Technological evolution

The shifting financial climate has finally made its mark on the commercial banking sector, with the development of new technologies prompting more changes than ever before

While the banking scene has altered drastically in recent years, this transformation has been more evident in some areas than others. Retail banking stands out as an obvious example of the former, with regulatory, technological and structural shifts aplenty. Commercial banking, on the other hand, has had something of a quieter time – until now. Undoubtedly, the onset of new technologies has played a defining role in this evolution, while new regulations are also making their mark on the commercial banking sector.

The first port of call for many institutions is the overhauling of back-end processes. Through digitalisation and automation, commercial banks are beginning to streamline their operations, which, in turn, is enabling them to make better decisions and track performance more effectively. To make this shift possible, collaborations with small fintech firms are increasingly prevalent – especially where client experience is a key focus. Ultimately, 2018 is seeing the commercial banking sector evolve at its fastest rate for many years.

Overhauling the back end Outdated legacy systems and paper-based manual processes are among the biggest challenges facing commercial banks at present, particularly as they limit the ability for such institutions to react swiftly to changing market conditions. Manual systems not only limit development: they are also responsible for higher costs and rates of error, as well as inconsistent results. These are outcomes institutions can ill afford in an increasingly competitive commercial banking space.

Over the past year or so, commercial banks have been making considerable efforts to improve their agility and efficiency in order to counteract such issues. Consequently, by standardising back-end operations, they are able to provide a much faster and smoother experience for their customers. This will be crucial as an increasing number of clients become digitally minded; the demand for immediate answers and real-time solutions across a variety of channels has become more pertinent than ever.

A forward-thinking digital strategy also helps with scaling, which is crucial for banks seeking to expand their product portfolio or market space. Further, as digital processes enable instantaneous documentation exchange and automated credit analysis, savings can be passed onto trade finance and corporate credit clients, affording institutions greater opportunities for expansion.

Unsurprisingly, some of the biggest players in the commercial banking space have already introduced digital solutions to improve processes for corporate clients. In October 2017, for example, Bank of America Merrill Lynch introduced ‘multicurrency netting’, a platform that centralises intercompany payments. Through this tool, multinational corporations are able to reduce both the number and total value of payments that occur between companies that regularly invoice each another, saving time and money.

Going to market Since the global financial crisis, institutions have become more prudent in terms of their lending practices. This shift has been accelerated by new regulations that require banks to maintain less risky balance sheets than those prominent in the days leading to the 2008 collapse. Combined, these trends have left the market ripe for those new players willing to meet the demand for fast and flexible credit.

Consequently, new technology has enabled lending through online marketplaces – or, in other words, data-driven platforms that connect borrowers with lenders and investors. Given the nature of such vehicles, customised requirements come part and parcel, adding further to their popularity. The use of data also enables firms to move from predictive to prescriptive analytics, which, in turn, speeds up the decision-making process. As for the marketplace itself, operations that are run via online platforms do not require the same level of resources in terms of staff and physical infrastructure, helping to improve profit margins. And aside from the obvious benefits – namely speed and effectiveness – Capgemini’s Top-10 Technology Trends in Commercial Banking: 2018 report predicts that the ongoing low-interest environment will encourage institutions to invest more in marketplaces, given the better returns they offer.

Another trend we are now seeing in commercial banking is the change in participants in online marketplaces. While earlier platforms were primarily focused on peer-to-peer lending, today there is far greater institutional participation on both sides of the coin. Further, as described in the Capgemini report: “The scope of loan types has gone beyond personal loans to short and long-term funding of various [business] loans, such as term loans, lines of credit [and] equipment financing loans.”

As these changes take place, innovative marketplace firms are continuing to push the envelope, pioneering new credit models that permit automated processing with well-calculated risks. As such, the appeal of using cutting-edge technology to foster greater efficiency and transparency, as well as higher returns, is set to grow exponentially (see Fig 1). Naturally, there are several hurdles to overcome given how new these systems are, but even so, online marketplaces are expected to become well-established players in the coming years.

Blockchain solutions Of the many things to have transpired since the financial crisis, a lack of uniformity and centrality in commercial banking is a feature that has become all too apparent. Specifically, there has never been a single platform upon which all stakeholders can conduct transactions swiftly, conveniently and securely. Given the siloed nature of the banking industry, interinstitutional processes have long been sluggish, expensive and prone to errors. And although considerable resources are spent to meet regulatory requirements, these systems are still vulnerable to fraud and breaches.

But that was before, and a new era is already underway thanks to one advancement in particular: blockchain. Numerous blockchain consortia now exist (see Fig 2), with hundreds of members between them. This uptake by players both big and small confirms that the advantages offered by the technology simply cannot be ignored, particularly given the ever-pressing need to reduce fraud, costs and communication delays, while simultaneously improving transparency, compliance and trust.

As indicated by the sweeping trends detailed previously, new technology is the biggest driver of the commercial banking sector’s evolution. While changes are already afoot in the sector, we can expect more in the coming years as technology progresses further still. The transformation seen elsewhere in the industry has finally made its way to commercial banking, to the benefit of corporate clients everywhere.