Digital transformation is a challenge for traditional banks. Innovative fintechs put pressure on retail banking – and not only there. How to deal with this development in corporate banking?
Asking bankers about the biggest challenges for their industry today, the first things usually mentioned are the persistent low-interest period and increasing regulatory requirements resulting from the financial crisis. But even more revolutionary for the financial sector in the long term will be the process of digital transformation.
This is particularly evident in retail banking, where innovative fintechs have been putting pressure on the established banks for a few years with a steady stream of new products and services. As a rule, fintechs focus on a specific and clearly defined area of expertise and develop digital solutions that address very specific customer problems. Focusing on a key product ensures low complexity and high excellence at the same time.
Fintechs are Developing Customer-Focused Solutions
Another important aspect for the constantly growing success of fintechs is the focusing on the customer: products and services are consistently developed and designed for the customer and his problems and needs. They deliver an immediately recognizable value for the customer and thus, less complex to explain and consult than traditional banking products, which are generally developed from a banking perspective – in other words: the profit perspective.
Many successful fintechs with profit in mind have in common that they offer significantly cheaper services other than traditional market participants. TransferWise for example aims at expatriates and promises cross-border transfers at a small percentage of the costs of a normal bank. Robo Advisers such as Scalable Capital, on the other hand, use low-cost ETFs (Exchange Traded Funds) to offer professional asset management usually only available to wealthy private banking clients to retail clients as well.
Are Banks Sleeping Through Digital Corporate Banking?
In retail banking, fintechs have now spread into almost every business segment and established themselves more or less successfully. Moreover, established banks have reacted as well – late, although not too late – with digitalization pushes in order to retain their customers.
So have banks learned their lesson from the attacks in retail banking, and reacted by storming ahead, (at least in corporate customer business)? The answer is no. It seems that product managers sitting in the banks are closing their eyes to the imminent danger once again.
In fact, it is more likely the innovator's dilemma preventing banks from pioneering the corporate banking with their own solutions – a sector out of which they still make really good money. The economy is booming, credit defaults are historically low and margins are adequate. In such a situation it would be counterproductive to start aggressive, disruptive innovations and to incite a bottom-up price competition. "Cannibalize yourself before someone else does." – an easy statement, but difficult to implement in established organizations as long as they are still successful. The question is: How long do the old structures work in an everchanging market?
The First Start-ups Venture into the Field of Corporate Credit
Several fintechs have successfully established themselves in corporate banking – across all segments. Companies like Kontist, Holvi, or Penta, for example, offer low-cost checking accounts for freelancers and entrepreneurs, competing in particular with savings banks. Sumup or iZettle are lowering the prices for card acceptance at retailers not belonging to the big supermarket chains. And platforms such as Compeon and Creditshelf provide corporate loans in the double-digit million range against commission.
Many traditional banks have been watching the hustle and bustle from the sidelines. Some of them have also launched digital initiatives in corporate business in the meantime – such as Commerzbank or Deutsche Bank, are already bearing their first fruit. Looking at all the banks in Germany, however, many specific programs have been sacrificed to austerity or restructuring.
The Financial Sector is Also Facing Competition from Big Newcomers
This inactivity has already led to the fact that payment transactions in eCommerce will be increasingly fulfilled by new players from the fintech sector. Companies such as Wirecard and Adyen have become real stock market players with double-digit billion euro valuations, outshining traditional banking groups. Where banks do not move, innovative newcomers provide movement.
These newcomers are not necessarily venture capital-fed start-ups only – internet giants such as Amazon are also forging into some areas of corporate banking. The focus point in this area lies on the lending business, in which many of the fintechs specialized.
Banks are under pressure in two respects: newcomers are beating down the prices and margins since they are much more efficient without legacy. At the same time, their IT systems and processes are significantly leaner and faster. If established banks do not want to be marginalized bit by bit, they need to act now.
Banks Need Strong Partners in Technology
Since large banks are often not able to develop their IT and processes disruptively from within fast enough, they will need external support. This can be achieved by buying interesting fintechs. Usually, this leads to the fintech disappearing from the market as a possible competitor, but the technology and processes cannot be transferred to the bank due to cultural incompatibilities. Thus, the banks only are able to buy time at a high cost.
It seems more advisable to look for one (or more) strong and innovative partner(s) offering ready-made platform solutions "white label" as a service and at the same time bringing a high level of expertise in profitably linking the old and the new world. Only in this way, banks can attain the speed they need in the current situation. There is no advantage in completely reinventing the wheel if it is already available on the market and can simply be purchased. Time plays a decisive role if you want to hold your ground against the agile competition.
With a strong partner in technology, important topics such as fully digitalized end-to-end processes can then be implemented quickly and consistently, as these processes are essential to accelerate process lead time, increase transparency in all process steps and ensure data quality. Not only to meet the ever-increasing requirements of the supervisory authorities, but also to meet the equally rising customer requirements.
Since traditional banks have reacted very hesitantly to the digital transformation of society in retail banking, they are also in danger of falling behind in the much more profitable corporate banking. Yet a resolute response to the current challenges is essential. Experience shows that achieving these goals on your own is difficult, but with the right solution provider as a technology partner, many things are possible.
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