How progressive corporate banks are driving their innovation agenda

Every six months, my team and I review the innovations we see across the corporate, commercial and SME banking space and call out the major themes that stood out to us. We see three key areas that seem to be of particular focus for corporate banks in the past half year.

1.???Placing relentless emphasis around their payments agenda

Corporates move nearly US$23.5 trillion p.a. across borders, or equivalent to ~ 25% of world GDP, with the global payments segment generating almost US$2 trillion in revenue for incumbent banks. However, the wholesale cross-border payment processes of correspondent banking networks can sometimes be sub-optimal in terms of?speed, transparency and cost.?

Beyond the transaction costs for global corporates, the current model for moving money also presents additional hidden expenses from trapped liquidity and delayed settlements. As these clients look to further improve their processes, market participants are focusing intently on the modernization of payment networks.

Financial services (FS) examples in the market:

Two banking behemoths and a payments FinTech completed one of the earliest interbank riskless settlement outside of the Continuous Linked Settlement (CLS) system in December 2021 on the FinTech’s platform. This payment-versus-payment settlement platform offers the ability to simultaneously settle foreign exchange trades in less than three minutes and, unlike the 18 currency limitations with CLS, the option to securely settle in all currencies.

An American FS organization launched its ‘Digital Bill Payment’ to equip businesses with a single, modern platform to more efficiently and effectively communicate, bill and collect payments from their customers. This institution is already one of the world’s top US$ clearers (processing ~26 million transactions worth between US$6-8 trillion daily), and this solution could further elevate its role within the payments space.

2.???Addressing the pain points of SMEs

Small-medium enterprises (SMEs) serve as the backbone of economies around the globe and are responsible for up to 40% of the GDP in emerging markets. However, 36% of respondents from EY's SME survey are considering switching from their main FS provider to a Big Tech, which offers a fully integrated platform to access not just financial products, but other major services needed to run and grow their businesses. Indeed, we saw 56% of SMEs looking to reconfigure their businesses in response to changing market conditions and leaning toward more digital models.

Non-banks are offering embedded finance within their own platforms, targeting a slice of the global market for API-driven embedded finance that is growing at a CAGR of 26% and expected to exceed US$138 billion by 2026. One such instance is a peer-to-peer lending marketplace that enables partners to natively integrate its platform into their websites to provide SMEs with a quick, painless option to apply for loans of up to US$0.7 million and receive funding within 24 hours.

To compete more effectively against such entrants, leading banks are redesigning their SME value propositions to offer a more seamless digital experience. They are also looking beyond banking and assessing how they can best meet their customers’ broader needs. Banks are leveraging their extensive networks to create innovative digital ecosystems to help SMEs execute several traditional business banking tasks, such as finding and accessing foreign market data, or locating trusted trading partners and third-party solution vendors.

FS examples in the market:

As the COVID-19 pandemic compelled even smaller businesses in emerging markets to transact online, a regional bank in Asia-Pacific introduced India’s first paperless financing of domestic invoices to drive trade digitization, reduce processing turnaround time and increase businesses efficiencies for SMEs.

Also valuable is for banks and disruptors to ‘collaboratively compete’ to drive mutually beneficial results. A Big Tech has launched a blockchain-powered global trade platform, built under the joint efforts with multiple partners, including trade marketplaces, banks, logistics and supply chain service providers. Since this platform’s launch with a British bank in 2020, partnerships have been formed with various global banks to enhance supply-chain connectivity and provide more trade financing options for SMEs.

3.???Leveraging transformative technologies

Global banks found themselves needing to pivot multiple times over the course of the past two years, as the pandemic and incoming competition sped up their technology trajectory. Given the groundswell of innovation by digital disruptors, tech enablement approaches at banks are getting bigger and bolder. I see increasing examples of banks benchmarking themselves against the architecture and mindset of Big Tech and established FinTech in their digital transformation programs.

Progressive banks are looking further into the future. They are experimenting with the next wave in advanced tech adoption, with applications such as immersive experiences (augmented/virtual reality technologies in the metaverse), quantum and edge computing.

FS examples in the market:

An American multinational FS company announced its ‘moment of acceleration’ in investments, dramatically increasing its global technology spending to US$12 billion for 2022 to fund multiple tech initiatives and fuel a team of 50,000 technologists.

A Spanish bank earmarked €20 billion on digital tech between 2019-22 as part of its efficiency efforts, implementing one of the most rapid cloud adoption projects to migrate 60% of its global IT infrastructure onto a hybrid of private and public clouds within 18 months. That opens the door to remote working for many of its teams, allows for quicker adaptability and agility to market demands, raises efficiencies via shared resourcing, and enables standardized management.

A few are already blazing a trail for FS into the metaverse — defined as a network of 3D virtual worlds focused on social connection. This includes a global digital bank powering a decentralized finance platform that has created a non-fungible token (NFT) card that customers will use in the metaverse. This NFT also allows users to apply for a free bank account which provides ‘real-world’ value.

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As I’ve noted in this piece, there is plenty to do for traditional corporate banks to uplift revenues and fend off incoming competition by offering greater customization, better business user experiences, and more holistic solutions. We are pleased to see a range of fantastic innovation across the industry as they seek to reap the benefits of ever evolving technology.

If you would like to have a conversation on how EY teams can work with you to navigate digital innovation, new business models and ecosystem partnerships to become the nimble, responsive organization that your customers demand, please send me a message on LinkedIn. You can also?access our latest thinking and learn about our capabilities here.[LC1]?

The views reflected in this article are the views of the author and do not necessarily reflect the views of the global EY organization or its member firms.

With thanks to @Li-May Chew