In corporate banking, the battle lines are shifting – but the banks don’t seem to see it. If they want to remain relevant in the future, they must open themselves up to new challenges and discard the old self-image.
In his masterpiece “The Sun Also Rises,” Ernest Hemingway records a brief business conversation between two characters: “How did you go bankrupt?” asks one, to which the other replies, “In two ways. First gradually, then all of a sudden”. This dynamic probably describes the change in most industries as perceived by outsiders. You might hear about a new provider or innovation without even knowing what it is until, seemingly overnight, an industry you thought was safe looks completely different – see Twitter, Instagram or Uber. Often this kind of change happens so abruptly and unexpectedly, partly because the innovators were not recognized or taken seriously as competitors, rivals or market participants for a long time.
Banks that want to compete in a new digital market, where ambitious entrants lurk that are not part of the traditional banking business, need to recognize and respond to change while it is still in its early stages. This is the point at which traditional corporate customer business finds itself today. If banks want to avoid losing relevance and customers to fast-growing companies like Square and Shopify, which are based on a different system than their own, they should act quickly.
Market participants need to focus on solving problems instead of continuing to rely on outdated and failed strategies that they have used to play to their customers.
Challenge: The self-image of banks
Corporate banking is changing today primarily because customers themselves are changing through a variety of new applications and services. This allows them, for example, to outsource financial operations relevant to the core business to seamlessly integrated solutions such as Square, Personio or Hubspot. These services are attractive to entrepreneurs because they lower barriers to entry and allow them to focus on their core business, such as improving their products and customer experience. Similar changes are underway in corporate banking, which are gradually – and soon suddenly – taking shape.
Corporate banks have long been unresponsive to change and have not sufficiently analyzed their role in the business ecosystem. In the past, they tried to convince the business community more or less successfully that they need “tailor-made” solutions and that “the banker:s themselves” are the heart of the business relationship and the business process. This may be traditionally true – but in view of numerous new software offers for entrepreneurs, it increasingly no longer seems up to date.
The bitter truth is that while banks see themselves as promoters of business, entrepreneurs and managers today tend to view them as the direct opposite: as gatekeepers, requiring them to go through lengthy, bureaucratic procedures before they can even get started, procedures that usually have nothing to do with the core business of a budding company.
Gradual shift to a seemingly unattractive segment
In the classic cycle of digital transformation, markets initially change in niche segments – well-defined but somewhat nondescript segments that are generally unattractive to the large established banks. In the banking sector, these changes could be observed over the past decade in areas such as payments, the fragmented landscapes of the hospitality industry, e-commerce, and professional services. Because banks themselves viewed these value-added areas as unattractive, insignificant, and uncertain, a number of startups instead drove innovation to fill underserved segments. The fact that banks do not feel threatened by these developments is probably mainly because they have not yet recognized their potential.
Gradually ready to suddenly go digital
The results can be observed in many places. Today, the founder of a business – say, a restaurant operator – can use Square not only to accept payments, but also to manage booking functions, order management, and delivery systems – gaining insights into data that help optimize the business. Through Square, entrepreneurs can even set up a simple checking account and take out small loans to finance day-to-day operations. Entrepreneurs:inside who want to start an e-commerce business, on the other hand, will probably use Shopify to build the website, with the goal of making the integration as easy as possible. And by integrating with Stripe, Shopify can now handle many of the banking transactions that lending houses once took care of.
Although founders:ins will likely still need a bank account, they will not need the full range of traditional banking services. The number of complex tasks that the new providers handle for these entrepreneurs:inside through their digitally integrated platforms with minimal barriers to entry is an offering that traditional banks cannot compete with. The former outsiders are becoming sleeping giants, gradually swallowing value-added pools to suddenly emerge as leading banking services for small and medium-sized enterprises.
But danger lurks elsewhere. That’s because Big Tech is also getting ready to enter these value pools. Rumors have long persisted that Apple might introduce a range of solutions for SMBs – an obvious next step for a company with such broad and deep hardware penetration. If a small business in the creative industry uses Apple devices, there’s nothing to stop it from building a whole range of software solutions into those devices right away. Apple and Goldman Sachs already entered into a strategic partnership for Apple Pay three years ago, offering a digital Mastercard. Customers who buy an Apple product are thus offered a classic banking service at the same time.
Customer business is further along in this transformation cycle than corporate business, but that will soon change as well. Companies like Spryker are already positioning themselves as specialized providers capable of digitizing more complex B2B transactions for use by larger enterprises. At the same time, the industry is moving toward digital operating systems in everything from scientific research to logistics, mobility and energy. These are industries from which banks derive much of their current revenue, and they need to be able to plug into these operating systems in order to exist as relevant and informed partners.
German tech players are also recognizing the potential in corporate banking for themselves. SAP has acquired e-invoicing and supply chain financing provider Taulia for approximately €1 billion. As a result, SAP, as a company from outside the industry, becomes a competitor and gains a massive data advantage over traditional banks. From now on, SAP will be collecting all of its customers’ billing data, payment terms, and conditions in much greater depth than banks do today.
Meeting the challenge of a new market through innovation
Banks that want to stand up to the threat of digital-first companies will have to redefine their offering to customers – and adopt a similar strategy to the “non” banks they compete with. Rather than focusing on self-promotion, banks should identify key business challenges in one or more industries and solve those problems by developing superior technologies and customer:inside experiences.
In most complex industries, there are still many inefficient manual processes that cost operators:inside billions and can be turned into pools of value for those who are able to develop tools and systems to improve and automate them in a scalable way.
But to recognize and take advantage of these opportunities, you have to stay alert. Banks should engage their customers and let them tell them what problems they need to solve, and then use their resources, reputation and established relationships to develop those solutions. In doing so, they must be open to the fact that the results will often have little to do with how traditional banking works today.
Banks will need to move from a more transactional business model to a circular model by digitally connecting different businesses and industries and enabling collaborative business models. By leveraging their expertise in dealing with the regulatory landscape, banks can position themselves to become digital infrastructure providers for specific sectors – while continuing to make money through payments and/or loans.