Commercial banks join the retail revolution: three reasons to consider transformation

Rina Pandalai, SapientRazorfish: calling on commercial banking industry to embrace digital transformation

In 2015, Dave McKay, the chief executive of Royal Bank of Canada (RBC), warned that traditional retail banks were on a “collision course” with the likes of tech giants like Apple and Google.

Later the same year, Antony Jenkins, former group CEO of Barclays, predicted that within ten years, fintech players would “substantially disrupt” the traditional banking industry, possibly reducing employment in the sector by 50%.

These were threats that the consumer banking industry took seriously, as many financial institutions redoubled efforts to organise their offering around the customer and develop products and services with the flexibility, personalisation and convenience that disruptors were delivering.

To some extent, commercial banks – those that cater to small and mid-sized enterprises (SMEs) with revenues between $10 and $250 million – were unaffected by these trends because the needs and preferences of their clients, including medical professionals, consultancy firms and manufacturing companies, were vastly different from those of retail consumers.

Moreover, the perceived threat of fintechs taking over large share of assets under management (AUMs), deposits, and assets on the commercial banking side had been virtually non-existent.

The reality is the relationship between commercial banks and their clients is one of symbiosis. Institutions serve clients who need the bank as much as the bank needs them. As such, the vast majority of the commercial banking industry remained focused on offering traditional lending and cashflow management tools to their clients.

While this strategy has been largely successful to date, long-term growth will require the commercial banking industry to embrace digital transformation in a way that benefits the institutions’ stakeholder base and satisfies the needs of its end-user clients. There are three reasons why a commercial bank should consider transformation:

1. Increased profitability and efficiency 

For many clients, access to capital is an absolute necessity if they want to continue to grow their business or simply maintain and manage their business operations such as accounts payable, inventory, or payroll. For that reason, one core service of commercial banks is to provide clients with commercial lending and loan origination inclusive of lines of credit, as well as short- and long-term loans.

As commercial banking clients know, the traditional lending process is extremely onerous and time intensive, often taking up to two-three months for a financial institution to reach an underwriting decision.

However, commercial banks have a real opportunity to reduce operating costs, drive revenue and deliver strong client relations through digital transformation. For example, commercial banks can use advanced technology, such as machine learning and analytics, to improve staff efficiency, reduce regulatory prep time and even automate some aspects of decision-making.

From the customer’s point of view, rethinking the lending process will not only allow for faster decisions, but also provide increased transparency along the way.

2. Safety and soundness

Another key benefit for commercial banks is in the area of loan monitoring and compliance upkeep.

Building and implementing a digital capability to detect early loan losses and mitigate risk through real-time monitoring will not only drive operating efficiency, but provide greater transparency at all levels in the organisation, including compliance, finance and audit.

By developing intuitive, straightforward dashboards with reporting capability, commercial banks can empower all first and second line of defense leaders to appropriately manage and monitor risk. In addition, commercial bankers will have an improved opportunity to communicate with their clients and understand what issues are affecting them from a business operations and solvency stand-point.

3. Digital experience and banker engagement

For retail banks, a fully integrated digital experience is a key to survival. On the commercial side, however, the digital experience has been slower to evolve for many reasons, not the least of which being that clients simply don’t expect one.

But as businesses continue to digitise other aspects of their operations and the people who run them become more accustomed to the convenience provided by the personal banking model, it’s only a matter of time before commercial banking clients will want more digital interactions with their banker and institution.

While improving the digital experience will undoubtedly require an investment on the part of banks, it could serve as a way to strengthen and expand customer relationships along with driving cross-sell. Ultimately, every business owner has a finite amount of time that he or she wants to spend working on the business – not administrative tasks.

For those banks that provide an online and mobile experience that is intuitive, provides the opportunity for self-service, or even just cuts down on mail and paper statements, the value is clear. In addition, creating banker-led experiences inclusive of pipeline reports and CRM activities will be equally critical.

Looking to the future

For commercial banks, digital and technology solutions may provide valuable opportunities to improve operating efficiency, drive transparency, simplify the client experience and reduce risk. While it may be tempting to delay major enhancements and transformations that the client does not yet expect, that approach is unlikely to yield long-term success.

As banking margins continue to contract, even commercial banks will need to re-think their business model, initially to improve their cost to serve, but over time to win with existing and new clients.

To remain relevant, commercial banks must follow the advice they give their own clients: invest in the future – today.

By Rina Pandalai, financial services strategy and digital transformation lead, SapientRazorfish