Amid Shrinking Profits, Corporate Banks Must Turn to Digital

NEW YORK, March 19, 2018 -- Digital disruption has finally come to corporate banking—with a vengeance— and senior management teams are under substantial pressure to act or risk the viability of their core businesses, according to a new report by The Boston Consulting Group (BCG). The report, titled Global Corporate Banking 2018: Unlocking Success Through Digital, is being released today.

The report, which examines the overall state of the corporate banking industry and explores key trends, says that banks are entering a second wave of digitization that will require a coherent strategy and holistic digital-transformation programs. Executives need to envision how their institutions will evolve, explore new business models, define the role that their banks will play in the new digital environment, and invest accordingly. The report also provides a four-step action agenda to help banks put themselves on the right trajectory for the future.

“The financial stakes are very high for corporate banks,” says Carsten Baumgärtner, global leader of BCG’s corporate banking segment and a coauthor of the report. “Over the next five years, we expect 30% of traditional corporate banking revenues to be accessible solely through digital channels.”

Some bankers are waking up to the current challenges, the report says. In BCG’s Corporate Banking Executive Survey, which gauged senior management views on digitization, a large majority of respondents (86%) said that digital will change both the competitive landscape and the economics of their businesses. However, less than half (43%) stated that they have an explicit digital strategy. Only 19% believe that their organizations have market-leading digital capabilities.

A Struggle to Create Value
BCG’s 2017 Corporate Banking Performance Benchmarking survey, which assessed the performance of roughly 200 corporate banking divisions that serve small businesses, midmarket companies, and large corporations, showed that a significant share have shrinking profits, particularly in the midmarket and large-business segments. Overall, the survey found that 45% of corporate banking divisions worldwide showed declining profits, although the picture varied by region. In Western Europe, 57% of corporate banking divisions reported a drop, while 38% of those in North America suffered a decline.

Moreover, nearly half of corporate banking divisions surveyed had returns on capital below the hurdle rate, despite a mostly benign macroeconomic environment. Across regions, the challenge has been especially tough for large corporate banking divisions, whose median pretax returns fell below the hurdle rate of 16%. Midmarket divisions fared much better in North America and emerging markets.

A Roadmap for the Future
The report says that although every corporate bank’s digitization journey will be unique, with challenges specific to each institution, most successful digital-transformation programs will be built on four pillars:

• Reinventing the customer journey. This usually starts with streamlining and compressing the onboarding and lending processes, which sets the right tone for the new relationship and allows the sales force to focus on higher-value-added activities.
  
  
• Discovering the power of data. Corporate banks have huge amounts of data that can be put to use in myriad ways. Unlocking this data is critical to digital transformation because it allows banks to position themselves as partners that offer highly tailored solutions to their clients.
  
  
• Redefining the operating model. To support new approaches to customer relationships—notably the “bionic” balance between human and digital interactions—banks need an operating model that cost-effectively delivers products and services across channels, keeps up with fast-changing customer needs, and assimilates the latest innovations.
  
  
• Building a digitally driven organization. Digital transformation must be a clearly articulated strategic priority, supported by appropriate funding, talent recruitment, openness to agile ways of working, and a willingness to take risks.

“Digital is forcing sweeping changes in corporate banking, and institutions will need to adapt or see their competitiveness and market share steadily spiral down over the next few years,” says BCG’s Carsten Baumgärtner. “Now is the time to develop a more coherent digital strategy to decide where to play and how to invest.”

A copy of the report can be downloaded at http://on.bcg.com/2G1LWDd.

To arrange an interview with one of the authors, please contact Eric Gregoire at +1 617 850 3783 or [email protected].

About The Boston Consulting Group
The Boston Consulting Group (BCG) is a global management consulting firm and the world’s leading advisor on business strategy. We partner with clients from the private, public, and not-for-profit sectors in all regions to identify their highest-value opportunities, address their most critical challenges, and transform their enterprises. Our customized approach combines deep insight into the dynamics of companies and markets with close collaboration at all levels of the client organization. This ensures that our clients achieve sustainable competitive advantage, build more capable organizations, and secure lasting results. Founded in 1963, BCG is a private company with offices in more than 90 cities in 50 countries. For more information, please visit bcg.com.