Will Corporate Banking Channel Management Become Obsolete?

The banking industry typically positions its strategy for corporate customers as an integrated approach to help treasurers unlock working capital from their supply chain. To realise this strategy, banks offer a service that is focused on getting involved in the corporate’s financial supply chain. This service includes cash management, trade finance and liquidity management.

Banks see their service delivery channels as a major competitive asset to get involved in the corporate’s supply chain. This channel excellence driven service concept has resulted in a multitude of channels, tailored for specific markets, products and technologies, such as FX channels, online payment channels and documentary trade channels. As a result, corporations are faced with several proprietary channels, making the integration of these channels into the corporate financial supply chain very complex.

The Service Delivery Paradigm

The service delivery paradigm describes three of the most important functions in financial service delivery:

1. Service: This is the core financial service delivered to a corporate, such as payments, cash management, lease and financing services.
2. Channel: The delivery channel is the distribution channel of a service, e.g. an Internet banking portal, a proprietary channel for integration into a corporate’s back office or a SWIFT corporate access channel. This function also contains the messaging standard used in this channel.
3. Integration: The integration of these channels and services into corporate financial supply chain processes, such as the integration of the purchase order process with the payment execution process.

Traditional Service Paradigm

It is difficult for banks to excel in all three functions and, as a result, they tend to concentrate on just one. Overlay banks, for example, focus on offering cash management services across multiple banks.

Most banks, however, have a strong focus on the channel function of service delivery. They consider their channels as an opportunity to create an immediate competitive advantage since the channel allows banks to easily differentiate themselves from others. Unfortunately, this channel excellence focus of banks has led to the development of various proprietary channels.

The diagram above shows that the integration of services and channels into the treasury process must be done in the systems of the corporation. In a multi-banking environment, integration of channels becomes increasingly complex for a corporate.

In summary, this channel focused service paradigm reveals two inefficiencies:

• Within the bank, every service has its own channel and its own standard: e.g. the payments channel uses different standards than the foreign exchange channel, and is organized differently within the bank (internal inefficiency).
• Across banks several standards exist: The payments standards of one bank differ from the payment standards from another, even if they are both EDIFACT (industry inefficiency).

Market Pressure Increasing

Currently, various initiatives have started to solve these inefficiencies. On a national level, single infrastructures already exist in some countries, such as Isabel (Belgium), Multicash (Germany), ETEBAC (France) and CBI (Italy). Several organizations such as TWIST and CAST are cooperating with SWIFT to develop a single messaging standard in financial services (UNIFI or ISO 20022) on a European level. It is only a matter of one or two years before corporate customers are ready to generate and process financial documents that comply with ISO 20022. At the same time, corporations are increasingly demanding a standard infrastructure from their banks such as advanced messaging and queuing protocol (AMQP), SWIFTNet for corporates and bank internet payments system (BIPS).

From a regulatory perspective, the Payment Services Directive (PSD) focuses on improved competition in the payments market by opening up the payments market for new entrants fostering greater efficiencies and cost reduction (source: European Commission). The single euro payments area (SEPA) gives corporations the opportunity to look for new value in banking relations, for example by centralizing their treasury and rationalizing their account structures. Some banks recognize the need to be a first mover in these developments, and are joining these corporate initiatives.

These developments not only ultimately eliminate the need to integrate the various proprietary channels into the ERP system or the treasury management system, they also simplify the exchange of information between a corporate and the banking community. Corporations require one language via one single channel from their banks.

In the service paradigm set out above, the channel function will no longer be a resource for competitive advantage for banks, because the channel and the messaging standard become shared resources in the industry. As a result, banks can no longer differentiate themselves from their competition by building proprietary channels. This immediately raises the question of which new service paradigm a bank needs to be able to distinguish itself from other banks and be efficient in service delivery for their corporate customers?

How Should Banks Respond?

The above service paradigm described a third major function in the delivery of financial services: the Integration function. The ability of a bank to integrate their services into the corporate supply chain without significant investments is one of the main corporate requirements.

In order to achieve this, banks should create consistency within the organisation and the industry. Three major efforts to achieve this are:

1. Use industry standards for financial messages: The use of industry standards in financial messaging is required to facilitate integration of multiple banks into the treasury processes of the corporate. Support of this industry standard significantly reduces the cost of integrating new customers, as no or minimal customization is needed in the bank’s processes.
2. Use industry standards for infrastructure: As with a single message standard, integration in the treasury process also requires a single infrastructure, e.g. AMQP, BIPS or SWIFT, that replaces the banks proprietary channels (infrastructural and messaging). Consolidating the bank’s channels into one or few standardized channels reduces the cost of managing the various channels banks currently have, and the cost of connecting new customers.
3. Reduce internal silos: In order to achieve internal harmonisation of services, banks need to reduce the silos that currently exist between the various services. Banks should start with reducing information silos between services that have a close relation with each other like payments, reporting, invoicing, and eventually FX trade. Reducing the silos allows banks to offer synergy between various services, like providing incentives to customers to process payments and financing deals through the same bank.

The diagram below shows these three actions on both axes, and the impact it has on the banking industry.

The above three points should be the banking community’s response to the request by corporations for a single interface. The diagram shows how a bank can choose two paths to move from the current quadrant (A) into full harmonization (D):

• Internal harmonisation (B) improves the information that can be delivered towards their corporate customer and allows synergies between various services.
• Industry harmonisation (C) enables banks to speak the same language as corporate systems, reducing the cost to connect a corporate to the bank for both the corporate and the bank.

In the full harmonisation (D) scenario, a single channel is (or few channels are) used by banks to deliver their range of financial services, e.g. cash management, foreign exchange, documentary trade and e-invoicing.

The table below summarizes the advantages and risks for these proposed changes:

How to Excel in a Standardised Industry?

The question remains how banks can excel in this harmonised industry. The answer to this question lies in the financial service and the integration functions of the financial service paradigm: enhancing the range of financial services and enhancing the ability to integrate into the treasury process. The following efforts should be considered to achieve excellence.

First, banks should consider increasing their service range by:

1. Enhancing their portfolio of services that can be delivered via the single electronic channel either by innovating new services or by disclosing existing services via the single channel. Examples of this are e-invoicing, remittance advice or the processing of a financing or lease request. More in general: better information services around a financial process create magnitudes of value compared to the cost of the actual service. The ‘payments business’ is becoming more and more an ‘information business’.
2. Offering third-party services via the single channel. By doing this, banks can offer other services, either as white labeled services or as sourced services. An example of this could be collaboration with the insurance industry, which allows banks to offer corporates access to insurance products through a single channel. This facilitates easy integration of other financially related services, into the corporation’s supply chain.

Second, banks should look for further opportunities to reduce the cost or increase the value of integrating their products into the corporation’s treasury processes by:

3. Cooperation with a vendor of treasury software allowing the bank to package their services with the software vendor’s treasury management solutions. This significantly reduces the cost of integration both at the corporate side and the bank side.
4. Create synergies between the various services. When the internal silos are reduced as described earlier, banks are able to create synergies between the various services. This increases the value for corporate customers to integrate multiple services into the corporate treasury processes: more steps of the financial value can be serviced with one bank (one stop shop). For example, this can be done by providing a single view on all financial services like a financial service dashboard.

By addressing the points above, banks will be able to build a sustainable competitive advantage in a world where the industry is increasingly focusing on harmonized service delivery toward corporate customers.

This service concept not only benefits corporate customers, but also the entire banking industry. The advantages and risks of the actions described above are summarized in the table below.

Conclusion

Corporate channels, as a bank’s competitive assets for service delivery, are under more pressure. Instead, customers want the channel to become a shared resource in the banking industry.

In a time where corporations are challenged to rethink their treasury processes and banking relations (as a result of SEPA), banks can reposition themselves by finding new ways to add value to their corporate customers.

To remain competitive, banks should move towards a harmonization of channels and financial messaging. Excellence in this harmonised industry can be achieved by focusing on how services should be integrated into the corporation’s treasury process and extending the number of services delivered via the channel.

It is the channel manager’s new challenge to enhance the service range via the channel and create synergies between various services.

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