After the First Internet Wave: Corporate Banking in CEE
After years of trials, carrying over customer opinion pools, fighting clients’ hesitations concerning security, the corporate banking sector finally and irreversibly entered the age of Internet communication. This communication includes ordering and effecting corporates’ most important financial operations (mainly non-credit related, cash management ones). Although the operating internet banking applications are usually not regional yet, some of the local ones have very good chances of becoming pan-Central Eastern European systems in the very near future.
The majority of corporate banks active in CEE, notwithstanding the introduction of internet banking, still maintain their traditional electronic banking systems, founded on the extended – usually Windows-based – applications with the MultiCash system still the dominant one. However, developing, upgrading and servicing these traditional systems as well as providing customer support to their users has become increasingly complicated and expensive. The necessity of maintaining these systems follows from the banks’ previous successes, i.e. from the fact that customers have become accustomed to these applications and have developed well-tried interfaces allowing customers’ financial and treasury systems to communicate with them. Nevertheless, everybody is already aware that the days of these non-Internet electronic banking systems are numbered. Yet, not everyone is aware enough of the break-through which corporate banking in CEE will face with the migration of operations and customer communication to the Internet.
The analytic reports as well as banking journalism often refer to the Internet as the grand equalizer within the financial industry. The smallest bank, ranked in terms of its branch network extension and the current base of traditionally serviced customers, can – extending its services via Internet – successfully fight largest, long-established “cruisers of the banking oceans”. There are very good examples of this theory in Poland: “m-bank” and “Intelligo” – two retail, purely internet banks created from scratch and proving definite successes in the fight for the share in this market segment. Yet, does the same rule of “equalization via Internet” hold in all segments of the Internet banking users’ market, notwithstanding these users’ requirements? Isn’t this “grand equalization” proving to be an appearance, which – in some market segments, esp. within the corporate banking area – is a disguise for the contrary tendency?
Internet brings the end to the traditional electronic banking not just in the dimension of the speed of operations, software requirements or ease of access. What accompanies Internet banking, irrespective of the sophistication of the required infrastructure and network organization, is the never previously encountered ease and accessibility of banking services. The times when the remote ordering of the ordinary payment was considered an enterprise slightly less complicated than the journey to the moon are definitely over. Traditional electronic banking systems, the main (often the only) functionalities of which were secure ordering payments from a current account and the receipt of a statement, but the implementation of which meant a month’s long, turbulent revolution to the accounting and payments department of the company, are becoming – judged against today’s standards of Internet services offerings – oversized, heavy and slow dinosaurs. Today the Internet allows you to buy shares, currencies and money market instruments online, to organize auctions and provide their immediate settlements, to reach any place not only in the region, but in the world in any moment, within a click of a mouse.
The use of Internet services is accompanied by the impression that it is all a ‘doddle’. Customers very rarely reflect upon the fact that the ease they experience when they use Internet services is the result – irrespective of often enormous expenses – of hard work, flashes of intellect, extreme dedication and unique organisation of dozens and sometimes even hundreds of specialists. However, since – from the point of view of the internaut – a few clicks is enough to order several hundreds of payments, therefore why shouldn’t the same number of clicks suffice to order guarded cash receipt or delivery, order direct debits, instruct the bank to discount selected invoices, view current transactions effected with company’s business cards, review daily cash pooling (e.g. sweeping or interest re-distribution) operations or download payment receivable reconciliation report which has just been provided by the bank.
If there are corporate customers that already have the impression that Internet services are simple and they derive their increasing expectations from it, then there will definitely be the banks that will try to fulfil these expectations. These will typically be financial institutions that already have substantial portfolios of corporate cash management products as well as flexible, quickly developing Internet banking systems. These will be the first to decide that Internet is the best place to sell their products quickly and distribute them easily. The tendency shall be predominating mainly within pan-regional (or global) banking groups, which will use the Internet to allow their customers to have treasury functions centralised on an international level to access their local services developed in particular CEE countries.
However, smaller, local banks (of a countrywide reach) will have to join this race too, if they decide to remain in the market of corporate services available via Internet banking. The international banking groups, which will first decide to make large portfolios of their services available to customers online, shall obviously not limit their market penetration to large multinational companies. They will also reach the lower segments of the corporate market (typically local companies), which until now – due to considerable cost of traditional marketing, distribution, implementations and the operations themselves – have not been targeted by them. When such supply appears, smaller corporate entities will respond to it not only with the increasing demand but also with the growth of expectations towards their banks.
As a result, the migration of corporate banking (especially cash management) services towards Internet platforms shall become not the beginning of the wider competition of banks, but the end of it. The competition in Internet means the easiness of comparing offers, and within the world of corporate banking the content (which definitely shall not be reduced to price) usually proves to be much more important than the form. Since all important banking players will soon be present on the Internet, this medium itself will not mark out their offers anymore. The Internet as such shall therefore soon loose its competitive importance. In case of companies, which expect more from their banks than an aesthetic web page, simple navigation, payment orders and the current operations’ report, Internet will cease to be an element worth mentioning, or the attribute of modernisation in corporate banking. This means that the strongest competition will soon concern – at least within this segment of the market – not just the presence of a bank on the net, but the scope, variety and quality of – mainly local – services made available to customers online.
To understand the hidden success driver of this competition to come we must unveil the most important feature of services available on the net. This feature is not services’ network accessibility but the fact that customers’ orders are registered and at least part of the operations is effected in real-time. In a country such as Poland, where three clearing sessions for low value payments are available to customers every day and where direct debits are settled between morning and evening and where interest rates exceed 6 per cent a year, the real-time may mean substantial financial effect for corporate treasurers.
This requirement for real-timeliness, in turn, means that banking services, before they will become available on-line, must undergo the most important transformation in their history: electronically driven automation. Execution of local and international payment orders, detailed reporting of operations and balances of the account, current reporting of embossed cards’ transactions, disbursement of cash by postal payments, execution of direct debits, handling their rejections and revocations, consolidation of accounts’ balances, sweeping funds to O/N deposits, currency exchange, factoring transactions, reconciliation of mass receivables, ordering cash withdrawals and booking of counted cash receipts must become automated to the maximum possible level. It will require far-reaching reorganising of traditional banking processes, their centralisation and electronic automation. New functionalities of the bank’s core system, of its satellite systems (transaction modules) or of an overlay system will have to be developed and implemented. This means a great challenge to CEE banks, their cash management specialists, operations, IT and budgets. However, the challenge itself – not its reason – will have relatively little to do with the Internet. We shall see relatively very little of it in the Internet: not more than could be seen of the iceberg that sunk the Titanic.
Considering all these requirements and challenges, the age of the Internet means that all of the banks lacking competence or consequence will soon get off the corporate banking race. The Internet will uncover nakedness of all these who will not be able to offer in it an ever increasing portfolio of ever more sophisticated banking products. The user-friendly web-page, payment order and statement will quickly mark the way of the losers. Moreover, when we talk about increasing portfolio of services, we mainly mean local developments, being a key factor of competition in the field of cash management in Central and Eastern Europe.
Although banks that are too slow or too modest will shortly be out of the game, the competition will become stronger. It will put new strategic choices in front of the remaining players. The Internet will create new opportunities that will demand corporate banks in CEE to reorient themselves and to understand their new role within the market. To meet these challenges, banks will have to modify their internal organisation. Traditional electronic banking departments, deprived of their main subject (non-Internet electronic banking) which determined their independence and consistence, shall break down concentrating themselves on two functions, which will prove crucial for the competitive advantage in this new era:
Both functions will finally concentrate upon banking services not on the Internet itself. To conclude, let’s sketch the key directions of further development of services that CEE banks will make available to corporate customers online.
First, local services of the increasing scope will be developed. The current, easy, secure and cheap communication between the customer and its bank will create the bridge to offer the company new services. In this relationship the bank has a chance to become the main service provider to the company. Except for the products increasing the customers’ liquidity and supporting their settlements with contractors, banks shall provide more and more value added services, starting from the processing of data related to banking operations and moving towards other – especially dematerialised – financial services. Banks will also become in-sourcers of many non-business (including non-financial) processes so far conducted within companies themselves or outsourced to many different entities. This in-sourcing can be twofold:
Obviously, such development will not be possible for all the banks. Only those that are determined to enlarge the scope of local services for corporations will survive. This local feature is of utmost importance for the competition in the region: with the centralisation of treasury functions of corporate customers, local services (their scope and quality) shall become the ones which make banks differ from each other. These services will also differentiate banking proper Internet applications from the offers available via multi-banking platforms. To remain competitive, several regional banking groups have already created structures allowing best local specialists with the most of cash management experience to share their competences and to develop or even implement in other banks of the region the services existing already in one of them.
Second, the infrastructure required for international transfers of funds and information, consisting of cross-border management of accounts, ordering off-shore payments, regional or global consolidation of balances, effecting international cash pooling or netting, cooperating with foreign banking partners (especially MT 101 agreements) and multi-bank platforms, as well as customers’ accounting or risk management applications will be further advanced. These services shall soon become integrators of regional Internet banking applications of main banking groups active in CEE. Yet, these international services shall not differentiate among regional banking groups in the long run. Since they will be required from everyone, they shall become a set of standard services, offered by anyone, easily accessible also via multi-bank platforms. However, before this stage is reached, a banking group must first implement a good, already well-tried Internet banking system in all of its local subsidiary banks.