The notion that corporates may one day do all their banking with tech groups seems entirely possible. It’s forcing an urgent revaluation between banks and their corporate clients of where the true value in their relationship rests. From the outside, corporate banking looks as vulnerable of falling victim to the internet as its retail cousin; look a bit closer and banks still have important advantages.
Two years ago Omnicom Group, the global marketing and communications company, introduced a centralised payments function within its US and European treasury divisions. It swapped a laborious, decentralised system involving processing payments through 500 separate accounts in the two regions, for non-bank technology from fintech company Pelican.
The new system gathers daily payment data from every Omnicom entity and aggregates those payments into a single file that is then processed through one bank account. “Banks are trying to do something similar but they’re not quite there yet,” says Maeve Robinson, Assistant Treasurer at Omnicom who spoke to multiple software providers before choosing Pelican. “The centralised disbursement system is more efficient and allows us to focus on strategic activities like cash flow forecasting, managing our debt and investment maturities, interest rate risk management, and ultimately promote shareholder value.”
Banks have been losing sections of their business to tech companies for a while, as sophisticated treasury teams switch to new software to improve their cost base and efficiencies. But the trend of fintechs picking off key parts of banks’ value chain to offer specific services is gathering apace. The churn of new applications and software means the outsourcing or unbundling of treasury services to fintech groups is constantly encroaching on banks’ traditional and profitable corporate offering, spanning everything from payments to foreign exchange and small company lending.
It is also happening much faster than banks, saddled with legacy technology and struggling to change the pipes while the water is still running, can adapt or compete. The notion that corporates may one day do all their banking with tech groups, particularly the big ones like Google or Amazon, seems entirely possible. It’s forcing an urgent revaluation between banks and their corporate clients of where the true value in their relationship rests. From the outside, corporate banking looks as vulnerable to falling victim to the internet as its retail cousin; look a bit closer and banks still have important advantages.
Unbundling rolls on
The unbundling trend is everywhere. SWIFT’s payment system offering corporates direct access to its platform to avoid transacting through multiple banks is the most obvious example. “We’ve just started using SWIFT because we needed technology that was independent from banks to meet our growing number of transactions and desire for independence,” says Tim de Knegt, Manager, Strategic Finance and Treasury at the Port of Rotterdam in the Netherlands. The raft of new know your customer (KYC) service providers which have sprung up offering the Holy Grail of standardised, automated KYC in contrast to onboarding with individual banks is another.
The centralised disbursement system is more efficient and allows us to focus on strategic activities like cash flow forecasting, managing our debt and investment maturities, interest rate risk management, and ultimately promote shareholder value.
Maeve Robinson, Assistant Treasurer, Omnicom
In one trend, tech companies are now introducing multi-bank portals for a much broader range of organisations, changing the way they can interact with banks as big corporate treasury already has. Non-banks like Kyriba and Finestra are introducing software that offers multi-bank portal interfaces directly, allowing more companies to carry out transfers, access information, compare prices and execute trades through their platform across multiple banks. “It’s an important trend that is making it much more transparent for the treasuer,” says Thomas Olsen, a partner in Bain & Company’s Singapore office.
Bank of Amazon
Technology companies are also bypassing banks to interact directly with corporates to cause disintermediation. This is most notable around supply chain finance and working capital solutions offered by cloud-based specialists like PrimeRevenue or Tradeshift. Similarly, Amazon and Alibaba now offer supply chain finance to the vast ecosystem of merchants selling through their sites. “This is the kind of financing down the supply chain that banks would have done in the past,” says Olsen.
Tech giants’ access to buyers and sellers’ data fuels their ability to offer working capital solutions. Amazon’s data gathering on the retail and consumer goods companies using its site spans things like information on their suppliers to how frequently they sell to large corporations; trade flows and details of destination and origination markets. Admittedly, it’s only one area of data and doesn’t reveal a holistic picture of a companies’ treasury policies around issues like foreign exchange hedging or overall cashflows, but it is more than enough to build new products and solutions around.
Indeed, it’s not just corporates outsourcing to tech companies. Banks themselves are throwing in the towel and outsourcing to fintechs, particularly around payment processes. Witness Commerzbank recently outsourcing all of its payments processing in the single euro payments area (SEPA) to French tech group equensWorldline. The ten-year contract will see equensWorldline take over all SEPA instant, multi-currency, and domestic payments – equating to 4bn transactions per year – on behalf of the bank, migrating legacy inhouse architecture to the equensWordline platform.
The loss of profitable services means less fees for banks and could result in banks charging more for large financings. An ongoing transaction banking and working capital relationship allows banks to build a credit profile when it comes to raising debt for new services and solutions. If companies only come to banks for bigger financing solutions, it will cost more.
Client is king
But tech companies’ encroachment on banks’ corporate business offering doesn’t extend into one important area – yet: the valuable relationship banks have with their corporate clients. Whether treasury divisions are investing in their own software solutions, outsourcing to third parties or using a third-party service through their bank, banks are still banking their clients. “Technology companies are playing a role in the corporate banking value chain, but corporates are unlikely to switch their core relationship to tech companies,” says Olsen.
One reason is because fintechs are not actually trying to compete with banks on everything because much of what banks do isn’t their area of expertise. This could involve providing a large credit facility, require a banking licence, or the ability to implement transactions in a regulatory environment. Platforms will face increasing regulation the more they venture into banks territory and although fintechs are cash rich, it remains to be seen whether they have the appetite to take on the costs associated with compliance. “A large corporate bank does many things, much of which a technology company wouldn’t want to do,” says Olsen.
Data danger
And corporate treasury is similarly reticent to embrace tech firms as their new bankers. It all comes down to trust. Companies are wary of how tech companies are already storing and using their data, nor do they trust them to manage their deposits or keep their assets safe. “I wouldn’t give a tech company a penny of our deposits because I don’t want to do anything that would put our assets at risk,” says Omnicom’s Robinson. “The Federal Reserve sits behind US banks; tech companies don’t have that because they are not banks.” She adds that choosing a third-party provider to implement the company’s new centralised disbursement technology involved a leap of faith. Two years on, and she would still rather the technology sat behind her banks’ firewall. “I would be more comfortable with banks’ level of security, systems and data centres, but they can’t do it right now,” she says. It’s a mistrust evident in her insistence that the daily payment data comes back in-house, enabling a “last look” before treasury sends it to the bank for processing – rather than Pelican mail the file direct, host to host.
Nor do treasurers like the thought of being sold services off the back of data gathered by tech companies. “I know that a bank will not use my data to predict what type of services they can sell to me,” says de Knegt, who explains that his concern that tech companies might use the Port’s data in this way is already manifesting in treasury strategy. “We are considering to what extent we should use technology in our financial processes from tech firms because the information we give them is much more valuable than the service their technology performs for us.”
Advisory wins
Indeed, he wants his banks to do much more to leverage the information they hold and their sector expertise, to offer more, higher value services. Alerts to risk in the Port’s complex supply chain that stretches to over 20,000 companies, is a key area in which he’d like some help. “We will invest more than €2bn in the port area over the next five years and if a small customer or supplier is in financial trouble it could mean the difference between a finished project, or a delay of several years.” He welcomes signs that some of his relationship banks are beginning to adapt and offer client analysis, like ING’s data company Suburbia.
The call on banks to make more of their corporate relationships, and translate their customer knowledge into new services, opportunities and profit, is coming loudest from within the banking community, especially while fintech still lacks the institutional history and access to flows needed to inform the advisory expertise that corporates say they value most. “The relationship is wasted unless banks leverage their knowledge of the client and turn it into a value proposition,” says Citi’s EMEA Treasury Solutions Head, Ebru Pakcan. It’s a process that should see banks get their hands dirty with new technologies, experimenting with clients around AI and data science, and worrying less about the immediate application of technologies. “Banks need to be able to pick up a piece of technology and understand how it works and what it does,” she says.
Technology companies are playing a role in the corporate banking value chain, but corporates are unlikely to switch their core relationship to tech companies.
Thomas Olsen, Partner, Bain & Company
She draws on Citi’s adoption of blockchain, where the hype often overshadows the realistic application, as an example of the approach in action. Rather than exploring ways to make payments on blockchain itself, Citi is looking at how its clients which are adopting blockchain can connect to traditional payments and financial services within the bank. “We have concentrated on how the bank can connect to the blockchain ledger of a corporate client and receive instructions and send information. We currently have one live client and are talking to others. It comes down to asking what problem are we trying to solve for our clients and what new services are needed?”
It also requires looking at what a business will look like in five years’ time, she says. Banks need to examine how companies’ changing business models will require different technology. For example, application programme interfaces (APIs) may not make much sense for a traditional treasury, but if a business switches from a distribution model to selling direct to consumers and selling more on-line, the real time benefit of API connectivity comes into play.
In another development that could work in banks’ favour, some fintech’s are struggling to sell their services direct to corporates, especially those plying data information technology to improve cash optimisation. It means these firms are increasingly coming to banks to help them break into corporate treasury. Citi’s recent collaboration with US-based fintech HighRadius illustrates the point, says Pakcan. “Many of these tech companies don’t require banking partners and they could go direct to the corporate. However, they need that introduction and access to the flows, and partnering with us makes integration smoother for the corporate,” she says. Viewed through this lens, the new financial services landscape shifts from competition to cooperation in a win-win for tech companies, banks and corporate treasury.
Unbundling may also slow down. Of course, technology erodes many inefficiencies, but the more third parties a corporate works with, the more unwieldly and potentially costly the proposition; unbundling also breaks with the two-decade trend in rationalising corporate treasury and one-stop shopping with large banks. “There is a fine balance in terms of how many third parties you want to partner with, ensuring that the benefits of these relationships don’t suddenly become costly and inefficient,” argues Pakcan who notes that companies expanding into emerging markets particularly benefit from a comprehensive single solution because working with individual providers is difficult.
Treasury is using technology to access banks’ services more efficiently, and new software is allowing corporates to change the way they interact with their banks. Yet ask most companies if they’ll start banking with a fintech and the answer is no: they depend on banks to keep their money safe in different pockets of the world and depend on technology providers for the software and applications they provide. “The difference between banks and IT companies is black and white,” concludes Robinson.
