At the Crossroads: A Checklist for Success in Wholesale Banking
Financial service providers have seen profits dwindle from their wholesale banking units during the past three years. Despite the record earnings that several U.S.-based banks achieved between 2001 and 2004, statistics from TowerGroup show that many wholesale banking units slumped during this period. While retail banking flourished, weak commercial loan demand and decreasing credit quality dragged on the wholesale banking market. The prolonged recession, war in Iraq, and increased competition from top players also had a notable and added impact. In many cases, the result was lackluster performance with declining returns.
Meanwhile, the early 21st century has shown that wholesale banking can no longer support traditional, one-to-one business practices and expect to increase profits long term. Today’s business climate, driven by automation and the economies of scale achieved through mergers and acquisitions, demands a renewed approach to forging customer relationships and providing service to business clients. Existing business models are unlikely to generate the profit margins they once achieved.
This combination – listless wholesale banking performance and the increased demands that overload traditional business practices – means that the coming year will be critical for developing a strategy to respond to new market conditions and adapt to the changing climate.
The good news is that business and economic indicators are pointing to a rejuvenated wholesale banking market in 2004. According to TowerGroup, cash management and commercial lending services will lead the way for an across the board increase in wholesale banking this year. And as banks are becoming more confident in the prospects for their wholesale banking divisions, they are readying to upgrade technology and the infrastructure to support it. As a whole, investment in wholesale banking technology has remained flat since 2001 as the segment has coped with diminished returns. Yet a survey conducted by TowerGroup and the American Banker Association (ABA) in late 2003 confirmed that large US banks (>US$20 billion assets) are poised to increase their technology spending nearly six percent in 2004 for wholesale banking.
Banks need to consider a myriad of factors in determining the right strategy that will help them successfully transition their systems and business practices to compete well in the new landscape of wholesale banking.
Following is a checklist that banking executives, faced with the challenge of deciding in what areas to invest in technologies, should take into account in devising plans for supporting their wholesale banking units this year and achieving continued growth.
Of course, banking executives also need to develop a clear understanding of the strategic business imperatives particular to their institution and plan IT initiatives that will help transform their practices to meet their goals.
A common characteristic of traditional wholesale banking practices at many banks is that technology decisions have often been made in a vacuum, apart from corporate and line of business objectives. Too often, a line of business managers have driven technology initiatives without taking into account the overall corporate strategies. This has changed in recent years, as budget and planning processes have increasingly taken a greater role in directing IT strategies.
Aligning corporate and technology strategies is a two-step process. First, banking executives must determine the strategic business imperatives that drive their wholesale banking. A strategic business imperative may be developing new sources of revenue, protecting leading lines of business, or improving a bank’s ability to be responsive to market conditions. From there, planners must determine the capabilities that must be in place to support those imperatives. Technology decisions need to be consistent with both the imperatives and the capability requirements.
Ultimately, banks need to have a clear idea of the market conditions under which they are operating, and a vision of how the bank should ultimately fit in that landscape. Measuring performance in comparison to the competition is critical to developing an overall perspective. Only then can banks document the gap between today’s reality and their visions of the future and determine what strategic initiatives are required to close that gap.
The TowerGroup/ABA survey demonstrated that banks are focused on investing in customer relationship management solutions for their wholesale banking divisions. The time has definitely come for banks to extend CRM technology strategies beyond retail and into their wholesale units. Banks have traditionally hesitated to deploy CRM solutions and related automation for this market segment at the same pace as retail banking, based on the understanding that wholesale relationships are more complex and multi-layered. To compete in this current climate, however, banks need to learn how technology can support their relationship banking as well. According to Lee Kidder, Director, Wholesale Banking at TowerGroup, “Relationship managers should look at technology innovations as productivity tools that free them to provide more value added personal service to customers, and not as impersonal automation that will displace their role as customer intermediary.”
Similar to the best practices in the retail banking space, wholesale banking units will achieve many long-term benefits when they begin to understand and capitalize on a client’s total relationship. Achieving one view of each business account, knowing their financial service needs, delivering services and products that are most relevant to them, and extending self-service capabilities so they can better their finances are all part of an excellent CRM strategy. CRM for business users, when executed well, can provide a high-touch experience and improved service for customers. It’s a first line of defense for ensuring customer loyalty. And, ultimately, it’s the best way to discover new opportunities for revenue on a broad scale. With that said, it is important that those strategic business imperatives and capability requirements always remain central to the development and deployment of a CRM initiative.
The pressure on wholesale banks to reduce operating expenses has been enormous and unrelenting, coming both from competitive price-cutting and from the large drop in market demand for commercial loans. Banks can no longer expect to keep up with these pressures by continuing to shave incremental percentages from their cost base. They must now be looking for larger, “transformative” opportunities that necessarily involve more change and more risk, but offer larger savings. Wholesale banks in fact have many such untapped opportunities for sizeable cost savings, according to TowerGroup. There are many financial services innovations that have not taken hold in wholesale banking at the same pace as retail. Among the more conspicuous options for further automation and streamlining are imaging and outsourcing, especially in commercial loan operations and cash management. CRM and developing a comprehensive view of customer relationships are also at the forefront of these transformative opportunities.
Polls have indicated that banks struggle with achieving one view of their business customer’s entire relationship. Laying the groundwork for such an initiative, based on the guiding principles of the strategic business imperatives, can open the door to many business-transforming initiatives. But doing so often requires that wholesale banking units break down the barriers – both cultural and technical – that hinder their ability to meet customers needs and achieve their business goals.
By integrating front-office applications, banks can achieve a single, comprehensive view of their wholesale banking clients. Achieving a single view of users can result in new revenue generating opportunities, enhanced cross-sell ratios, and improved customer service. From knowledge-based cross selling to delivery channel optimization, achieving a single view of customers can enable banks to realize exponential returns.
Traditionally, the primary motivation to implement new technology initiatives has been to cut costs and improve quality. However, wholesale banking outlets need to follow the growing trend of using technology “offensively,” that is, to develop new sources of revenue – an entirely new way of thinking. When technology decisions lead from strategic imperatives, the planning and potential become far more obvious.
Certainly CRM implementations, for example, support the objectives to reduce churn in an account base and develop customer loyalty. But any technology initiative that does not have stated objectives around growing business, increasing revenue or opening new avenues of business opportunity is an opportunity lost.
As conveyed in TowerGroup’s November 2003 report, “Wholesale Banking Technology Agenda for 2004,” legal and regulatory mandates – USA Patriot Act, Sarbanes-Oxley, Basel II – that require extensive technology investment for compliance provide banks with opportunity to leverage risk management as the driving force for several other strategic initiatives. Risk management can be the overall theme that both triggers and justifies initiatives related to operational efficiency, straight-through processing, real-time processing, CRM, channel integration and outsourcing, all on the basis of increasing risk management effectiveness and thereby optimizing capital allocation.
Historical measurement and decentralized record keeping no longer define today’s effective risk management deployment. Rather, today’s risk management functions generate enterprise-wide information and integrated management reporting. In this context, its benefits extend well beyond finance departments and statutory agencies to business managers, head-office executives, and external stakeholders. An effective risk management infrastructure is the best way to both keep up with changing regulatory requirements in each country in which a bank conducts business, while also supporting consistent financial reporting and decision-making in wholesale banking operations.
The bottom line is that risk management should not be viewed only as a reporting and policy obligation, but as an effective way for banks to achieve a higher level of customer understanding and deliver to customers new and enhanced value-added services. Ultimately, risk management rises to become part of the backbone that creates efficiency and customer loyalty, and enables banks to achieve strategic cost management in their wholesale banking units.
All effective technology strategies ultimately need to have a well-integrated technology infrastructure as a foundation. Achieving true synchronicity among systems is a paramount concern for a technology initiative to effectively support strategic business imperatives. The proliferation of products, services, and channels in the financial services industry has made multi-channel integration a critical requirement for connecting delivery channels and customer touch points. A single, integrated platform on which all customer-facing and employee applications reside can facilitate easy integration across channels.
Often, achieving excellent integration in a wholesale banking unit’s IT infrastructure must start with a cultural revolution – one that abandons an archaic nation state model of separate and autonomous business lines, and advances to a federal model, where the parochial interests of individual business lines are consumed in the larger entities of wholesale banking services, according to TowerGroup.
Wholesale banking functions need to operate as one, not many, to achieve consistency, reliability and efficiency in the products and services they provide to corporate customers.
With signs of a recovery in the wholesale banking market, it will be critical for banks to carefully evaluate and improve their technology infrastructure to ensure they can operate profitable, efficient wholesale banking operations. Establishing a thorough understanding of corporate strategies and developing initiatives that motivate a transformation in business practices are vital to creating profits in today’s competitive climate. Understanding customers well is also critical, and is best achieved by integrating systems and developing a clear picture of users. In this light, CRM, risk management, and other technologies that traditionally were implemented to save costs or engender customer loyalty can become the centerpiece for new profit streams.