.
There are many reasons why banks remain the provider of choice in the corporate space. The main factor is that they are fully-regulated financial institutions, certified by central banks as trusted providers of financial services with privileged access to the underlying financial architecture. Many banks also have long and storied histories, acting as crucial institutions in the development of the markets they operate in, and as partners to the corporates that operate in those markets. These two factors, combined with the fact that until recently there has not been any other choice for corporates, has made banks indispensable partners to every organisation on the planet.
In the post-war era of globalisation, the role of the bank has arguably become more important for corporates who have spread their wings and ventured into new and exotic markets in pursuit of greater profits. In doing so, the banks have moved beyond being an indispensable partner simply because they take deposits, lend money and process payments. They have now become de-facto members of the treasury team, acting as trusted advisors and navigating the way for businesses as they move into new markets.
For Ebru Pakcan, EMEA Head of Treasury and Trade Solutions (TTS) at Citi, the emergence of banks as advisors to their corporate clients has been the big change in how transaction banks operate over the past decade. “Banks have always been in the business of providing corporates with solutions and services to help them realise their objectives,” says Pakcan. “But what has changed is how we are now regarded as advisors to the business.”
Pakcan explains that banks have assumed this role because it is what clients have demanded. “In the past, many treasury teams were simply focused on executing the basic processes day-to-day,” she says. “Today, many treasury teams have a much broader remit and are regarded as a strategic partner to the business. This has led treasurers to turn to their banks for advice on what they can do to achieve their new strategic objectives.”
Whilst the growing advisory capacity of banks has been a big positive for many institutions, allowing them to foster deeper relationships with clients, there are also some negative forces impacting banks. Most notably these include the regulatory pressure, through Basel III for instance, that every bank in the world has been under post-crisis. These new regulatory pressures have had a profound impact and quite publicly put an end to the era of the global bank, forcing institutions to streamline, refocus and retrench.
This regulatory burden has also hamstrung banks in terms of their ability to be innovative – both in terms of the money they are willing to commit to innovation and the areas they are comfortable innovating in. This has inadvertently opened the door for non-bank providers to enter the market, giving rise to the age of fintech.
“Banks are in a tough spot and often come across as analogue players in a digital world,” says Don Raftery, Head of Commercial and Corporate Banking Practice at Greenwich Associates. “This is because at exactly the time when their customers are learning how fast, easy and transparent online service can be, banks are struggling to simply maintain the quality of service, because most of their technology spend is dedicated to addressing risk, security and compliance needs.”
Fintechs have jumped at the chance to take advantage of this opportunity and challenge the banks, most notably in the area of payments. These companies are doing so by leveraging new technology and creating value propositions that are deeply focused on solving specific pain points for customers – something that the banks, arguably, have not done in the past.
The dynamics between banking and fintech are constantly in flux and it has been a fascinating story to follow. Initially banks saw these disrupters as a threat: companies that could begin eating into significant chunks of banks’ profit margins. Over time, however, their stance has softened and banks now regard fintechs as potential partners that can help them serve their customers better. On the other side of the equation, many fintechs have realised their best chance for success is to align themselves with a bank to distribute their products and services.
A recent paper from Christine Barry, Research Director for Aite Group’s Wholesale Banking Practice, highlights this. “The acceptance of fintech companies as potential partners did not happen overnight,” says Barry. “In fact, it is part of a far greater shift in bank attitudes and buying behaviours around technology in general.” For Barry, the last few years have seen large banks begin to move away from fully building their own cash management solutions to instead deploying vendor-built solutions end-to-end or some components of these solutions.
“Several factors drive this shift in buying behaviour, including faster speed to market and the ability to build in areas in which there is a competitive advantage while outsourcing the rest,” adds Barry. “Additionally, technology has improved over the last few years. As such, solutions are far more customisable without having to touch code, and available functionality has widened.”
This change in buying behaviour is part of a wider shift in how banks operate as they seek to mimic fintechs and put the customer at the heart of everything they do. “The operating models of banks are profoundly changing,” says Winston Nesfield, Partner at Strategy&. “Before, banks used to be organised around products. Now they are striving to put the customer at the heart of their operations and systems in order to embed themselves in the customer journey. We should not understate how big a shift this is, both in how banks operate and how their people think.”
Transforming the culture of the organisation by hiring the right people and giving them room to flourish is likely to be a big driver of success for banks in the coming years. In an interview with McKinsey & Co, Piyush Gupta, CEO at DBS, commented that “we are up against businesses that work out of a garage, that take risks, operate in a nimble way and have a different kind of energy and drive. Large incumbent companies that can’t create a similar kind of culture just won’t be able to compete”. Indeed, the public aim of DBS is to be akin to a 20,000-person start-up.
DBS’ Head of Digital of Institutional Banking Group, Raof Latiff, offers more insight into how the bank is achieving this goal. “We have established various innovation project teams throughout the bank, they are left alone to work on improving products and processes, and bring new ideas to the table,” he says. “At the same time, we have trained staff around new ways of working, such as applying the agile methodology and following a customer journey process to encourage staff and clients to think innovatively and develop client centric solutions. Thus, we have started to cultivate a culture where it is encouraged to think outside of the box and experiment, and it is okay to even make mistakes as long as we learn from it.”
Erik Zingmark, Co-Head of Transaction Banking, EVP at Nordea explains that the Nordic bank has adopted a similar philosophy. “The people we hire today have a very different skillset to those we recruited five years ago,” he says. “We are also empowering our people to work differently, ensuring that creative people are not burdened by institutionalised reporting processes and other things that have traditionally hampered banks’ ability to innovate.”
Scanning the market, it is clear that these changes in thinking, culture, procurement and hiring at banks are having an impact on the products and services they are offering. Over the past year or so a seemingly endless list of bank product launches have leveraged all manner of existing and emerging technologies in an effort to solve pain points for clients.
The future of banks, though, is not dependent on digital product launches or on applying the “digital lipstick to products” as DBS’ Gupta so viscerally told McKinsey & Co. It is about completely digitising the organisation end-to-end.
Treasury Today has had numerous conversations with banks around the world about how they are leveraging various technologies to improve their back office functions and offer a more seamless experience for clients using the bank. “Banks will not necessarily have to continuously release cutting-edge digital services to satisfy customers’ needs,” says Greenwich Associates’ Raftery. “Instead, they need to get the basics right and make it easier for their customers to do business with them.”
Granted, some may cynically say the banks are doing this to cut costs, and to a degree they are right. However, Strategy&’s Nesfield is keen to point out that banks realise many products are commoditised, and that they will only retain and gain more customers by making themselves easy to work with. “As a result, banks are now looking to leverage technology not only to cut costs but also to ensure they keep business,” he says.
To put this into context, Citi’s Pakcan explains that it is crucial for banks to look at their process end-to-end and remove all the friction that exists. “To provide an example, we are working to digitise our call centre so that clients no longer need to pick up the phone to ask questions about the status of a payment,” she says. “Instead we want to provide that information into their eBanking portal using APIs, or allow them to ask a chatbot that will find the information for them. To do this, though, requires a big overhaul of our back office processes to ensure all the dots join up to deliver the correct information to our clients in a timely fashion.”
Revamping the back office and making sure that data is organised in a logical fashion and easily accessible to clients will also enable banks to be better advisors to clients. According to Greenwich Associates’ Raftery, this work is crucial because advisory will be “one of the enduring pillars of differentiation”.
Raftery goes on to say that “the true power of the advisory model will emerge when banks integrate ‘high-touch’ service with digital technology”. This will see banks use algorithms based on client inputs and industry data to inform solutions to clients’ short, medium and long-term goals – thereby enabling banks to “connect customers with products experts in areas critical to their business”.
For some banks, this is already becoming a reality. Citi, Nordea and a host of other banks have developed solutions that harness client and third-party data to show where improvements can be made and are using these to build more bespoke solutions for their clients.
DBS has also recently stepped into this area, taking a slightly different approach. Treasury Prism, a web-based solution, allows treasurers from around the world to upload data on their treasury structure and simulate what impact certain changes or the use of different liquidity and payment products will have. The solution suggests all the possible changes that can be made to their operating model today.
Explaining the thinking behind Treasury Prism, DBS’ Raof highlights that the bank was conscious not to develop a product to just simply push sales. “This tool gives treasury teams an easy way to evaluate their treasury management structures and see what improvements they can make or new structures they can work on without having to talk to the bank directly,” he says. “Of course, we would like them to come and speak to us down the line and we would follow up. But the main purpose of the tool is to get people thinking and share the knowledge that we have with anybody that wants to access it.”
What will a transaction bank look like in the future? Will there even be transaction banks? It is hard to say because as Nordea’s Zingmark notes: “The only guarantee you have when predicting the future is that you will be wrong.” With that in mind, Zingmark highlights how the strategy of Nordea is to develop a bank that is digital and nimble, thereby “allowing us to be able to meet customer demands as they evolve”.
This view is similar to the future of banking as predicted by Greenwich Associates’ Raftery. In his opinion, banks will prevail and the threat of non-bank financial services companies will subside as regulators scrutinise them more closely. “With electronic banking ubiquitous, large traditional providers transform into ‘digital banking superstores’,” he says. “Stripped of their technology advantage (and their regulatory advantage as well, assuming regulators act appropriately), non-banks will cede clients and share of wallet to the banks. At the same time, corporates will rediscover the benefits of one-stop shopping with large banks. Many remaining major fintech and non-bank providers will be acquired by banks, further enhancing banks’ technology prowess.”
For Strategy&’s Nesfield, the question of whether or not banks will survive in the future is a simple one. “Banks need to make their offerings simpler, smaller and more connected to the customer,” he says. “To do this, banks need to stop being a destination you go to in order to use financial services and instead become an experience you consume as part of everyday life. They need to fit into our lifestyles and workstyles rather than us, the customer, fitting into their operating model. If they can do that then they can survive in a variation of their current form, and it will be more of an evolution than a revolution.”