CAPCO THE IRRESISTIBLE RISE OF CORPORATE SOPHISTICATION

Transcription

1 CAPCO THE IRRESISTIBLE RISE OF CORPORATE SOPHISTICATION

2

3 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 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 IN THE BEGINNING 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

5 5 THEN THEIR CORPORATE CUSTOMERS BECAME (MUCH) MORE FINANCIALLY SOPHISTICATED 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). AT THE OUTSET, GREATER CORPO- RATE FINANCIAL SOPHISTICATION STILL MEANT GUARANTEED REVENUES FOR BANKS 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 AND ALL CHANGE 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 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. LEVEL OF CORPORATE SOPHISTICATION 1. First corporates adopt technology 1 2.Start of ERP implementation 2 4.SWIFT for corporates 3.Online banking massive uptake 3 5. Financial crisis start ? 6. Corporates start own banks, non-banks offer transaction services FIGURE 1. TECHNOLOGY DEVELOPMENT AND FINANCIAL CRISIS AS TRIGGERS ON THE CORPORATE SOPHISTICATION CURVE

7 7 GREATER FINANCIAL SOPHISTICATION BECAME KEY TO CORPORATE SURVIVAL 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 8 THE RISE OF THE FINANCIAL SUPPLY CHAIN NETWORK 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. BANKS UNDER ATTACK - FROM CORPORATES AND NON-BANKS 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?

9 9 DEPOSIT CREDIT PAYMENTS ACCOUNTS OTHER Corporates In-house cash pooling Walmart (preshipment funding of suppliers) DHL (in-house payment factory) 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. CORPORATE SOPHISTICATION IN ACTION CORPORATES ARE DOING IT FOR THEMSELVES! 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 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. NON-BANKS HAVE ALSO COME INTO THE MARKET AS PLAYERS AND THEY ARE SUPPORTING CORPORATES MOVE TOWARDS GREATER SOPHISTICATION 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.

11 11 SUMMARY 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 RELEVANT 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 e- trade 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

12 12 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).

13 13 THE MOVE TO FULL CORPORATE CUSTOMER RELEVANCE - HOW CAPCO CAN HELP AND SUPPORT 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

14

15 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). bernd.richter@capco.com. 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. ilja.ilit@capco.com ABOUT CAPCO Capco an FIS TM company is a global business and technology consultancy dedicated solely to the financial services industry. We work in this sector only. We recognize and understand the opportunities and the challenges our clients face. We apply focus, insight and determination to consulting, technology and transformation. We overcome complexity. We remove obstacles. We help our clients realize their potential for increasing success. The value we create, the insights we contribute and the skills of our people mean we are more than consultants. We are a true participant in the industry. Together with our clients we are forming the future of finance. We serve our clients from offices in leading financial centers across North America, Europe, Africa and Asia. WORLDWIDE OFFICES Amsterdam Antwerp Bangalore Bratislava Charlotte Chicago Düsseldorf Frankfurt Geneva Hong Kong Johannesburg London New York Orlando Paris San Francisco Singapore Toronto Vienna Washington DC Zürich To learn more, contact us in the UK on , in Continental Europe on , in North America on or visit our website at CAPCO.COM 2014 The Capital Markets Company NV. All rights reserved. T EU

16 CAPCO.COM