Tech transformation themes for corporate banks this year

2022 was another challenging year that I think most of us happily said goodbye to — the world had to deal with a lingering long-tailed COVID-19 pandemic effect, rampaging inflation, a rising rate environment (and now, the prospect of recession). Meanwhile, the Russia-Ukraine conflict has not only seen a tragic loss of life, but added increased geopolitical tension into the stew of volatility, and continues to cause supply-chain issues and raise energy prices.

Tech is impacting tectonics of the financial services landscape

As these socio-economic headwinds continue to roil markets and undercut recovery into this new year, businesses are turning to their banks for trusted financial guidance.

But improving support to clients requires deeper, more strategic technology spend, and many corporate banks we speak to remain cautious on where to allocate their precious funds. While they are making discerning investments to address legacy buildup, there is hesitancy to invest in newer developments. Instead, they are enhancing their toolkit with more established tech such as artificial intelligence and big data analytics, process automation and machine learning techniques, blockchain and Open Banking APIs.

Of course there are institutions that are dabbling with moonshot investments into promising, albeit less established tech, with forays into digital assets, quantum and edge computing and Web 3.0. However, the reality is that most don’t have the scale of tech budget like JP Morgan or Meta, and are unable (or unwilling) to upend their decades-old traditional business models.

This then got us thinking: As banks respond to the tech arms race, what practically could they focus on to reap more likely and immediate benefits?

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Practical strategies to enhance core offerings

Assuming that corporate banks have gotten their “brilliant basics” in order, (i.e., they are meeting their customers’ most fundamental expectations of them — see my earlier commentary) — we think the following are four compelling areas to focus tech investments on:?

1.???Real-time treasury

2.???Intelligent pricing

3.???Leveraging Internet of Things (IoT)

4.???Advancing the ESG agenda

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1.???Real-time treasury: managing liquidity must be more dynamic than ever

Fueled partly by the COVID-19 pandemic as well as the accelerated pace of digitization and automation, treasury functions have expanded to deliver broader strategic value, make informed decisions around working capital management, and mitigate risk exposures. Treasurers demand quicker liquidity and account solutions for enhanced visibility and control of global funds, and real-time payment and liquidity management services.

For our conversations with several corporate banks, the provision of a comprehensive real-time treasury in a 24/7 environment is still more conceptual than reality. However, we believe this will change. Businesses require real-time visibility over their exposures for both outgoing payments and incoming liquidity. For instance, faster payments support more precise funding and enhances working capital, while improved liquidity supports shorter collection cycles and quicker inflows following dispute resolution.

Banks that haven’t started on this journey need to consider enhancing their real-time treasury management services in 2023. This includes offering intra-day pooling to centralize cash at the group level for greater clarity on overall liquidity positions. Instead of external funds, corporates can mobilize internal surpluses from fragmented global accounts for short-term payment obligations, and to optimize debt cost and enhance shareholder returns.

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2.???Intelligent pricing: unlock value through smarter pricing models

Of all the levers banks can pull to enhance returns, price management is among the most impactful catalyst to fuel profitable growth. To optimize customer acquisition and retention, they must gravitate away from traditionally static pricing strategies (based on cost-plus, segmentation- or competitor-based) toward prices that are more dynamic, relationship-based, as well as fair and transparent, re?ecting the underlying value of a product or service. This is particularly more so as regulators and media intensify scrutiny on front-book versus back-book discrepancies, hidden fees and incentivized sales tactics.

To ensure that money isn’t left on the table, sophisticated pricing should be targeted but still flexible, and utilize data and analytics-driven platforms that support the banks’ approach to pricing optimization. And this isn’t a small change – we estimate that pricing excellence could potentially boost banks’ revenues by 10-15%. Most of this step-up would come from enhanced loan pricing (e.g., shifting from single-product to holistic client relationship pricing to support deeper cross-sell) and fee optimization (e.g., improved discount management and a portfolio pricing strategy).

Realizing the full potential of pricing programs requires holistic change management efforts. These include securing stakeholders’ sponsorship to ensure resource alignment, self-diagnosis to identify current pricing capabilities and pricing leakages, and governance of frontline teams to ensure adherence to processes for discounting.

3.???IoT: crafting novel business models that leverage IoT

With over 75 billion connected devices worldwide boasting 5G bandwidth by 2025, 5G and IoT will provide the infrastructure to deploy large scale machine communication. This, along with emerging technologies such as digital identity and smart contacts, could potentially impact traditional business processes in corporate banking such as trade finance and asset financing.

IoT-generated data could help trade financers assess risks throughout the lifecycle, allocate funds more efficiently, and scale up finance strategies. Added transparency could further provide the security to extend financing to smaller SMEs. IoT is also an enabler for Equipment-as-a-Service, with equipment installed with real-time sensors to monitor wear-and-tear, asset usage and idle time, which savvy banks could link finance products to.

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4.???ESG: supporting clients with their sustainability agenda

The ESG agenda continues (thankfully) to expand in momentum. For banks and their clients, this presents a significant challenge, but a massive opportunity in parallel. There are ample prospects for incumbents to provide unique insights to help clients make ESG decisions such as around a more sustainable supply-chain; develop digital exchanges for carbon credits; as well as take an active role in supporting governments, regulators, and the broader society to advance our collective sustainability targets.

But benefits for corporate banks from these ESG initiatives extend beyond meeting public commitments and regulatory expectations to include demonstrating social purpose to attract the most sustainable businesses to transact with them. These programs would also strengthen trust with the next generation of clients and the new generation of talent.

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Respond quickly to the tech arms race to ensure relevance

For corporate banks pursuing these initiatives, my quick takeaways are to:

• Ensure that these go beyond superficial applications to inside-out digital transformation. This means deploying technologies at scale and speed to adapt to changing operational environments, countering competition from incoming disruptors, and addressing expanding client needs. Banks cannot be encumbered by complex legacies but must rethink processes and organization structures, develop partnerships and expand their ecosystem to optimize on client deliveries.
• Look beyond short-term quantifiable ROIs to consider the longer-term and intangible benefits from such investments. The latter includes supporting innovation and cross-business collaboration, ensuring organizational buy-in, training development experts, and empowering talent with digital tools and skillsets.

Corporate banks’ opportunities are limited without transforming their technology estate – those that hesitate will struggle to grow bottom lines and ensure ongoing relevance. However, for those that are raring and gearing for growth, there’s really plenty to be positive about, such as around these four areas. My team and I would be delighted to connect if you would like to further discuss (or debate) these suggestions.

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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.

Do also have a read of my colleague’s Jan Bellen’s comments on his five bets for the broader global banking market this year.

?With thanks to @Li-May Chew

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