Today’s banking landscape appears vastly different from just a few years ago: interest rates are up; regulation is expected to decrease; and both people and businesses alike are looking to borrow. All of which adds up to a new reality in the banking industry.
For retail banks that have spent the better part of the past five years attempting to transform their business to compete in a digital landscape, responding to a changing market is perhaps nothing new. If anything, this evolution may further fuel their transformation journeys as budgets shift away from regulatory upkeep to more sizable technology investments.
However, it may not be the case for commercial banks, which remained largely on the sidelines during the revolution that swept the retail industry. The needs and preferences of commercial banking clients, such as medical professionals, consultancy firms and manufacturing companies, were vastly different from those of retail consumers and did not necessitate large-scale change. Moreover, the perceived threat of fintechs taking over large share of assets under management (AUMs), deposits and assets on the commercial banking side had been virtually non-existent.
The result? Commercial banks have not embarked on a transformation in the same way, or on the same scale, as their retail counterparts have. Furthermore, they may not recognise the value in doing so.
The following offers an examination of several of the most common misconceptions commercial banks may have about digital transformation and explains how embracing digital can lead to greater efficiency and profitability, as well as improved customer relations.
Myth: Digital transformation is a costly and unnecessary investment for commercial banks.
Reality: Strategic transformation can lead to increased profitability and efficiency.
Any significant transformation effort will require an upfront investment. Yet with a thoughtful and strategic approach, organisations can develop and deploy solutions that are designed to improve efficiency and, in turn, increase profitability.
For example, one of the most important and common services that commercial banks manage is commercial lending and loan origination inclusive of lines of credit, as well as short- and long-term loans. This access to capital is an absolute necessity for customers who want to continue to grow their business – or simply maintain and manage their business operations such as accounts payable (AP), inventory or payroll.
As commercial banking clients know, the traditional lending process is extremely onerous and time-intensive, often taking up to two or three months for a financial institution to reach an underwriting decision. However, commercial banks have a real opportunity to reduce operating costs, drive revenue and deliver strong client relations through digital transformation. For example, they can use advanced technology, such as machine learning and analytics, to improve staff efficiency, reduce regulatory prep time and even automate some aspects of decision-making.
Myth: Digital transformation introduces a new level of risk.
Reality: Digital transformation contributes to improved safety and soundness.
By definition, to transform is to upset the status quo. Any change can, and often will, introduce new concerns and challenges. Yet again, with a thoughtful approach, the rewards should far outweigh the risks.
For example, another key benefit of transformation for commercial banks is in the area of loan monitoring and compliance upkeep. Building and implementing a digital capability to detect early loan losses and mitigate risk through real-time monitoring will not only drive operating efficiency, but provide greater transparency at all levels in the organisation, including compliance, finance and audit.
Further, by developing intuitive, straightforward dashboards with a reporting capability, commercial banks can empower all first and second line of defence leaders to appropriately manage and monitor risk. In addition, commercial bankers will have an improved opportunity to communicate with their clients and understand what issues are affecting them from a business operations and solvency standpoint.
Myth: Commercial banking clients don’t want a digital experience.
Reality: A strong digital experience may help strengthen customer relationships and increase banker engagement.
For retail banks, a fully integrated digital experience is a key to survival. On the commercial side, however, the digital experience has been slower to evolve for many reasons, not the least of which being that clients simply don’t expect one.
Yet as businesses continue to digitise other aspects of their operations – and the people who run them become more accustomed to the convenience provided by the personal banking model – it’s only a matter of time before commercial banking clients will want more digital interactions with their banker and institution.
While improving the digital experience will undoubtedly require an investment on the part of banks, it could serve as a way to strengthen and expand customer relationships along with driving cross-sell. Ultimately, every business owner has a finite amount of time that he or she wants to spend working on the business – not administrative tasks.
For those banks that provide an online and mobile experience that is intuitive, provides the opportunity for self-service, or even just cuts down on mail and paper statements, the value is clear. In addition, creating banker-led experiences inclusive of pipeline reports and customer relationship management (CRM) activities will be equally critical.
New reality: Commercial banks embrace digital transformation… now
For commercial banks, digital and technology solutions may provide valuable opportunities to improve operating efficiency, drive transparency, simplify the client experience and reduce risk. While it may be tempting to delay major enhancements and transformations that the client does not yet expect, such an approach is unlikely to yield long-term success.
As banking margins continue to contract, even commercial banks will need to re-think their business model – initially to improve their cost to serve, but over time to win with existing and new clients. To remain relevant, commercial banks must reject the biggest myth of all: that transformation is optional.