Commercial Banking Bylined article for Financial Executive magazine March 2013
Meeting the New Demands of Commercial Banking Clients by Richard Day, Chris Harris and Bernhard Klein Wassink, Ernst & Young LLP The business and operational changes needed to comply with new regulatory mandates have demanded a great deal of bank executives’ time and attention. By now, most banks have established internal structures to address the changes in a coordinated manner. As this process continues to stabilize, resources have begun to shift toward reinvigoration of the commercial banking businesses as an engine of growth. This is in contrast to recent years where most banks’ commercial businesses were in retreat. During the financial crisis, even top-rated borrowers found their banks reluctant to lend. In addition, banks sought new concessions to help mitigate net interest margin compression from a sharply lower interest rate environment and flat yield curve, as well as to optimize scarce capital. These concessions, such as LIBOR floors on loans and credit-derivative-linked pricing on revolving credits, further complicated access to capital. As the financial crisis faded and their own liquidity risk stabilized, banks became more willing to lend, but the prospect of meeting new, higher capital requirements, as well as burdensome new credit risk policies, continued to impede the flow of capital. This reluctance is now giving way to the current abundance of market liquidity. Banks are awash with cheap sources of funding, and the search to deploy these excess funds in higher-yielding earning assets has driven increased competition in the commercial and industrial (C&I) lending space. This has led to relatively strong C&I lending growth over the last few years, but tighter credit policies have focused this growth among a smaller group of borrowers, leading to margin and profitability compression. Against this extremely competitive landscape, leading banks are recognizing that growth requires distinguishing themselves in the marketplace, effectively meeting the changing demands of clients and reengineering internal functions to remain competitive.
Changing client demands
To successfully grow, commercial banks will need to respond effectively to the changing demands of their clients. Fundamentally, a bank must understand a customer need and then fill that need with the right product at the right price. But those are the table stakes. Corporate clients increasingly consider other factors in their buying decisions, including the quality of the relationship manager (RM), the onboarding experience, and the technical ability to deliver products and services seamlessly using effective, integrated client data management tools. Winning banks will excel at these aspects of the client experience, as well as continued innovation to align with the growth strategies of their clients. The quality of the commercial banker, or RM, is a key factor. Rather than a simple sales relationship, clients value a consultative approach. They are giving their business to RMs who display a deep understanding of their industry and financial challenges and who can provide a range of appropriate, value-added solutions. The effectiveness of the RM is further enhanced by the ease of the approval and onboarding experience. Customer research shows that this experience shapes a customer’s perception of the bank for years to come. Issues at the start of a relationship can linger in clients’ minds well into the future. Leading banks are getting it right through a variety of actions: • Setting clear expectations and process with clients as well as internal stakeholders (e.g., Product, Sales, Implementations, Operations, Technology) • Continually focusing on simplifying the end-toend onboarding process • Leveraging business process management (BPM) tools to enable better visibility and issue mitigation for clients through the various handoffs in the end-to-end process • Providing transparency to the client throughout the lifecycle • Ensuring consistency in adhering to regulatory requirements in a timely manner across the global footprint (e.g., Foreign Account Tax Compliance Act, Anti-Money Laundering, Know Your Customer) • Establishing streamlined client testing and integration
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The client experience during the transaction approval process is another important factor. Credit administration functions have grown onerous, opaque and inefficient. Decisions are often unnecessarily slow and unpredictable. Beyond RM effectiveness, improvements here represent sizable cost efficiency gains. Finally, the ability to deliver solutions seamlessly is another important part of the client experience. Investments in the right technology, common data and integrated operational infrastructure help to execute as promised. As an example, common data involves capturing necessary client data efficiently – the “one and done” data management ideal – and integrating the data across business lines to support delivery of a range of products and services. Innovation remains key as clients’ own growth strategies demand new and far-reaching financial solutions. One such battleground for growth is support for overseas initiatives. International markets are opening up to more and smaller companies at an increasing pace. These companies need a partner with deep local expertise in each new market and ideally an arm of its main relationship bank to facilitate international treasury management, trade finance and other capabilities. Understanding where opportunities exist for current clients in overseas markets, and offering to support their entry and growth in those markets, allows the bank to expand its business and product penetration with the clients while establishing beachheads in foreign markets. Banks that succeed in establishing themselves in this manner will be well positioned for international growth. To do this, banks must have effective organizational structures to manage the growth, whether organic or driven by acquisitions. Some leading banks have put together separate international groups to organize investments and/or support their overseas strategies (e.g., outbound/ inbound banking). Solving operational issues and providing seamless offerings to their customers create competitive advantage through deeper, “stickier” relationships. Unfortunately, banks often have fragmented business offerings for commercial
clients, which make it difficult to provide a comprehensive user-friendly platform – for example, one that combines cash management, short-term credit and foreign exchange hedging. Different financial regulations in different international jurisdictions often limit a bank’s ability to provide this type of comprehensive service, but equally often the problem is due to the bank’s siloed business lines and operational constraints. Because it’s inherently more difficult to coordinate international services across time zones, jurisdictions and languages, banks must properly align incentives throughout the organization to promote teamwork and capitalize on these client opportunities. The difficulties stemming from having incompatible product platforms is driving portal, mobile and end-user innovation. There is an increased focus on portals that combine platforms in order to provide clients an integrated user experience. Giving clients portal access via mobile platforms is another priority. These are not only technological challenges; banks must also solve the operational issues involved in running an integrated international business. This includes the ability to invest the necessary capital and manage an international network.
Positioning and growth
Banks have begun to address their clients’ demands beyond just extending their balance sheets, although that is usually a prerequisite for obtaining business. To do so, they need high-quality relationship managers. Currently, there is an overwhelming demand for these professionals. Once found, banks must have the management systems in place to fully enable their productivity. Specifically, in order to understand and serve their clients better, banks need to align their (usually fragmented) systems and standards, establish common data platforms, and use standardized data management protocols. Banks may have hundreds of incompatible legacy systems operating in different jurisdictions around the world; these hamper their ability to cross-sell and offer comprehensive solutions. From a relationship management point of view, this means carving up the market analytically into sales territories or by industry focus, with
a careful analysis of the customer base driving prioritization. Depending on the bank’s sales culture, loading customers and prospects into a customer relationship management tool, and actively using sales pipeline reporting in pursuit of growth, can help bankers achieve a coordinated marketing strategy by pursuing and focusing on the right customers. To establish a broader international presence, banks are following their US clients abroad, establishing footprints and providing outbound solutions in new jurisdictions. First, they serve their existing clients, and once established, they can pursue new ones. But multinational banks with strong client bases will be tough competitors, not least because they usually offer international cash management and lending services that treasurers find very useful. Some large global banks are also at the forefront of attempts to consolidate the sales forces of different product lines in order to capture a bigger share of their clients’ business. Banks that get this right will have access to valuable client information. Regulatory changes and the need to allocate capital more effectively have increased the imperative for banks to get more insight from the data they already have. Those with antiquated systems that do not aggregate data or communicate with one another will find it hard to respond to current or future regulatory reporting requirements. They will also have a poor view of their own capital and liquidity positions, meaning they will not have an optimal understanding of their risk. Banks and their technology partners are working to rationalize data architecture and loan origination systems in order to get a clearer view of the bank’s clients, as well as the bank’s capital and risk positions. Banks also need to offer more effective services. In particular, treasury and cash management services and technologies have become increasingly important as treasurers have gained influence since the financial crisis, due to their responsibilities for hedging, obtaining credit and managing liquidity. To grow their commercial businesses, banks must better target their investment priorities – innovating new products and services in a streamlined, channel-coordinated and costefficient manner.
Investment priorities
To position themselves among leading institutions that are revamping and expanding their commercial banking businesses successfully, banks must: 1. Put the client on the agenda as the primary driver for change. Regulation has driven change for several years; now it has to be the client’s turn. Improving the onboarding experience, client data integration and relationship manager quality are all high priorities. 2. Commit to investing in technology upgrades for wholesale/commercial business lines. These investments will help support business growth, international expansion, customer satisfaction and retention, as well as enable cross-sell opportunities. 3. Adjust – or transform – the bank’s operating model to support these transformational initiatives. This includes ensuring tight integration with enterprise risk management (ERM) and compliance. 4. Ensure that the organization’s commercial banking vision is well articulated and that incentives are properly aligned across business/ functional lines. This will promote growth and position organizational resources to efficiently meet client needs and provide value-added services, while effectively managing institutional risk Most banks are at the beginning of these processes. But they have little time to spare. To successfully revitalize their commercial banking strategies, banks need to devote the time and resources to this effort as soon as possible. Their competitors certainly are not waiting, and their customers’ demands are not going to become easier to meet anytime soon.
Richard Day is an Executive Director, Chris Harris is a Principal and Bernhard Klein Wassink is a Principal in the Financial Services Office of Ernst & Young LLP.
Meeting the New Demands of Commercial Banking Clients
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