Banks should embrace digitization to stay viable and relevant – Report

The Boston Consulting Group (BCG), a global management consulting firm, has released a new report that urges corporate banks to reinvent themselves to adapt to a new era where digitally enabled business models are redefining the movement of data and money and challenging banks' traditional advantages.

Titled “Global Corporate Banking 2016: The Next-Generation Corporate Bank”, the report draws on insights from BCG's most recent Corporate Banking Performance Benchmarking survey which involved 300 small-business, midmarket, and large corporate banking divisions from around the world.

The report explores the current state of the industry, the growing need for cutting-edge digital capabilities, and the scenarios in which next-generation corporate banks will likely have to operate. In addition, it also offers clear steps that players can take to begin their digital transformations and best position themselves for the future.

"Our benchmarking data confirms the hazards of clinging to traditional credit-centric revenue models and static, inflexible operating practices," said Carsten Baumgärtner, the global leader of BCG's corporate banking segment and a coauthor of the report. "Incumbent banks must embrace deep, systemic digitization to stay relevant, open up new paths to economic profit generation, and overhaul all key levers."

The report says that the recent wave of digitization is disrupting corporate banks whether or not they are ready. It pointed out that these banks have a “narrow window of time” to free up resources and develop the capabilities needed for the sweeping transformation that is required. Leading banks are already embracing digitization and are overhauling their client strategies, revenue models, cost approach, and risk management.

“Banks must start by addressing pricing -- usually the single biggest source of untapped funding for digital investment”, BCG said.

Speaking of the future, the report discusses three possible evolutionary scenarios: Industry 4.0, ecosystem banking, and the Internet of Things.

• The report describes that Industry 4.0 will connect buildings, vehicles, sensors, and machines, enabling faster, more flexible, and more efficient processes that, in turn, will generate significant increases in productivity and radical new business models.
   
• In ecosystem banking, the report talks of a powerful ecosystem that allows corporate banking divisions to support a diffuse network of companies in a particular industry-specific value chain.
   
• In addition, the report also envisions an even more ambitious future built on the Internet of Things and blockchain-enabled smart contracts.

The report further lists the five imperatives of the “transformation path” that will help keep the options open while building digital capabilities and generating near-term cash to fund the ongoing journey. This includes determining the bank's digital aspirations and future strategy; reviewing client journeys and redesign the most important ones; considering which potentially game-changing disruptive businesses to invest in, and at what level; developing a comprehensive plan to fund the journey; and committing to a rigorously executed change-management program.

"Corporate banking divisions have emerged from the financial crisis only to be hit by a massive digital disruption," said Baumgärtner. "To stay viable, they need to understand the client journeys that matter most, invest in continual client-centric innovation, adopt agile ways of working, and create more effective and collaborative sales cultures. The example of early movers makes clear that the next-generation bank is around the corner. The only question is which banks will be among them."