The future belongs to digital corporate banking
Empowering corporate banking – Implementing digital Solutions
This article was originally published on Der Bank Blog on September 10th, 2020.
By: Cornelia Schwerter, Chief Risk Officer finleap connect
Is the market acting too slowly with regard to digitization in corporate banking? Established banks are in danger of losing this next important race. The contact to corporate customers is in a state of constant change.
As a member of the finleap connect management team, I am one the one hand a user of corporate client offers, both from established and challenger banks. On the other hand, I follow the developments in open banking and the increasing relevance of SME-Banking in the fintech market. Combining these perspectives with each other results in my personal opinion on the status quo.
We are at the beginning of digital corporate banking
In the 2010s, the digitization of financial products tended to focus on retail customers. While the potential in this respect is still being exhausted, the focus is shifting to digital corporate customer offerings.
Why this chronology? Digital solutions for corporate customers should be more profitable for everyone across the whole value chain. The diverse use cases and thus the opportunities to differentiate oneself through digital features appear more tangible. Starting with onboarding to the corporate account, the classic payment transaction, over to support functions between account, accounting and tax, expense, cash, forecast and risk management, supply chain financing, document management, factoring, up to credit application lines or treasury or investment offers. If you add bank-related insurances or the company pension scheme, further fields open up.
Of course, in recent years parts of the above-mentioned use cases have already been digitally addressed for individual target groups. Many of these offers are however separated, i.e. are not part of the offer or in the sphere of influence of the principal bank. It is not only the white label and open banking trend and thus the independence from banking licenses that is accelerating this development. The breadth of possibilities in corporate banking also allows successful business models to be developed focused on individual use cases and niches. In addition, corporate customers can be clustered into target groups that couldn’t be more different: from digital-native freelancers to family-run craftsmen’s businesses, to listed corporations. Apparently, this decoupling makes sense. After all, the digital answer to each of the applications outlined above is highly complex in itself and can usually only be solved perfectly for one target group at a time.
Diverse opportunities mean complex challenges
Challenger banks may tend to underestimate the complex environment, but they also tend to overestimate the willingness of corporate customers to change. Meanwhile, one or two heads of corporate banking divisions in the classic world may still be standing in front of a flipchart with innovative ideas for their segment. And at finleap connect? Well, we are supplying the first challengers with our switch kit product and are planning further open banking features.
Now to speak from the user’s perspective of a corporate customer – aka regulated tech service provider without complex supply chain needs: We actively use three banks. These can be roughly divided into principal and secondary banks for payment transactions (risk distribution) and a challenger bank for our corporate debit cards and expense management. In addition, we use various classic but also challenger tools for further finance management. In the overall assessment, even after years of digitalization, the established companies still have strenuous, manual processes. On the other hand, we are encountering limitations among challengers when it comes to role and rights management for our growing company size. The offerings are operationally very diverse and usually not very well adapted to us. Meaningful – rather simple features, such as notification of transactions and balance changes would already be very helpful for our everyday life but are only available at our challenger bank. And yet, the banks we use for our payment transaction will still remain the traditional ones for the time being.
To become the principal bank of a corporate customer is even more difficult in the challenger sector than in the retail environment. The selection of the main bank is essentially based on its reliability in order to avoid unnecessary risks. In order to convince corporate customers to change banks for their day-to-day business, a challenger must offer not only comparable security but also real added value in something like a clear reduction in effort, rather than a chic, practical UX only.
Can incumbent banks rest on this low fluctuation? No! Meanwhile, the valuable point of contact with the corporate client’s financial department can be lost to players such as Microsoft or SAP and not just fintechs.
Implement digital solutions step by step
For banks, the lessons learned from the technical development in retail banking are partly transferable to the corporate banking world, i.e. the strategy can initially target user-centric, contextual banking solutions. With the difference that user-centricity is the first major challenge. Which target group do I want to focus on as a bank or fintech? Do I need a size focus as well as an industry focus for my product ideas?
If the goal is clear, initially simple everyday features, targeted at the accountant and the CFO on the client-side should be developed (push notifications, categorization, multibanking, financial timelines, etc). In this way, it is possible to convince corporate customers of the merits of my own (digitalization- or challenger-) strategy by making small, but significant progress. Providers with a contextual approach can keep the interface to the customer for valuable cross-selling points or win new customers, even if they are only the second, third or not even a bank.
Of course, the incumbent corporate bank can instead take the blockchain response to any use case problem or the rebuilding of complex end-to-end processes with internal resources. However, this path remains invisible to their customers for a long time. And if their dissatisfaction rises due to everyday obstacles, there is a risk of losing this valuable interface to open banking services.
Like in the retail sector, cooperation with technology providers should be a central part of the strategy – this applies to both large banks and challengers. I believe it is virtually impossible to cover the complexity of this area exclusively with in-house technology, even though, as we have already seen, it is foreseeable that digitization will take longer in the corporate customer segment than in the retail environment.
Conclusion and outlook: The goal is a central platform
My demand as a user is clear: a central platform would be ideal for all use cases that we currently cover via various banking providers.
It remains to be seen whether challenger banks will be able to keep up in the long term in this very special market – in niches, certainly. It is noticeable, for example, that sustainable banking for SMEs has not yet been tackled by challengers. For platform models, large banks are in a better starting position based on their existing customers and resources alone. However, they are currently losing (not just tech-savvy) founders as new customers. This is also happening deliberately because managing them and betting on their scaling does not pay off for them. A market division instead of clear winners therefore seem foreseeable.
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The platform models of the established companies will therefore tend to focus on the larger companies, while Challenger will continue to gain market share among freelancers, small companies and start-ups. However, with an average of over 360,000 start-ups per year in Germany alone, this is an attractive market if it is served profitably through digital and therefore efficient processes.
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