Corporate digital delivery channels and the customer experience

Corporate digital delivery channels and the customer experience

Celent feels (and others agree) that it’s important that banks deliver an omnichannel digital customer experience, but the term means different things to different people. Based on our own research, we believe that omnichannel is about delivering a customized but consistent financial institution brand experience to customers across all channels and points of interaction.

An omnichannel experience is even more critical when delivering services to corporate clients. Each client has a unique set of business and technology requirements based on their corporate treasury organizational structure, geographic footprint, and treasury technology sophistication. A consistent financial institution brand experience is important to corporate clients, but the experience needs to be tailored to each client segment’s unique needs. For the largest, most complex organizations, an even more bespoke and customized experience is critical.

With banks investing increasing amounts of capital in technology incubators and startup accelerators, the pace of innovation in digital channels continues to grow. But for corporate clients, innovation isn’t about incubators, accelerators, or hackathons. Innovation is about simplification — increasing usability, straight-through processing, and digitization. As outlined in the new Celent report, Tailoring the Customer Experience: External Forces Impacting Corporate Digital Channels, the competitive environment, regulatory climate, economic conditions, and technology impacts are shaping the evolution of corporate digital channels. But emerging technologies will have the largest impact. External Forces Corporate digital channels are just one component of a complex treasury technology landscape, but a critical one. Corporates maximizing the efficiency and transparency of digital channels today are enabling and preparing themselves for innovative technologies for the future.

Reports of small business lending’s death are greatly exaggerated

Reports of small business lending’s death are greatly exaggerated

I’ve spent much of my career in and around the financial services sector focused on small business banking. In the US, small business customers get bounced around like Goldilocks—they are too small to be of interest to commercial relationship managers and too complex to be easily understood by retail branch staff.

I applaud those banks that make a concerted effort to meet the financial needs of small businesses. After all, in the United States small businesses comprise 99.7% of all firms. (According to the US Census Bureau, a small business is a firm with less than 500 employees). In general, larger small businesses are better served as they use more banking products and generate more interest income and fee revenue than smaller small businesses. The lack of “just right” solutions for many small business financial problems has been a golden opportunity for FinTech firms.

In the FinTech space, much of the focus is on consumer-oriented solutions like Mint for financial management, Venmo for P2P payments, and Prosper for social lending. But FinTech companies figured out early on that small businesses weren’t getting the attention they deserved from traditional banks. Many of the top FinTech companies—Square for card acceptance, Stripe for e-commerce, and Kabbage for business loans, have gained prominence serving primarily small businesses.

Online small business lending by direct credit providers has especially taken off. Disruptors like Kabbage, OnDeck, and Lendio were quickly followed by more traditional players like PayPal, UPS, and Staples. Morgan Stanley reports that US small business direct lending grew to around $7.5B in 2014 and projects expansion to $35B by 2020. They also maintain that most of this growth is market expansion, not cannibalization of bank volumes. This makes sense—direct lenders usually attract borrowers that can’t get bank loans and charge accordingly. For example, Kabbage averages 19% interest for short term loans and 30% annually for long term loans. According to the Federal Reserve, the average interest rate for a small business bank loan (less than $100k) in August 2015 was 3.7% and current SBA loan rates range from 3.43% to 4.25%.

And that common wisdom that US banks have pulled back from small business lending? Let’s take a look at data compiled by the FDIC starting in 2010.

Small Business C&I Loans The overall volume of small business loans increased year-over-year from 2010 to June 2015, with a CAGR of approximately 3%. The total dollar value of small business loans outstanding dipped slightly in 2011 and 2012, reflecting slightly smaller loan amounts, a result of tighter lending standards. The facts are that US small business loan volume and dollar value outstanding are at their highest levels since the FDIC began collecting this data from banks. And by the way, there are almost 2,200 fewer banks in the US today than prior to Lehman’s collapse in 2008. Banks are happy to work with credit-worthy small businesses to meet their working capital needs. And direct lenders are happy to work with everyone else—-a win-win for all.

Increasing headwinds in corporate banking?

Increasing headwinds in corporate banking?

This week I’m in Singapore, which provides a beautiful backdrop for Sibos 2015, the annual conference that brings together thousands of business leaders, decision makers and topic experts from a range of financial institutions, market infrastructures, multinational corporations and technology partners.

IMG_2628

This year’s conference theme is connect, debate and collaborate and takes place at a time of increasing headwinds from a slowing global economy, higher compliance costs, increasingly global corporates, and competition from both banks and nonbanks alike. I spent the past few months taking a deep dive into corporate banking performance over the past 10 years–a period of both tremendous growth and unprecedented upheaval. As expected, corporate banking operating income and customer deposit balances have experienced healthy growth rates over the past 10 years. But surprisingly, despite increases in customer deposits, corporate banking income was largely stagnant over the past few years.

Corporate Banking Income and Deposits

Corporate banking plays a dominant role for the largest global banks. In 2014, corporate banking was responsible for 33% of overall operating income and 38% of customer deposits across the 20 banks included in this analysis.

As outlined in the new Celent report, Corporate Banking: Driving Growth in the Face of Increasing Headwinds, this critical banking sector is shaped by four external forces: economic conditions, the regulatory environment, business demographics, and financial technology. These same factors are slowing corporate banking growth and creating an environment in which banks are overhauling client offerings in the face of regulatory pressure, re-evaluating geographic footprints in response to shifting trade flows, and investing in technologies to ensure a consistent, integrated customer experience.

Much of the discussion at Sibos is on exploring transformation in the face of disruption. As they look to an unsettled future, corporate banks that are flexible, adaptable, and creative will be the ones that succeed. Changing time-tested ways of doing business is painful, but critical for future success.

The importance of customer experience in financial services

The importance of customer experience in financial services
Service Design. Journey Maps. Customer Stories. Mood Boards. Experience Recovery. These are a handful of the topics discussed at this week’s Customer Experience for Financial Services (CXFS) Conference, organized by Worldwide Business Research in Charlotte, NC. As an analyst currently immersed in research on corporate banking financial performance, regulatory environment, economic conditions, business demographics, and financial technology, the CXFS event was a welcome change of scenery.
Journey Mapping

Journey Mapping

The CXFS conference was all about the “voice of the customer” (VoC) and how financial institutions (FIs) can improve their customer “listening” skills. One of the sessions mentioned that FIs are listening to anywhere from four to ten channels including web site, call center, e-mail, Internet, customer surveys and social media. But as one presenter stated, having more VoC channels doesn’t automatically result in a better customer experience. For example, in recent years many global banks fully integrated their major lines of business with product, operations and technology grouped organized under one segment leader. These integrated groups have created silos which create a highly verticalized client experience (CX), preventing consistency across a firm. Event attendees were encouraged to “climb over the silos and create a collective story to make things change”. Customer experience strategy and technology have gone a long way since I was involved in online banking user interface design in the early 2000s. Technology providers at the event are enabling banks to digitize and tag unstructured data such as call center recordings, agent notes, e-mails, and social media posts. This enables firms to mine and analyze the data to inform customer-centric innovation. Other firms specialized in market research including voice of the customer and voice of the employee surveys. Customer experience consultants are helping firms to understand how customers are thinking, feeling, seeing, saying doing and hearing so that people, processes, products and technology can be improved. The event featured discussions on how to build CX into people, processes and products by creating centralized information stores, centers of excellence, customer councils, and shared KPIs. Most of the FIs at CXFS were early in their customer experience journey and still working out a comprehensive solution. My favorite quote of the event was advice from Ingrid Lindberg, CXO of ChiefCustomer.com: “Have the patience of a saint, the heart of a lion, and the tenacity of a street fighter because it is one giant game of Whack-a-Mole.”

Corporate banking in China: my crystal ball grows cloudy

Corporate banking in China: my crystal ball grows cloudy
I’m in the midst of writing a Celent research report on how corporate banking is faring amid increasing economic, regulatory, competitive, and technology headwinds. Part of my research includes looking at the performance of 20 of the top global banks over the past 10 years. Four of these banks are headquartered in China, a country currently struggling with a government-directed transition to a “new normal” characterized by a shift to a “real economy.” Perusing Chinese banks’ 2014 annual reports, in early 2015 the banks were looking forward to continued acceleration of growth in a stable and healthy environment. What a difference a few months make! China’s economy traditionally depended on expanding exports and massive infrastructure spending. But China’s move to a services-based economy, built on an expanding middle class and private entrepreneurship, is proving challenging. Looking back at the past ten years, China grew to be the largest exporting nation with $2.3 trillion in exports and a CAGR of 15%, the fastest growth rate among top exporting countries. China also weathered the global financial crisis dramatically better than the rest of the world, with its GDP growth rate only dipping to 9% at the same time as world output contracted by 0.5%. China GDP growth China’s growth into a global economic powerhouse and its resilience during the financial crisis contributed to a nearly 20% CAGR for corporate banking operating income across the top four banks from 2004 to 2014. Similarly, these banks enjoyed a 17% CAGR for corporate banking customer deposits. Chinese Banking Income and Deposit Growth Even as China’s economic growth decelerates, the IMF estimates that it will continue to outperform advanced economies. For the corporate banking sector, small-to-medium enterprises are expanding, increasing their need for more sophisticated trade and treasury banking products. This presents an opportunity for global and regional banks to expand transaction services, broadening the options available to corporations doing business in the region. What remains to be seen in my cloudy crystal ball is how China’s corporate banking sector (and its client base) weathers the current stock market shocks. Will China be able to grow its “real economy” into a “new normal”? Or will China finally experience its own financial crisis with a severely contracting GDP and bursting economic bubble?

Paying banks to take your money — huh?

Paying banks to take your money — huh?
Corporations have historically parked excess cash in their demand deposit accounts to take advantage of earnings credit allowances. Each month, the bank calculates the earnings allowance for a client’s accounts by applying an earnings credit rate to available balances. The earnings allowance is then used to offset the cost of cash management services. In the United States, corporates got the option of earning interest in money market accounts with the repeal of Req Q by Dodd Frank. The Liquidity Coverage Ratio (LCR) provisions of Basel III and the advent of negative interest rates in some European countries are upending traditional cash flow management for banks and their corporate and institutional clients. The LCR requires large and internationally active banks to meet standard liquidity requirements. It makes assumptions for deposit runoff in times of financial stress, resulting in a liquidity squeeze. Banks must hold enough high quality, liquid assets (HQLA) to fund their operations during a 30-day stress period. Examples of high quality assets include central bank reserves and government and corporate bond debt. The phase-in of the LCR started on January 1, 2015. It requires banks to distinguish between two types of short-term (30 days or less) deposits. Operational deposits include working capital and cash held for transactional purposes. Non-operational balances are other cash balances not immediately required and assumed to be investments; such as short-term time deposits with a maturity of 30 days or less and accounts with transaction limitations, such as money market deposit accounts. Non-operating/excess balances are assigned a 40% runoff rate for corporations and government entities and 100% for financial institutions, making them the least valuable to banks. As a result, corporates with non-operational cash investments may find it difficult to place in overnight investment vehicles. Many banks are reducing their non-operating deposits either by encouraging corporates to place their funds elsewhere, or by creating new investment products such as 31+ day CDs, money market funds and repurchase agreements to avoid the LCR charge on excess balances. Similarly, corporates also face a risk of higher costs for committed lines of credit which also require more Basel III capital to be held by banks. Bank demand for HQLA in the form of central bank reserves along with European fiscal policy has pushed central bank interest rates into negative territory for the safest monetary havens (Sweden and Switzerland). In other countries with central bank rates hovering near zero, once you take the inflation rate into consideration, those rates are negative as well (ECB and Denmark). Central Bank Interest Rates Central banks had hoped that negative interest rates would encourage commercial banks to increase lending, but there’s only been a slight increase in outstanding loan balances. Financial institution clients are hardest hit by central bank negative interest rates, particularly deposits in Euros, Swiss francs, Danish crowns and Swedish crowns. Many global banks are charging “balance sheet utilization fees” or other deposit fees. For corporate clients, savvy banks are taking a collaborative approach—working with corporate treasurers to educate them on the impact of regulatory and economic forces on their cash management and investment decisions and advising them on the available options.

Biometrics: the next generation of corporate digital banking authentication

Biometrics: the next generation of corporate digital banking authentication
Corporate treasury departments initiate and approve millions of dollars in high-value payments on a daily basis. As an example, in May 2015 the average amount of a US Fedwire transfer was $5.7 million. Because of the dollar value of these transactions, banks were early adopters of enhanced authentication for corporate online banking applications. Many banks continue to offer one-time-password authentication (on top of traditional username and password) using RSA SecurID or Vasco DIGIPASS hardware tokens at both login and payment initiation. When Celent published its report “Corporate Mobile Banking Update: Adoption Conundrums and Security Realities” in September 2014, it highlighted alternatives to traditional two-factor authentication for corporate online and mobile banking applications. Alternative methods include voice, pattern and biometric authentication methods. As discussed in the Celent Banking Blog “Logging Into Your Bank in a Heartbeat”, several banks have rolled out Apple’s Touch ID fingerprint authentication technology for consumer online banking login authentication. However, as quickly demonstrated by clever hackers, Touch ID is vulnerable to various hacking methods. For this reason, banks are turning to more sophisticated biometric authentication methods for its corporate online and mobile banking applications. The focus remains on layered, multi-factor authentication, but combines authentication technologies in unusual and unique ways. Barclays Bank’s offering combines biometric and digital signature technology in an offering called “Barclays Biometric Reader.” To overcome limitations with traditional fingerprint scanners, Barclays is implementing Hitachi Europe’s Finger Vein Authentication Technology (VeinID) which reads and verifies the user’s unique finger vein patterns. The latest authentication announcement comes from Wells Fargo who is combining facial recognition with voice biometrics. Wells Fargo is working with SpeechPro to pilot the new bi-modal security solution (VoiceKey.OnePass) and fine-tune the biometric authentication features. The solution uses a standard smartphone microphone and camera to capture a facial image and voiceprint. Wells Fargo is also working on authentication using eye vein scanning (as opposed to typical retina scans). Biometrics New authentication technologies, from a slew of relative newcomers to the financial services space, could eventually replace traditional hardware tokens and eliminate multiple authentication hoops throughout the digital corporate banking experience. Watch this space.

Corporate banking: serving the needs of business clients

Corporate banking: serving the needs of business clients
Last week I joined Celent’s banking practice as a Senior Analyst covering Corporate Banking. I join fellow corporate banking analysts, Gareth Lodge and Jim O’Neill. Gareth covers payments back office, payments infrastructures, and payments connectivity. Jim covers core systems modernization, the impact of cloud computing, and treasury management technology. My coverage will be focused on the technology impacts of meeting the financial management needs of business customers, ranging from global multinational corporates to small businesses. This includes global transaction services, small business services, commercial and small business lending, and the changing role of corporate treasury and its impact on meeting the needs of corporate banking clients. It’s an exciting time to return to the Corporate Banking analyst ranks. In the face of an uneven global economic recovery, evolving regulatory imperatives, and unpredictable supply chain disruptions, corporate treasury and finance teams have expanded roles and responsibilities. These developments are putting increased pressure on financial services providers in the areas of working capital management, liquidity management, external financing, payables and receivables, international trade, supply chain finance, merchant services and delivery channels. For the large global banks serving corporate and institutional clients, transaction banking revenues and deposits are holding up due to strong transaction volumes, despite a low interest rate environment. Looking across the largest global banks, transaction banking’s share of total bank revenue averages 13%, with its share of deposits averaging 36%.
Transaction Banking Revenue and Deposits

Transaction Banking Revenue and Deposits

On the lending side, US commercial loan outstandings have more than fully recovered from the 2008-2009 financial crisis. US commercial and industrial loans, particularly hit hard during the crisis, have rebounded almost 45% since their lowest point in 2010. Commercial lending in the euro area is another story. Since their peak in 2008, loans to corporations have declined 9%. As discussed in this year’s Top Trends in Corporate Banking 2015 report, banks are facing a complex new reality with disruptive technology, the changing role of corporate treasury and regulatory imperatives shaping corporate banking strategies in new and unprecedented ways. In order to maintain (and hopefully grow) corporate banking revenue and market share, banks need to address the top trends outlined in the report in the context of Celent’s three overall financial services technology themes:

• Digital and Omnichannel • Innovation and Emerging Technologies • Legacy and Ecosystem Transformation

If you have feedback on additional top corporate banking trends we should be covering, I would love to hear your ideas.