How can banks transition to become platform players in the corporate lending market?
The future of financial services is open. Today’s market trends have led to the emergence of yet another fintech buzzword: managed services. Managed services can be defined as when a technology service provider hosts and manages applications, removing the burden from the bank, opening up flexibility around software and prioritising digital transformation.
There are three reasons why managed services is a preferable route to success:
- Managed services provides banks with the agility to meet evolving business requirements and focus scarce internal resources on strategic priorities.
- Managed services can support banks in effectively mitigating risks around security, operations, reputation or Environmental, Social and Governance (ESG) considerations.
- Managed services can increase ROI on their IT investments and drive long-term lower total cost of ownership (TCO).
Digital transformation requires cloud services. Cloud can enable banks to grow and transform their business in turbulent times. Forrester predicts that the cloud will power how companies adapt to the new normal, or post Covid-19 world, as every enterprise will need to become more agile, more effective at managing risk and more strategic than ever before.
After slight deceleration in 2019, Forrester reveals that the cloud market was turbocharged in 2020 and 2021, and the likes of Amazon Web Services and Microsoft Azure will look to compete to provide industry-specific cloud services, with a special focus on regulated industries such as financial services.
“For cloud buyers, the differentiator will no longer be which hyperscaler has the most services, but which one delivers compliance while enabling application developers to do their jobs faster and better in their specific vertical,” Forrester states.
Financial institutions, in addition to this, will need to decide whether they are merely relationship builders or investors in the platform ecosystem, and organisations that truly leverage managed services. The platform ecosystem combined with managed services is the preferred route to successfully meet evolving market needs, more quickly with reduced risk.
Products, relationships, and platforms
Market changes will require banks to more carefully position themselves as value-adding, outcome-driven partners rather than product providers. They must also reengineer their business models to become end-to-end service providers to the customer through the combination of cloud, automation, and data analytics.
Rafael Otero, Managing Director, Chief Information Officer and Chief Product Officer for the corporate bank at Deutsche Bank highlights that while it is evident that the needs of their corporate clients will evolve and become even more complex, the focus of traditional relationship management for loans may change. Also, with the extent of transparency in consumer lending, Otero spoke about whether corporate loan products should be “platformed away or platformised.
He added: “For off the shelf products, traditional relationship management may not be required. However, for larger multinationals, off the shelf loans need to fit into the wider lending landscape, liquidity planning, cash management, cross border payments and foreign exchange. Complicated environments call for relationship management, but I believe this model will continue to develop,” Otero says.
Considering the lending market, value-added services will be a priority for corporate organisations. As Otero says, corporates “don’t want to think about one loan in geography A and one loan in geography B. Something that we as an industry need to evolve to be capable of is providing a holistic and embedded view of lending products, much more than we are today.”
In Otero’s view, “a good financial institution of the future must provide products, build relationships and it can then aspire to be a platform player.” Using the lending market as an example, he expands on this point and says that over the years, technology providers have enabled banks to assume the role of the product provider. However, this is not the ideal outcome for a bank.
“If you are a bank that is super-efficient in creating loans and in implementing, executing, and operating loans, it’s not a bad spot to be. However, most banks do not have that operational excellence. They also do not want to lose that relationship with their clients for a number of reasons,” Otero explains.
While traditional banks excel at relationship retention, they may not have all the technology tools to serve the corporate lending market alone, and thus corporates will rarely only utilise one bank for all their needs. Otero’s opinion is that this is due to risk mitigation, but to progress to a future of platform players, financial institutions must consider that they are “always going to be one bank in between two or three.”
He continues: “If a bank wants to become a platform player, it needs to allow its clients to use their tools and front ends, but perhaps execute loans with different banks. Banks cannot become platform players in a day. Banks need to play one part of the equation and operate on both sides of supply and demand. Having a single bank as the supply is not my definition of a platform player.”
David Hobbs, Solution Architect – Lending at Finastra echoes this sentiment. “Within the lending market, what has become very clear is that value added services are a top priority for clients and that clients have become much more aware and knowledgeable of the options in the market that are available for them.” He goes on to say that when bank accounts were opened decades ago, that was the bank a customer banked with for life. “It was like a commitment. Nowadays, it's a much more open market and customers know they can engage with a number of banks and lenders to get the best deals.”
By positioning themselves as value-adding and opting for a more collaborative approach with clients, banks have a simplified route to becoming real end-to-end service providers. Hobbs says that this is where the platform player role comes in.
“To be in that sort of position where the client has access to everything they need within a single status or location is crucial. To get there, they must start looking at their infrastructure now. Banks are not going to compromise on their controls and risk management just to provide this service to their clients. It is going to be a balancing act.”
Neil Budd, Global Head of Managed Services at Finastra states that there is no silver bullet, but a cultural shift is required too. “Institutions are continually asking themselves the question: why do they need to own, maintain and monitor a platform if there’s no competitive advantage? Perhaps someone could take on the accountability and deliver this ‘as-a-service” quicker, cheaper, and faster without increasing risk to unacceptable levels?”
Further to this, “financial institutions, in isolation, often lack bandwidth and capacity to execute the transformational change required and therefore seek third party support from external partners.”
Reposition with a mindset shift first, then technology
For banks to become successful platform players, those inside of the institution must prioritise business agility. Banks’ business agility is limited by their ability to change their technology landscape to meet evolving business requirements, therefore, a mindset shift must come before the utilisation of technology. Executives within the bank must know why these changes are being made.
Historically, agility to make changes has been constrained, by lack of expertise, tools, or processes. Solutions are also often not flexible enough to always suit business needs. To keep pace with business requirements, internal resource needs to be focused on strategic priorities, and that resource must be aware of what those priorities are.
With the knowledge that a corporate client will not solely work with one bank, financial institutions must consider the data play involved with becoming a platform player. In the same way that APIs are being integrated across systems to provide a streamlined approach in the consumer market, the open nature of embedded finance and contextual banking initiatives must also become the norm in the corporate world. A long-term mindset can lead to a successful long-term strategy.
For Otero, “the important part is, how can banks serve clients better if their competitors are capable of providing better access on loans?” Although banks can decide not to serve a geography where their competitor is a better provider, or attempt to learn from their experience, any change to products must always be for the benefit of the customer, not the platform.
This is the mantra of open banking, and the cloud is a great enabler of this, as it allows financial institutions open innovation to scale faster in other geographies, which is an advantage for the corporate lending space. With open banking, contextual banking, and embedded finance, automation ensures that the platform marketplace becomes efficient and no longer riddled with manual processes.
Hobbs also considers the importance of agility in relation to technology. “Banks need to be seen to be agile and flexible, in terms of not only the services they offer, but how quickly and efficiently they make their services available. It's a choice that banks will have to make. If they want to be involved in this more dynamic market, which most of these banks do, then that has to be through digitalisation.”
Providing his view on the market, Hobbs explores how “the lending world is changing and it’s probably changing more dramatically now than it has done in 30 years. Not just from a consumer and commercial lending perspective, but the syndicated lending world is also looking to adopt more online based processes and transactions to finally move away from antiquated, paper-based engagements.”
When considering shifting to a managed services model, banks must consider the following:
- The associated cost
- Total cost of ownership
- Security innovation
- Accountability of service delivery
- An outcome-oriented approach
Budd concluded: “If lenders do not reposition themselves in the evolving customer ecosystem, they are going to become irrelevant rather quickly and lose valuable market share. The challenge that many financial institutions are ultimately facing is one of pace. With antiquated business models and spaghetti architectures institutions are finding the speed at which they can pivot compromised, there-by compounding the time to market challenge. This cannot change overnight and choosing the right partner to accelerate this journey can yield significant value.”
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