Corporate banking innovation: Reimagining business models for the next normal
John Barber, Vice President of Infosys Finacle Europe
The corporate banking industry has been facing a range of challenges over the years, from geopolitical uncertainties and increased regulatory compliance costs to rising competition from new and innovative players. The Covid-19 pandemic only further intensified these challenges and pushed the industry into a digital adoption overdrive.
One major challenge that corporate banks are facing is volatility in the lending business. Interest-based income, the mainstay of the segment, remains uncertain due to wavering economic conditions. NPAs that rose in the pandemic years, has somewhat led to a lag in the growth ofthis core businessfor corporate banks. Additionally, loan losses during the pandemic years have made this core business vulnerable, resulting in shrinking profitability and margins. Finally, corporate banks have been experiencing a shrinking loyalty factor. Customers are willing to move their business to the bank that offers tailored products and serves them with the most cost-efficient solutions.Considering these imperatives of the post pandemic world, corporate banks must look to diversify their revenue streams and explore new lines of business to sustain growth.
Unprecedented Need for Business Model Innovation in Today’s Rapidly Changing Environment
According to recent research on innovation in corporate banking, over 90% of banks believe that the primary growth for corporate banks in the next three years will be driven by transaction lines of business such as cash management, payments, trade, and supply chain finance. To differentiate and sustain growth, banks must adopt emerging business models in the corporate banking landscape.
One such emerging model is the platform business model. An overwhelming majority of 72% of respondents in the aforementioned research believe that the corporate banking future will be about building a platform business by tapping new and diverse partner networks within a larger ecosystem. With the industry value chains being reorganised, the digital reset momentum is gathering pace. Banks will now have to make conscious choices of adopting emerging business models in the corporate banking landscape to differentiate and sustain growth.
Unlocking the Financial Marketplace and SME-Focused Player Business Models
To succeed with the emerging business models, corporate banks must make deliberate choices based on customer segments or lines of business where opportunities for market share growth exist.
Enabling enhanced propositions for specific lines of business, banks may look at setting up financial marketplaces to tap new and diverse partner offerings within a larger ecosystem. Multiple buyers, multiple service providers enables true market discovery dynamics, including competitive offerings. Proxtera is a good example of such a financial marketplace, which connects business owners, B2B marketplaces, trade associations,and institutional investors digitally to simplify and amplify trade propositions.Proxtera offers differentiating value proposition for each of these players. For example, Business owners can list and sell their products on multiple marketplaces, expanding their reach. Digital B2B marketplaces can broaden their buyer-supplier network, tap into new markets, and provide users with additional services like logistics, escrow payments, and financing.Proxteraunlocks revenues with a subscription and a per transaction model for various participants. Additionally, flexible pricing options are also available to suit the unique needs of newly onboarded platforms/marketplace.
Corporate banks can also take a specific customer segment approach and offer a select portfolio of products, such as SME-focused players offering specialised products and setting up ecosystems to enable tailored and truly digital offerings for the segment. For instance, financial institutions can differentiate by providing easy access to flexible credit/financing options and building an ecosystem of non-financial products and services to enable SMEs with a seamless experience in their business workflows. OakNorth Bank is an example of an institution that offers business finance and savings products to SME businesses across industries.Some of the strength of its value proposition include quick access to cash with a‘get funded faster proposition’, highly customised solutions with tailored finances for unique needs of SMEs, transparent processes like meetings with key decision makers and experts that understand business growthpotential of the SME and flexible savings account options.
Taking Action to Adopt and Evolve New Business Models
Business model innovation requires key considerations along multiple dimensions, including identifying a target model with deep focus on customer segments to serve, key offerings and their value propositions, channel strategies, cost structures, and revenue models. Scaling organisational capabilities around people, process, technology, and data is also crucial, as is accelerating creation and delivery of value through product, channel, and ecosystem innovations.
To succeed, a bank can revise its business model by converging its wherewithal on an area of excellence and differentiation or by adopting alternative models such as marketplace banking or as-a-service offerings. Each bank will need to chart its business model innovation journey, but all banks, without exception, will need to expedite action to survive the next normal.
In conclusion, the corporate banking industry must embrace innovation and reimagine its business models to thrive in the face of uncertainty and rising competition. The platform business model, financial marketplaces, and tailored offerings for specific customer segments are all emerging trends that banks can leverage to sustain growth and stay ahead. Business model innovation requires careful consideration and the scaling of organisational capabilities to accelerate value creation and delivery. Banks that take these steps will be best positioned to succeed in the next normal.