With Sibos just around the corner, I’d like to take a look at some of the issues shaping the transaction banking industry today, and discuss what I think they mean for its growth-minded leaders. In particular, I want to focus on three key topics – digital deployment, standardisation and business development.
Most banks are well underway with digital transformation initiatives, but the jury is still out on the extent to which such investments have actually transformed corporate banking. While the argument for wholesale transformation is clear, the initial enthusiasm and expectations have been significantly checked by tangible results. Despite promises of radical revamps to user experience, self-service and client intelligence, a number of projects have stalled, or overrun in costs. Delivering a veneer of polished front-end has – it’s fair to say – not been accompanied by core back-end capability for bank clients. How do we explain this mismatch of expectation versus results? I think there are a few reasons.
Firstly, over the past few years, banks have been overly eager to reduce the cost of supporting their technology “assets” – cutting staff, shifting contract engagements to larger utility centres, or even outsourcing entire departments altogether. These measures, together with a high churn rate of critical front-office product managers, have resulted in a dramatic loss of understanding of remaining bank system architectures, capabilities and their interdependencies – making commitments to next-generation transformations difficult to manage and execute successfully.
Secondly, huge pressures on banks have resulted in a noticeable shift in C-level behaviour in many institutions – notably, the call for unanimity on a handful of strategic projects deemed critical to a bank’s success. Indeed, digital transformation initiatives have almost become religious crusades, with non-believers simply unable to temper expectations.
Finally, and somewhat linked to the above, is the increasing use of consultants. Their views on how to transform banks through digitalisation have often been fixed-minded and backed up by unproven cases of dramatic cost reductions and revenue increases. Such margin promises were likely not reviewed with the necessary level of rigour or reinforced by sufficient evidence – leading to some of the consequences that we see today.
This history of failed projects, and a growing realisation among banks that that the costs of customisation far exceed the benefits to clients, has led to demand for standardisation in the form of product simplicity and replicability – an encouraging development. Similarly, the complexity of IT back offices has been accompanied by a drive to have consistent platforms – or even better – single platforms that can be managed as “products” with guaranteed support, regular updates and visibility over the sustainability of the software itself. These developments are positive, calling into question why certain banks continue to believe that they should develop their own proprietary software that, in actuality, supports public, standardised transaction banking activities.
Finally, I want to turn to business development in the context of transaction banking. My view is that transaction banking enterprises can only justify internal allocation of funds based on a track record of superior business growth against peer products within wholesale banking. Parity status or GDP growth rates will not be sufficient due to the historically large sums committed to transaction banking, the long tenure of projects, and the short-to-medium term view on interest-rate movements.
This means that banks will need to do more business with growing segments of the economy and deliver core product capability to clients that are most in need. The SME sector – in the past overlooked or even considered outside the purview of transaction banking – is emerging as a key sector, the prize being to grow SMEs into high-margin middle-market customers.
Corporate banking heads remain uneasy with the risk profiles of such companies – but know they have to act. This has given a new injection of life into supply chain products. The theory is that if the bank can better validate the activity of SME clients with larger and more numerous counterparties, then credit decisions can be looked at from a “transactional” risk perspective rather than from a pure balance-sheet angle. Armed with such client intelligence, the bank will be far better equipped to address pressing client questions such as:
- How are you enabling me to improve my working capital and manage critical funding gaps?
- How are you helping me access a wider ecosystem of suppliers and buyers?
- What product bundles are you offering me? How easy are they to draw down?
- How can you help me manage my business risk and unexpected events?
If there was ever a doubt that working capital support was within the remit of transaction banking, it can be no more.
So what does this all mean for transaction banking business leaders? In my view, those that can persuade their technology partners to leave their past ideologies behind them will be most successful. In this era of change and expectancy, banking business leaders will need all the guidance they can get on how to transform their franchises. Recognising that in-house IT development is inadequate for designing tomorrow’s operating models will be key. Instead, a fully dedicated technology partner working in tandem with the bank will much more effectively articulate the voice, expectations and the business case around digitalisation. Standardised solutions will prevail due to their simplicity and relevance, and customer insights will be more fully explored and delivered – with more successful outcomes.
Andrew England is Head of Strategy at iGTB
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