For wholesale banks, one New Year’s resolution represents equal parts common sense and common good: to take the necessary steps to remain relevant to customers and profitable in 2018. But to do that, these banks must reassess their entire way of doing business.
To start, they need to streamline their processes. They must also implement digital tools and practices that improve both the customer experience and back-office productivity.
Revamping such fundamentals proves especially critical given the continued shift toward a two-speed global economy and changes in the growth of crossborder payments revenue and trade flows. By the end of 2026, emerging economies should see revenue from wholesale payments grow by eight percent, compared with about four percent in mature markets, according to BCG’s latest global payments report.
Wholesale banks also face changing competitive dynamics. New entrants from in and outside the financial services arena now take advantage of open banking and new technologies—and successfully vie for market share in high-margin niches.
These developments do not mean wholesale banks cannot win in the new environment: they can. But besides raising their games on fundamentals, they have to fine-tune their strategic focus. As they assess the types of companies in their client bases—and candidly examine their own capabilities and financial strengths—banks can pinpoint which strategic path best fits their future.
In our view, four basic approaches will help banks rise to the challenge as they take on these roles:
Vertical leader. Digitally-savvy banks with a market-dominant product or service can build global scale in that vertical segment. Prime candidates for globalization that stem from flagship products include:
working capital optimization
accounts payable and receivable automation
foreign-exchange services, and
This strategy requires banks to modernize their IT capabilities, augment their digital talent pool and partner with or acquire relevant B2B FinTechs; some FinTechs have already found success with this model. One has emerged, for example, as a supply chain finance platform that connects buyers and sellers with multiple banks, while it also enables tracking of goods and cash flows. Incumbents can do the same: They can scale such a platform by leaning on their experience to provide working capital to a strong existing client base.
Ecosystem navigator. Ecosystem navigators differentiate themselves from competitors when they guide clients to the most appropriate offerings in the ecosystem. Local or regional banks with longstanding client relationships can pursue this strategy by offering a customer-centric platform that packages and distributes proprietary and third-party offerings. These banks can also provide one-on-one advice to companies that want help assessing a variety of solutions.
Rather than provide a full suite of services directly to customers, ecosystem navigators use data and analytics to deliver proactive advice. They also support treasurers with their core corporate treasury requirements (such as real-time overviews on cash positions, predictive models that anticipate demand spikes, and virtual accounts and tokens that facilitate invoice and payment reconciliation).
Payments factory. Regional banks with above-average process efficiency can serve customers as a digital data custodian or by providing banking-as-a-service, risk assessment-as-a-service and other similar offerings. These services could have wide appeal among corporate customers and pay to maintain a high-performing core banking infrastructure—which many banks find increasingly costly. Banks could implement this approach using a hub-and-spoke model, with one or two main payments factories that serve the needs of many corporations in a particular region. Some banks have already started to apply the payments factory approach to international payments. Others offer new digital banks or FinTechs access to a banking and payments platform.
International transaction banking leader. Since the financial crisis, many midsize banks have cut back on their regional presence—while a stricter regulatory landscape has led them to reduce correspondent banking activities. As a result, these banks sit stuck in the middle: Their network is too small to compete with global wholesale banks yet not sufficiently integrated to work as an attractive regional alternative. This creates a market opportunity for regional banks. They can serve internationally active corporations as they extend banking services or become regional champions that specialize in a particular locale and offer an integrated network experience.
The central element these approaches share lies in providing an exceptional client experience. And that requires putting the right fundamentals in place—including significantly improved cost performance and productivity.
Whichever strategy a bank chooses, successful execution demands ramping up the rate and scale of digitalization. The battle for business and loyalty hinges on how well banks and their competitors use data and analytics to increase value and lower risk. In other words, 2018 will prove a year when, like never before in banking history, digital ones and zeros will help win customer hearts and minds.
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