Wholesale Banking: the Drivers behind Digital Channels
These applications are all interconnected, pre-packaged and run on industrial electronic highways behind the scenes – creating the “instantaneous” experience of the digital life. Strangely, my digital life goes six years back in time, five days a week between 8am and 6pm.
This ‘retro’ feeling is experienced by millions of office workers, largely because of our digital consumer world at home. Expectations are shifting faster than reality, especially in the workplace. This article focuses on the impact of this digital ‘gap’ in the world of wholesale banking – enter small and medium enterprises (SMEs) to my left, corporates to my right.
A Historical Difference between the SME and Corporate Market
Until recently, the first group – the SME market – tended to use local currency bank accounts and domestic “low value” payments through historical clearing with a fairly small financial supply chain. Business online banking was the most appropriate channel to capture their account payables and receivables (APs/ARs); either through web-based file upload/download or manual form input.
In other cases, an SME would outsource this function to a payment and payroll service bureau. In the second example, a business would have a direct ‘legacy’ electronic submission method with the bank (or in the UK use the BACSTEL-IP service). The treasury team often consists of just one or a small number of individuals with other responsibilities in the business, such as accounting and office administration.
The second group, corporates, is more ‘industrial’, requiring direct host-to-host integration for both low- and high-value payments coming from a treasury system – part of an organised and optimised treasury and financial supply chain function. Payroll files, collection instructions and payment submissions are the result of highly industrial processes, requiring an industrial relationship with the bank. The day-to-day process is relatively unattended; however, the treasury team usually consists of top professionals versed in the world of working capital optimisation, intra-day liquidity and cash flow management.
SMEs Behaving Like Corporates and Vice-versa
On the one hand, SMEs are becoming accustomed to commercial ‘digital’ packages that enable them to automate their small treasury and finance operations. Accounting and treasury desktop software – usually available as an online or mobile version as well – now enables SMEs to ‘transact’ with their bank, instead of painstakingly browsing an online banking website to upload or enter a series of records. SMEs are basically becoming “host-to-host capable” through internet-based communication protocols, such as SSH or secure file transfer protocol (SFTP) and hypertext transfer protocol (HTTP).
On the other hand, Corporates need to manage a growing number of exceptions in their industrial process, such as prompting a business signatory to execute an action, or ‘hijacking’ and applying manual intervention against a transaction outside the industrial flow. For example, high-value payments require multi-eye approval from business executives. Receivables reconciliation issues are flagged up to accountants immediately during an intra-day bank statement report.
This leads corporates to increasingly require flexibility from their technology to act outside the industrial corporate-to-bank flow of information – typically through a digital and user-friendly online banking or mobile-based ecosystem. A corporate treasurer or signatory will be much more open for an iPad-based executive approval prompt from the bank (with contextual information), rather than go to the office, insert a physical security token on his desktop computer or on one of the treasury workstations. This is the beginning of the ‘omnichannel’ age for wholesale banking.
What’s Holding Back the Banks?
SME and corporate channels were designed for their original purpose: online and mobile banking for the former group, host-to-host for the latter. These are usually in silos separated from front- to back-office, with huge programme management and IT lifecycle structures around them. Digital requirements and converging client markets mean only one thing -these banking platforms and the traditional approach are becoming obsolete. So are their mind-boggling costs for keeping the lights on, or applying simple changes.
Digital Transformation – the Way Forward
Digital channels have a positive side effect on the bank’s technology estate: they enable products that are lean and simple, free of client-specific customisation. This is something that banks call their “vanilla flavour”. Client customisations are built and maintained within the channel layer. Payment, trade finance, investment banking and even consumer products remain leaner, easier to maintain throughout their lifecycle with fewer dependencies and more predictable profit and loss (P&L) changes over time.
I sincerely believe that banks will start competing with a growing number of non-bank financial suppliers (independent trade finance organisations and Payment Services Directive (PSD2) service providers). The digital transformation is necessary now to compete and differentiate tomorrow.