Corporate banks need radical shift to remain viable: Report

BOSTON: Corporate banks must reinvent themselves to adapt to a new climate in which digitally enabled business models are redefining the movement of data and money and challenging banks’ traditional advantages, said a report issued by The Boston Consulting Group (BCG) on Sunday.
Drawing on insights from BCG’s most recent Corporate Banking Performance Benchmarking survey — involving 300 small-business, midmarket and large corporate banking divisions from around the world — the report titled “Global Corporate Banking 2016: The Next-Generation Corporate Bank” explores the current state of the industry and offers clear steps that players can take to begin their digital transformations.
“Our benchmarking data confirms the hazards of clinging to traditional credit-centric revenue models and static, inflexible operating practices,” said Carsten Baumgärtner, the global leader of BCG’s corporate banking segment and a coauthor of the report.
According to the report, relatively few corporate banking divisions — less than one-third in North America and Asia and less than half in Europe — reported positive and growing economic profit from 2013 through 2015. In addition, while these top players achieved returns above the hurdle rate, bottom-quartile performers fell below the hurdle rate in almost every region and segment.
The survey revealed some favorable developments as well. The economic profit of around 70 percent of corporate banking divisions in Western Europe improved during the same period despite ongoing economic challenges.
Conversely, the economic profit of more than half of North American corporate banking divisions shrank during the 2013-15 period, a worrying trend that has been somewhat camouflaged by the fact that many divisions in the region still post relatively high returns on capital compared with those in other parts of the world. In Asia, meanwhile, some banks reported improved economic profit — but two-thirds suffered declines.
The report says that corporate banks are being disrupted by digitization whether or not they are fully ready — and most are not. With the contours of the next-generation banking environment already taking shape, the only way that corporate banks can stay relevant is by adapting their operating models swiftly and aggressively. But they have a narrow window of time in which to free up resources and develop the capabilities needed for the sweeping transformation that is required.
Although the exact nature of the industry in 20 years is impossible to predict, the report discusses three possible evolutionary scenarios: Industry 4.0, ecosystem banking and the Internet of Things.
The rise of Industry 4.0 shows how technology can alter the nature of specific industries and the financial services they use. Industry 4.0 will connect buildings, vehicles, sensors and machines, enabling faster, more flexible and more efficient processes that, in turn, will generate significant increases in productivity and radical new business models. These capabilities will also fundamentally change traditional relationships among banks, suppliers, producers and customers.
In ecosystem banking, the report says corporate banks would be able to serve not only the platform leader itself but the many individual suppliers and distributers that operate on it. The result would be a powerful ecosystem that allows corporate banking divisions to support a diffuse network of companies in a particular industry-specific value chain.
According to the report, although all corporate banks have taken at least tentative steps down the path to digitization, launching a long-term strategic transformation can be daunting. Rather than focusing on specific projects or products, it is important to identify a transformation path that keeps options open while building digital capabilities and generating near-term cash to fund the ongoing journey.
“Corporate banking divisions have emerged from the financial crisis only to be hit by a massive digital disruption,” said Baumgärtner. “To stay viable, they need to understand the client journeys that matter most, invest in continual client-centric innovation, adopt agile ways of working and create more effective and collaborative sales cultures. The example of early movers makes clear that the next-generation bank is around the corner. The only question is which banks will be among them.”