Corporate Banking
Drivers
All industries are being shaped by the global Megatends of Globalisation, changing Demographics, Sustainability and Technology innovation. Shaped by these trends, the financial crisis in 2008, the pandemic, rising interest rates and a declining economy, the corporate banking sector is being transformed by five major drivers:
Customer Experience
Retail banking digtial adoption has spilled over to corporate banks. Like the consumer market, the growing influence of BigTechs has raised the bar for customer service for businesses and the customer experience is shifting online.
Many corporate banks, known for paperwork, red tape and branch dependency, were unprepared to support customers during the pandemic, resulting in low satisfaction. Major US corporate banks earned a Net Promoter Score (NPS) below 15 in 2021, compared with the average score of 34 in banking overall [1]. However, switching primary bank is low in the corporate sector (only 7% are likely to switch) due to enormous friction associated with switching [2]. Whilst switching primary bank is low, corporates tend to have relationships with multiple banks (10 or more in the case of corporate business with $1 billion or more in revenue) to meet their varied financial needs [3].
This has allowed challenger banks and FinTechs to compete. Starling Bank, for instance, boasts of 89% service quality overall among SMEs with more than 20 percentage higher than incumbents such as Barclays, Santander, and Metro Bank [4].
Trust & Compliance
Following 2008 there was much new regulation focused on capital adequacy to avoid future bailouts (e.g. Basel II, Dodd-Frank). This will continue as will the opening up of the banking system to competition (e.g. PSD2) and development of payments (e.g. NPA). Focus will grow on the usage and security of customer data (e.g. GDPR) and anti-money laundering (AML). The regulatory burden (and cost) will continue to limit the ability of institutions to innovate (in terms of capital and speed). Regulatory fines are also growing, with fines for AML and data privacy having totalled $5.4 billion in 2021 [1].
The financial crisis challenged the trust previously placed in banks, but over 80% of UK consumers still trust their banks [2].
Banks have seen a 35% increase in fraud attempts through digital channels during the crisis. Bank account hijacking went up over 20% in the first nine months of 2020. Overall attempted attacks are up 500% [3].
Many banks have well developed internal sustainability programmes but they will come under increasing pressure to focus investments on sustainable projects both from a climate and resources perspective (ESG, sustainable or green financing). 70% of medium sized businesses require their banks to offer sustainable products whilst also sustainably operating themselves [4]. The European Central Bank (ECB) has found that most banks are partially or wholly missing climate risk goals. Fewer than half have taken steps to adjust their strategic planning in the face of “inevitably larger climate-related risks going forward” [5].
Innovation
A majority of bank respondents (59%) agree “the traditional branch-based banking model will be dead” by 2025, up from 44% in 2019 [1]. COVID-19 has accelerated the shift to digital payments away from cash and digital currencies (CBDC) are being developed. Up to 90% of customer needs are now being met digitally [2].
Competition in the sector is becoming fiercer as FinTechs are orchestrating commercial banking ecosystems and building B2B super apps. Corporare banks will need to shift focus from business banking to simplifying business processes using intelligent automation and as-a-service models to meet customer demands for automated functions and insights to driver efficiency in their operations. Data is a major area for innovation, only 14% of corporate executives rate the quality of data and analytics at their bank as very good [3].
Failing to innovate is a major issue as banks have been hamstrung by legacy systems (spending 75% of IT budgets on legacy support) [4], stifling regulations and an inability to change due to lack of expertise and cultural inertia.
Efficiency
With growth being captured by neobank/FinTechs, traditional banks need to focus on operational efficiency. The cost-income ratio has been stuck around 62% since 2008 [1].
Reducing friction and manual work is also key to delivering customer experience. Banks have benefited over the past decade from changing customer behaviors and took the opportunity to decrease the number of both branches and employees. Finding ways to decrease costs even by 1 to 2% a year from now on—after a reduction of 25% of branches and 12% of employees in the past five years alone—will be increasingly difficult [2].
Resilience and hybrid working is also critical on the back of COVID-19, with up to 82% of workers having to work from home during the crisis [3].
Profitability
Inflation, higher rates, persistent supply chain shocks, and a looming recession portend a more stressful environment for corporates. While bank net interest income has improved as central banks raise rates, banks may also be forced to raise rates on deposit products to retain clients seeking higher interest–earning opportunities.
Another area of concern is business loans and the potential for increased business failures.
The unpredictable new normal driven by inflation, uncertain geopolitics and a focus on climate change will mean contiued volatility. Corporate banks will need to invest in digital services, a new client service model and sustainability in order to suceed.