Transformative change is happening all around us — whether in the consumer or corporate world — as technology literally rewrites how business gets done. For banks, the sea changes taking place today threaten to marginalize important relationships with clients as attractive alternative options have proliferated.
Over the past decade or so, banks have gradually become disintermediated in the marketplace, as corporates turn to other sources for cash management services, such as supplier management and dynamic discounting. As a result, banks have increasingly been used primarily for their balance sheets to execute transactions.
While this disruptive paradigm shift may be setting off alarm bells across the financial services industry, the bond between banks and corporates is not irreparably broken. On the contrary, both sides have a vested interest in improving each other’s performance. Banks still have a crucial opportunity to leverage innovation, provide access to critical capabilities, and finance corporate growth — bringing tremendous value to the relationship.
Slow and Steady Does Not Win the Race
There is a lesson to be learned from the consumer payments marketplace. When PayPal entered the market 18 years ago, they filled a consumer need for online payments that was not being met elsewhere. As a result, PayPal ended up capturing a large slice of the B2C payment pie, leading other third-party payment vendors, such as Stripe and Venmo to follow suit and challenge banks for market share.
There is a lesson to be learned from the consumer payments marketplace. When PayPal entered the market 18 years ago, they filled a consumer need for online payments that was not being met elsewhere. As a result, PayPal ended up capturing a large slice of the B2C payment pie, leading other third-party payment vendors, such as Stripe and Venmo to follow suit and challenge banks for market share.
It remains true that banks are still dominant in B2C segments such as real estate financing, retirement planning, and consumer investment strategies, but B2B transactions are suddenly a vulnerable portion of the business. With global transactional revenues estimated at $375 billion annually (McKinsey on Payments, June 2016, p.4), it’s little wonder that competition for the B2B payments business is heating up.
A Growing Need for Integrated, Innovative Financial Products
As digitization transforms the business universe, more and more corporates are demanding integrated, innovative financial products. These businesses are looking for convenience and flexibility, automated transaction processing, and the ability to optimize working capital. To remain competitive in this complex global world, businesses are demanding payments innovations that streamline treasury processes and give them a competitive edge.
B2B networks have recognized this opportunity and are exploiting their large global customer bases, leveraging technology platforms that connect suppliers, distributors and logistic providers. These B2B networks are seeing an opportunity to cross-sell financial products to their customers, filling an innovation gap left by slow moving banks.
While the picture may seem troubling for banks, they do in fact have some advantages that they can exploit to compete in this brave new digital world. Banks have the opportunity to tap into a wealth of data related to their customers that can enable them to cross-sell more effectively on a major scale. This data can be effectively analyzed to render better credit decisions and risk analysis, as well as drive greater automation, which in turn reduces costs and strengthens the client relationship.
Because most banks have their own large networks of clients, they are well positioned to meet the needs of treasurers and CFOs, who are traditionally risk averse, and more likely to rely on a trusted banking relationship. Banks have an opportunity to offer services beyond reverse factoring and dynamic discounting by including factoring along with standard bank products such as credit lines. Innovative, integrated solutions that optimize across a business’s silos would undoubtedly be well received by corporates looking to improve liquidity.
Is the Glass Half Empty or Half Full?
Data is at the very heart of today’s digital transformation. This wealth of data will become an increasingly important part of business in the future, particularly in the B2B space. Banks are sitting on a goldmine of data that resides in their connection with corporate ERP systems. The only question that remains is, will banks have the wherewithal to harvest and use this data to help clients better manage the relationship with suppliers, or will third-party providers swoop in and marginalize them.
Banks can view the glass as half empty — or they can see it as half full and tap into big data to deliver increased value to clients, strengthening the relationship. Banks can partner with third-party providers who can help collect and analyze this wealth of data without the threat of being marginalized. Together, they can leverage data and artificial intelligence to develop new products that meet client needs in a highly complex and competitive global landscape.
And for those banks that aren’t quite ready to take this next step forward, it still makes sense to begin harvesting and storing that data, which will prove invaluable in the future as technology advances.
BY ALAN KOENIGSBERG
Alan Koenigsberg is a strategic advisor to Traxpay. He is a payments expert and served as a banking and payments executive at global financial institutions for more than 25 years.
