The Irresistible Rise of Corporate Sophistication?

The Irresistible Rise of Corporate Sophistication?

CAPCO
THE IRRESISTIBLE RISE OF CORPORATE SOPHISTICATION
T H E I R R E S I S T I B L E R I S E O F
C O R P O R A T E S O P H I S T I C A T I O N
THE RISE OF CORPORATE SOPHISTICATION IN FINANCE.
WHAT IS IT? AND HOW CAN BANKS REMAIN RELEVANT TO RESIST IT?
4
Unchallenged, banks used to provide corporate customers with a range of
services, from payments processing to business extension financing. Then
everything began to change, with the emergence of much greater financial
Corporate Sophistication. Starting now, banks need new strategies and
new approaches, to retain and regain business that used to be assured.
Against whole new forms of competition, resistance is all about
RELEVANCE.
The banks used to do it all
I N
T H E
B E G I N N I N G
…
… banks were effectively assured of a central role handling many key aspects of their
corporate customers’ business model and transactional execution. The core services they
provided historically, and exclusively, included:






Processing of payments
Issuing letters of credit to mitigate counterparty/transaction risk
Managing cash accounts across regions
Providing Forex management
Investing excess cash positions into overnight facilities
Financing of business extensions
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T H E N T H E I R C O R P O R A T E
C U S T O M E R S B E C A M E ( M U C H ) M O R E
F I N A N C I A L L Y S O P H I S T I C A T E D
In more recent decades, corporate customers began the journey to optimizing their own
in-house financial and operational sophistication through application of technology.
This journey continued with Enterprise Resource Planning (ERP) and Treasury
Management Systems (TMS) - by leveraging the expertise of major players such as SAP,
Oracle and others. Greater corporate financial sophistication was first observed in
multinational corporates (MNC), was then followed by mid-sized corporates
(MidCorps) and later even adopted by the small-medium enterprises (SMEs).
A
R
S
R
T T H E O U
A T E F I N A
T I L L M E A
E V E N U E S
T S E T , G R E A T E R C O R P O N C I A L S O P H I S T I C A T I O N
N T G U A R A N T E E D
F O R B A N K S
To gain full advantage from their growing sophistication in approach and capabilities,
many corporates also invested in bridging the ‘last mile’ of their in-house technology
environments directly with the banks, in order to achieve fully automated transactional
solutions. As a result, the majority have in effect built up a bank-dependent ecosystem.
This in turn has provided the banks with a predictable flow of corporate transaction and
credit business.
2 0 0 8
A N D
‘ A L L
C H A N G E ’
Continuous automation of online banking, with direct banking connectivity solutions or
through implementing standardized SWIFT for corporate access, has been a major
contributor to corporate financial sophistication (see the exhibit below). But closer
analysis reveals that the only non-technological trigger (the deep financial crisis of 2008)
was also the most impactful. What happened?
C O R P O R A T E
S O P H I S T I C A T I O N
6
During the crisis, banks were actually turning down corporate business. Their emphasis
shifted to their own survival. A large element of that survival was seen to be regulatory
compliance, which drove increased risk awareness across all business lines within banks
and dried-up the securitization market for loans during this period. A unique
combination of adverse factors meant banks left their corporate clients with an underserved (or completely un-served) need for lines of credit.
7. ?
7
LEVEL OF CORPORATE SOPHISTICATION
6. Corporates start own
banks, non-banks offer
transaction services
5. Financial
crisis start
4. SWIFT for
corporates
6
3. Online banking
massive uptake
2. Start of ERP
implementation
1. First corporates
adopt technology
2
3
4
5
1
1950
1960
1970
1980
1990
2000
2010
2020
FIGURE 1. TECHNOLOGY DEVELOPMENT AND FINANCIAL CRISIS AS TRIGGERS
ON THE CORPORATE SOPHISTICATION CURVE
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G R E A T E R F I N A N C I A L
S O P H I S T I C A T I O N B E C A M E
C O R P O R A T E S U R V I V A L
K E Y
T O
Many corporates were cut off suddenly from their traditional credit access (and had
much more limited or non-existent access to capital markets). As a result, they had to
become more sophisticated than ever in terms of their approach to financial engineering
- and they had to do it very quickly to survive. They began to use their operating cash
flow to fund investment into maintaining or growing their business internally.
Left essentially on their own by the banks, and driven by the urgency of the situation,
corporates developed a range of capabilities to enhance their financial planning,
engineering and processing sophistication. Key examples include:




Standardizing corporate to bank connectivity (to gain ‘switch’ possibilities), using
standard formats such as ISO 20022, CGI, EDIFACT, FIX and others
Maturing cash flow predictability and internal treasury and funding ability by
employing former bank experts in liquidity & market risk management
Creating a range of simple-to-complex financial supply chain management networks
between suppliers and buyers, based on matured business relationships, to
marginalize bank involvement
Reassessing banking relationships (pricing and transactional capabilities) on a
continuous basis to take advantage of competitive markets and the possibility of
switching banks
The net impact of this growing trend in corporate capability is clear to see. From the
corporates’ perspective the intermediary role of banks, a role that at one time was
assured, has been steadily decreasing. And this has happened in proportion with the
growth of their own corporate sophistication, especially in the area of supply chain
capabilities.
C O R P O R A T E
S O P H I S T I C A T I O N
8
T H E R I S E O F T H E F I N A N C I A L
S U P P L Y C H A I N N E T W O R K
Larger corporates have, over time, established that it’s in their own direct interest to
optimize and leverage their financial supply chain network on a global scale. Typically,
the practical result has been a closed eco-system network where the major node (i.e. the
manufacturer) links together all parts of the physical supply chain (e.g. commodities,
processors, assemblers, distributors, etc.) and makes best use of their excess liquidity –
which is estimated (in 2014) at approximately US$ 3 Trillion. This relationship maturitybased trust network aims to maintain predictable interactions between participating
firms, avoid risks and increase stability of the overall supply chain network.
Mid-sized and smaller corporates and SMEs are today very often trading as parts of a
broader supply chain network. Ultimately involvement in this model leads to a reduction
in the banking footprint they actually need, because participants can make use of the
supply chain’s own inherent liquidity - provided in exchange for various forms of
discount programs, a move from letters of credit to open account processing, access to
low credit rates, and other initiatives.
Now contrast this, far more corporately sophisticated, situation with what used to
happen in the past. At one time, banks could rely on the income driven by transactionbased products. This income would deliver steady profits, even in down markets. Today,
this assurance simply no longer exists. The greater capabilities - and more sophisticated
solutions and approaches - being implemented by corporate customers are radically
impacting the market. Put simply, corporates in many instances either don’t want or
don’t need the old transaction-based products. Or their demand has evolved towards
new and more relevant products.
B A N K S U N D E R A T T A C K - F R O M
C O R P O R A T E S A N D N O N - B A N K S
Today, corporates and non-banks provide previously bank-only processes and services
(see the exhibit below). This is happening to such an extent that we can say, without
exaggeration, banks are under attack. How is this attack manifesting itself?
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DEPOSIT
Corporates In-house cash
pooling
CREDIT
Walmart (preshipment
funding of
suppliers)
PAYMENTS
DHL (in-house
payment
factory)
ACCOUNTS
OTHER
IATA
(remittance and
settlement
function)
Life Science
(company risk
management by
ex-bankers)
In-house banks (e.g. Siemens, EADS, VW, BMW, Mercedes, GM, Trumpf)
Nonbanks
Bitcoin
(circumventing
traditional bank
infrastructure)
Lending Club,
ZenCap (direct
funding of
corportaes
without bank as
intermediary)
Holvi/PSPs
(end-to-end
payment
services), realtime payments
& SoMe
integration, on
the horizon:
PayPal, Google,
Square
Tesco (after
getting customer
data from
installment
payments and
credit cards)
TransferWise,
Kantox – FX for
corporates at
interbank rates,
Traxpay –
alternative to
Trade Finance
FIGURE 2. ATTACK ON CORE BANKING AREAS FROM INCREASING CORPORATE
SOPHISTICATION AND ENTRY OF NON-BANKS.
C O R P O R A T E S O P H I S T I C A T I O N
A C T I O N … “ C O R P O R A T E S A R E
D O I N G I T F O R T H E M S E L V E S ” !




I N
Deutsche Post/DHL have centralized their in-house payments factory using the
“payments/collections on behalf of” model for in excess of 800 subsidiaries across
100+ countries globally. Similar movement is seen at luxury goods producer LVMH
(Moët Hennessy Louis Vuitton, with 700 legal entities and 60 independent brands,
some of them present in more than 80 countries).
A Life Sciences company has implemented advanced in-house risk management –
they are employing former risk management specialists/investment bankers to
manage financial risks (in areas such as commodities, FX, counterparty default, etc.).
Established financial supply chain management networks (buyer/supplier) are
providing pre-shipment financing to suppliers, with early payment options
(Walmart).
An international airline organisation running a USD 250bn+ remittance and
settlement function internally is using banks only as payments transaction enablers,
while making those banks and their services exchangeable and fit for purpose.
C O R P O R A T E
S O P H I S T I C A T I O N
10


Larger MNC corporates have launched their own in-house banks (examples include
Siemens, EADS, VW, BMW, Mercedes, GM, and LVMH) to offer direct financing of
their products and services. This trend has recently begun to be adopted by midcorporates too (e.g. Trumpf in Germany).
Supermarket Tesco has extended its retailing activities into the arena of consumer
credit by offering the facility to pay in instalments for more expensive items (first in
co-operation with non-banks, then alone). Since early in 2014, after collecting
sufficient customer data, they have been providing full current account facilities.
N O N - B A N K S H A V E A L S O C O M E
I N T O T H E M A R K E T A S P L A Y E R S
A N D T H E Y A R E S U P P O R T I N G
C O R P O R A T E S ’ M O V E T O W A R D S
G R E A T E R S O P H I S T I C A T I O N
The growth in corporate financial sophistication is not a straightforward, exclusive move
from bank service to in-house capability. Non-banks are also involved and they are
making inroads into ‘heartland’ corporate banking services. Here are some examples:

Loans/Credits - Lending Club (with some 30 other similar platforms) is bringing X2B
alternative financing to corporates, without the need for a bank intermediary (another
similar offer called ZenCap recently started in Germany).

FX - TransferWise and Kantox offer FX transaction services for corporates at close to
interbank rates.

Trade Finance - Traxpay is being offered as an alternative to the conventional letter
of credit / bank guarantee business.

Payments - Many PSPs (Payment Service Providers) have emerged in Europe,
targeting corporates to provide end-to-end payment services with an advantage of
operating without the burden of costly legacy systems. And they have no shortage of
potential business: SEPA has created a new, 400m strong customer market (that is set
to increase to 500+m from 2016). Examples include Finnish PSP Holvi, which
announced its EU-wide expansion in the summer of 2014, with bundled services for
small companies.
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S U M M A R Y
Corporate business is attractive. If it doesn’t go in-house, it won’t automatically stay
with the bank. It may well go to a non-bank competitor.
A powerful combination of increasing corporate sophistication and emerging
competitors - utilizing innovative approaches and technologies - may well take away a
major portion of established (and previously assured) corporate business from banks.
Bank responses to protect and grow corporate business – Effective resistance requires
relevance.
The best (the only viable) form of defense is to react fast - and make sure the reaction is
based on remaining totally R E L E V A N T to the needs of customers. Some practical
ways in which this can be achieved are detailed below:
Offer deeper intimacy
Successful banks must recognize and leverage the opportunity to create deeper intimacy
with their corporate customers, by becoming their default innovation provider. What
will it take to tie in these customers, making them more immune to the attractions of
new market entrants? This could be achieved through moves such as incorporating etrade finance standardized communication (e.g. Bolero) into online banking for
corporates & MidCorps. Banks can also help SMEs by becoming a ‘hub’ for other useful
services (e.g. providing links to e-government through e-Commercial Register, e-tax
office and others). This has already been done by some banks in Sweden.
Forget “not invented here”
Leave behind the mind-set that all the technology and process capabilities required for
success in this new landscape have to be invented and executed in-house. The reality is
that too much is happening too quickly, with evolving opportunities and emerging
threats, for any bank to work effectively in isolation. Instead, think partnerships and “coopetition”. Cases where a collaborative approach is indicated will include new products
and services that require significant investment. A critical mass of users and/or devices is
ready to utilize and deliver those products and services. And education of customers is
necessary to drive wider usage and enable broader reach (POS infrastructure for
contactless payments and educating customers to use them is a good example).
C O R P O R A T E
S O P H I S T I C A T I O N
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Stay relevant (not least by executing a robust digital strategy)
Offer the services customers really need, want and expect (and exceed their expectations
with relevant innovations). This can be achieved through a combination of deep
customer insight and industrialized approaches to pure process. Some of the key
practical elements include:





Deliver basic services flawlessly – enabled by machine-driven functions running 24/7
to reduce complaints (and costs).
Deliver synchronized services (to provide convenience, choice and control for
customers, who enjoy easily shared and accurate common access to the same bank
information, irrespective of channels/device platforms).
Eliminate potential gaps in total customer service by intermediating services from
other providers that are relevant to customers (see above, Offer Deeper Intimacy).
Leverage relevant insights derived from eligible data intelligence to offer services that
the customer is showing you they really need (based on their previous patterns of
banking behavior and cycles of service uptake).
Partner with financial technology firms as enablers to deliver extended product and
processing capabilities (i.e. mobile payments, financial supply chain management etc.)
to drive innovation enablement for corporate clients and thereby build deeper bankto-corporate intimacy and relevance.
Recognizing and acting on the key areas identified can lead to ongoing conversion of
corporate customers, from ‘satisfied’ (at best) to active advocates of their bank and its
services. If done ahead of established and new competitors, the right action drives loyalty
and market share and provides the only viable long-term defence against being disintermediated (and thus slowly terminated). The stakes are significant. If corporate loans
(with average APR of 3.5%) in the Euro currency area alone were to decrease by 50%
over a period until 2025, banks’ income would sustain a corresponding decrease of
approximately EUR 75 billion (benchmarked against ECB 2013 data).
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T H E M O V E T O F U L L C O R P O R A T E
C U S T O M E R R E L E V A N C E - H O W
C A P C O C A N H E L P A N D S U P P O R T
Capco has a proven track record of supporting our clients by identifying and developing
new propositions and innovations that go beyond the usual thinking in the financial
industry. We are also adept at identifying and re-applying successful experience from
other markets, where there are more advanced or successful practices. Capco’s
experienced practitioners thoroughly understand the relevant business issues and the
technologies. They are proven innovators in the key fields of digital strategy, service
design and platform developments/evolution.
Capco also has a unique “dual perspective”. Not only do we understand the needs of our
financial institution clients in depth. We also keep the expectations of their customers at
front of mind. In practical terms, this means we are regularly co-creating innovative and
rewarding end-customer experiences by working closely with our clients. Among recent
examples, we have supported financial institutions in transforming their channel
strategy, through using new digital functionalities to create an end-to-end value chain
expansion for corporate business and SME clients.
C O R P O R A T E
S O P H I S T I C A T I O N
Bernd Richter is a Capco Partner. Bernd’s core areas of expertise are in market-entry and
growth strategy, product development and pricing, pre-merger management and postmerger integration. He has deep domain knowledge of key areas including international
payments, cash management, trade services/ finance and financial supply chain management, and cards (acquiring/issuing). [email protected].
Ilja Ilit is a global Research Analyst at Capco, with close to two decades of experience in
various areas of banking across in Slovakia and Austria. He is a certified PM, and holds an
MBA from the Open University, UK. [email protected]
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