Retail banking is facing a seismic shift in consumer expectations driven by the availability and advances in consumer technology. But any wholesale bankers who think they have escaped the consequences of the consumer technology revolution should think again. Consumer demands are becoming increasingly relevant in the B2B space, as the expectations of corporate customers are shaped by the daily experiences of their individual staff members. Collectively, these technologies form the foundation for the business model of tomorrow.
Corporate banking also has to take notice of regulation originally intended to revolutionise the retail space. Directives like the Single Euro Payments Area (SEPA) and the Faster Payments initiative were intended to improve the retail customerâs experience, but have had a dramatic effect in wholesale divisions where they have driven a number of technological changes.
In this environment, innovation is needed to protect current revenue streams, open up new income sources and deliver the superior service that customers demand. Being effective and innovative, however, is far from straightforward; greater agility in the operational framework is needed to shorten return-on-investment timescales and improve time to market - but must be achieved in a cost-constrained environment.
However, by adopting a three-stage roadmap, banks can achieve the critical goal: delivering information and offering services in ways that are relevant to customers - regardless of the way in which this is achieved.
Stage one: consolidation
The first stage is to tighten up existing practices, processes and tools and remove excess baggage and waste. Simple actions such as making sure that all available functionality from vendor-supplied products is actually deployed can make a surprising difference. Similarly, re-using rather than replacing existing functionality and components can reduce the cost to market and ease integration and adoption of any new solutions.
There is also an opportunity to consolidate system environments. Merging payment processing capabilities, streamlining suppliers and simplifying IT solutions will keep costs down, while end-to-end solutions that bring multiple processes into a common business service will dramatically reduce costs. The added benefit here is that it enables the re-use of components and supports a faster time to market for new products.
If new tools are brought on board then they must be scrutinised carefully to ensure budget is not wasted on unnecessary or incomplete functionality, overly complex integration or unexpected downtime during implementation. The clearest example here is the middle-ware kits that promise solutions they simply do not deliver. Equally, the underlying fundamentals of any new process must be fully considered. With the push for International Bank Account Number (IBAN) and Bank Identifier Code (BIC) protocols to be adopted around the world, for example, there is a growing desire for corporate-to-corporate straight-through processing (STP). But although a bank needs to excel at STP payments, it must be even better at dealing with payments that fail the process. If it is going to invest in STP it must also invest in systems that can route, manage and repair failed transactions if the real benefits are to be delivered.
Finally, cost-efficiency of payment processes can invariably be improved through better fraud prevention. Technology that conducts real-time filtering, anti-money laundering and checking for suspicious activity at an enterprise level can generate significant savings in remarkably short timescales.
Stage two: develop critical strengths
In wholesale payments, it is the ancillary services that accompany payments that help create a fully rounded customer proposition to attract and retain lucrative customers. Furthermore, these propositions enable the bank to move towards more accurate pricing that reflects real added value in the provision of loans and liquidity, real-time, pooling services and general cash management.
The next stage in the innovation roadmap is ensuring that these key areas are developed and facilitated. One of the most important requirements of corporate customers is certainty of settlement, plus accurate, real-time information on the dates, times and costs of each transaction to better manage their own liquidity and treasury positions. The ability to provide this information whenever and however customers want it is a critical area for investment.
Much has been made in the industry of the renewed interest in payments as a revenue source. But underneath it all, payments remains a commodity business. In isolation, domestic payments generate almost no revenue, and even the days of high revenue streams from international payments are gone. Revenue from international payments needs to be maximised, therefore, by making it easier for customers to generate payments internationally as well as domestically.
A critical element in international payments is to ensure a consistent service level and experience is available in all the territories that the bank serves. Given the diverse nature of IT solutions, protocols and regulations involved this can be problematic. Nonetheless, global propositions can be improved through enhanced correspondent relationships, partnerships such as the International Payments Framework Association, as well as the development of internal IT infrastructures.
Finally, although customer self service has become an important area for modern banking, there are plenty of examples of over-enthusiastic banks that have all but eliminated the personal element and lost ground to specialist banks that have picked it up as a key service differentiator. Contrary to popular belief, innovation can be achieved by going back to basics.
Stage three: harness the strength of partners
One of the hottest topics of conversation in industry circles is the arrival of new market entrants in the payment space and how far this drives the development of new customer propositions. Although banks may be losing some space to these up-and-coming providers, their ability to handle final settlement secures their position in the food-chain. Banks should continue to provide exemplary settlement services, and treat new players as well as any other customer. In this diverse marketplace, banks should direct innovation towards providing a seamless service to all existing and potential customers, regardless of the nature of the contact point.
What is far more pressing is that these new entrants talk directly to customers, and lobbying for legislative changes that will level the playing field and allow them to offer competitive banking services. Therefore, the third stage of the innovation roadmap is to establish ways of working alongside these new players, who are invariably able to move with greater agility and deliver innovative propositions more quickly than traditional banks.
These new players typically process person-to-person or small-value cash and card retail payments, or front-end traditional banking systems in the remittance space. Because the potential revenue in this space remains small, the value for banks in aggressively pursuing market share is questionable. More attractive are international payments with high value and strong revenue potential; these are the services that traditional banks need to protect and retain. Critically this will only be achieved by offering the products and services that clients want to buy.
And this is the heart of any innovation program. Most innovation programs are tending towards the development of a fully functional and agile payments hub. But the key point about hubs is that they allow banks to offer new products, services and channels, safe in the knowledge that they have the functionality to meet customer demands, whatever they may be. If an innovation program simply follows the latest technical fashion without focusing on the business essential of giving customers what they want, when they want it, at a price they are prepared to pay, then it has no value - and very little chance of success.