Finding a new business model Corporate and investment banking in times of fundamental change - August 2018 - Roland Berger

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Finding a new business model Corporate and investment banking in times of fundamental change - August 2018 - Roland Berger
August 2018

Finding a new business model
Corporate and investment banking in times of fundamental change
Finding a new business model Corporate and investment banking in times of fundamental change - August 2018 - Roland Berger
2 Roland Berger Focus – Finding a new business model

Management summary

Corporate and investment banking cannot go on with            technology. To face this challenge head-on and deal with
business as usual. Digitalization and the onslaught of        the all-round digital impact, banks need to refocus their
FinTechs and other new players put a question mark            offering along the lines of the attack and assume one of
over the very business model and structure of tradition-      three positionings.
al banks. So far, most firms have been confronting the
challenge by incrementally introducing digital initia-        With this new alignment, they will be able to withstand
tives of three main types: sales enabling, efficiency in-     the increased competition and take full advantage of
creasing, and those that provide enhanced risk manage-        their position as traditional banks with experience and
ment.                                                         in-depth knowledge of their clients. This transforma-
                                                              tion will require a thorough digital strategy, uncompro-
These adjustments are taking place within the current         mising implementation focus, and a raft of technical
setup. However, the entry of new players in the market,       and cultural changes.
the impact of digitalization on the clients' businesses as
well as the emergence of platform-based business mod-
els present challenges that require more than just incre-
mental change. They alter the setup under which banks
operate. New players usually attack via three anchor
points: the client interface, the product offering, and the
Finding a new business model Corporate and investment banking in times of fundamental change - August 2018 - Roland Berger
Finding a new business model – Roland Berger Focus 3

                                  Contents

                                  1. A good start, but not enough ................................................................................................... 4
                                       Banks are adapting incrementally to digitalization.

                                  2. Danger ahead ...................................................................................................................................... 6
                                  	Digitalization is disrupting the current corporate and investment banking model.

                                  3. Reaction to the new market setup ..................................................................................... 12
                                       Choose the right business model.
Cover photo: aluxum/iStockphoto
4 Roland Berger Focus – Finding a new business model

Chapter 1:

A good start, but
not enough
Banks are adapting incrementally to digitalization.
Finding a new business model – Roland Berger Focus 5

In a recent Roland Berger survey1 and in a series of in-
terviews with representatives of 20 corporate & invest-
ment banks, most managers reckoned that digitaliza-               Most banks are
tion is about incremental change and the optimization
of existing business models. In this sense, banks are             developing and using
mostly developing and using digital solutions in three
main fields:                                                      digital solutions
1. Sales enabling                                                 in the fields of sales,
Here, banks focus on moving closer to their clients.
They use new technology such as API interfaces that en-           efficiency and
able individual configuration of data sets or big data an-
alytics to understand the underlying dynamics and ad-             risk management.
just products and services accordingly. In doing so,
banks can integrate ever more seamlessly in the client            But will the incremen-
journey and offer products beyond core banking.
                                                                  tal adaptation of
2. Efficiency increasing
The availability of data and corresponding analytics fa-          their business model
cilitates greater efficiency, quality, and process speed.
Automation initiatives that employ new technologies               suffice?
such as robotics and machine learning (and prospective-
ly AI and the blockchain) are now a frequently used
means of process optimization. Besides this, digitaliza-
tion enables the use of industry utilities such as Know
Your Customer (KYC) platforms that can improve client
relations by offering seamless processes.

3. Providing enhanced risk management                              advanced portfolio management. Enhanced risk man-
A range of initiatives can help banks reduce cost of risk.         agement has an impact on all risk types: credit risk,
Data analytical capabilities are leading to new ways of            market risk, and non-financial risk.
risk assessment. New technologies such as the Internet             Most banks have begun to activate the three optimiza-
of Things (IoT) enable real-time maintenance tracking.             tion levers mentioned above. But will the incremental
Enhanced analysis facilitates better risk decisions and            adaptation of their business model suffice?

   Cf. Roland Berger Focus: Corporate Banking 2020, 2017 (in German)
1 

   https://www.rolandberger.com/de/Publications/pub_corporate_banking_2020.html.
6 Roland Berger Focus – Finding a new business model

Chapter 2:

Danger ahead
Digitalization is disrupting the current corporate
and investment banking model.
Finding a new business model – Roland Berger Focus 7

In corporate and investment banking, digitalization is          were planning to engage the services of FinTechs and
much more than just a facilitator of the current busi-          non-banks in the future. These new players can be clus-
ness. As it progresses, digitalization will change the          tered according to their strategy for attacking tradition-
structure of the market and the business model. Banks           al banks: aggregators and multi-dealer platforms, prod-
are facing three serious challenges. A                          uct specific intermediaries, and technology providers.
                                                                Additional pressure arises from institutional investors
1st challenge:                                                  who – on the lookout for profitable investments – are
ATTACK FROM NEW PLAYERS                                         breaking into the credit business. Banks and their cli-
New players are not limited by inflexible legacy systems        ents are increasingly cooperating with new players in
and are able to react to client needs effectively and effi-     their day-to-day business. This is diminishing the banks'
ciently. The deployment of new, easy-to-use, value-add-         revenue pool. Non-banks and FinTechs are altering the
ing functionalities is becoming a race against time for         character of the CIB industry and increasing the pres-
established players. In a recent Roland Berger survey2          sure on banks to modify their business model more
among corporate clients, 68% of respondents said they           than just incrementally.

A: Disruption on many fronts
Three challenges of digitalization

                                                2.   Corporate clients are
                                                     also facing digital
                                                     challenges – rising
                                                     risk for the bank

       1.   New players threaten
            the revenues of tradi-
                                                                                        3.    Platform economy leads to
                                                                                              a split of business models:
            tional banks along the                                                            focus on client interface or
            value chain                                                                       product creation

                                                       SPECIFIC
                                                    CHALLENGES OF
                                                    DIGITALIZATION

 Cf. Roland Berger Focus: Corporate Banking 2020, 2017 (in German)
2

https://www.rolandberger.com/de/Publications/pub_corporate_banking_2020.html                               Source: Roland Berger
8 Roland Berger Focus – Finding a new business model

2nd challenge:                                                  3rd challenge:
IMPACT ON CLIENTS' BUSINESS MODELS                              SEPARATION OF BUSINESS MODELS IN THE
The business model of the banks is not the only area            PLATFORM ECONOMY
impacted by digitalization – the impact on the banks'           As in other industries, the separation of the business be-
clients is also significant. It yields benefits for them, yet   tween occupying the client interface (e.g. Uber, AirBnB)
it poses significant risks to companies across all indus-       and offering the underlying product (taxis, private car
tries and sizes. If clients cannot cope with the digital        owners, hotels, landlords, etc) is also taking place in the
transformation and do not sufficiently adapt to it, other       financial services industry. FinTechs and other compet-
competitors that offer a better digital experience will         itors are establishing platform models and posing a se-
step in and, in the medium to long term, push them out          rious threat to traditional banks by conquering the cli-
of the market. This also holds true for entire industries.      ent interface and putting customers in contact with
The banks' concern in this case needs to be threefold:          many different competitors and their products. Tradi-
Banks need to understand client industry dynamics               tional banks selling almost indistinguishable corporate
thoroughly in order to a) avoid being trapped with              banking products will find it more and more difficult to
non-performing loans from clients who get left behind,          compete in this platform-driven market with its en-
b) be in a position to offer access to and solutions for        hanced client journeys, comparison and solution-selec-
new clients emerging as winners of industry trans-              tion features, and quick access to many vendors. Being
formation, and c) fully understand the changes to their         just another provider of standardized products will not
clients' business models in order to be able to support         be enough. In the future, banks will need to specialize
and advise clients along their transformation journey.          to charge a price premium or focus on the platform
Different industries will be impacted by digitalization to      business themselves by providing broad access to prod-
different degrees.                                              ucts and advisory services from different sources. As
Oil and gas, for example, will most likely be negatively        such, they become more like coaches to their customers,
affected in the long run by the reduced consumption             concentrating on their needs and offering bespoke solu-
brought about by electric vehicles and stronger compe-          tions from different solution providers. In both cases, it
tition from renewable energies. Commerce, on the oth-           is important for banks to focus on high value-adding
er hand, can benefit from digitalization allowing banks         services along the value chain. For example, treasury
to offer more tailored products to the customers in that        subscription models for the operation of treasury de-
area. With the experience that banks have, they could           partments by the bank can be a strategic option for cer-
become even more relevant advisors and facilitators for         tain steps in the value chain, with tangible advantages
their clients. Benchmarking based on the data collected         for both the bank and the corporate client.
from clients could be another inroad toward offering
enhanced advisory solutions.
Finding a new business model – Roland Berger Focus 9

Attack from new players
Changes in the setup of the CIB industry.

B2C banking has already seen major disruption through                       Platforms are increasingly integrating the client coverage
the emergence of FinTechs. Now it is the B2B segment's                      layer, especially for transaction banking and financing/
turn to be challenged. We have identified three main an-                    credit solutions. Providing cross-banking and price com-
chor points where FinTechs and other new players are                        parison offerings, multi-bank aggregators could potential-
attacking the incumbents in corporate banking.                              ly replace banks completely at the client interface. A market
                                                                            leader for integrated accounting as well as commercial and
Anchor point 1: CLIENT INTERFACE                                            sales management solutions, for example, developed a
FinTechs attacking banks at the client interface aim to                     platform allowing the comparison of different banks (and
have a direct business relationship with the corporate                      their individual conditions). The client is therefore able to
client. A bank relies on keeping control of the client in-                  choose the bank with the best offer. The firm partners up
terface in order to continually identify and satisfy the                    with a FinTech for factoring and a FinTech for foreign ex-
clients' needs and serve as a quality gatekeeper for a                      change (FX) transactions. Without any banks involved, the
whole set of financial services. But now there are a range                  client interface is completely covered by the FinTech.
of non-banks and FinTechs beating a path to the client                      Additionally, FinTechs are developing banking and com-
interface – through multi-bank platforms and solutions                      pliance platform business models that are based on con-
sitting directly at the bank-client interface. B                            necting a global network of partner banks with compa-

B: Conquering the client interface
New players offering multi-bank platforms and API solutions

                                       MULTI-BANK PLATFORMS/                                  BANK-CLIENT DIGITAL INTERFACE
                                       INTERFACE AGGREGATORS                                  OPTIMIZERS: CREATION OF APIs

Examples                               Sage; Compeon; Kyriba; 360T Trading                    Railsbank; treezor
                                       Networks

Value add &                            Cross-banking offering                                 Improved integration services for corporates/
USP                                    Price comparison/ease of exchange for                  links to banks
                                       commoditized products                                  More fluid information exchange and stronger
                                                                                              agility than banks to adapt APIs

Implications                           Danger of losing the client interface                  Need for enhanced agility at the client inter-
for CIB                                Potential to force banks into a "price war"            face: build specific support teams to help
                                       (similar to comparison portals in retail)              clients link their systems or leverage external
                                                                                              teams

Source: Roland Berger, company website, Crunchbase
10 Roland Berger Focus – Finding a new business model

nies that want access to global banking via an API.               involvement of fronting banks. Moreover, they do not
Banking services such as receiving money, issuing cards           have complex credit approval processes. C
or managing credit can be granted.                                Borrowers today can get finance via lending platforms or
                                                                  other alternative non-bank sources, all without the in-
Anchor point 2: FOCUSED PRODUCT OFFERING                          volvement of banks. New players are also offering a wide
While traditional banks often offer "everything" and try          variety of services historically occupied by traditional
to keep up with a diversified product portfolio, new play-        banks: launching bonds, trading of notes and loans,
ers provide single-purpose products focusing on specif-           fundraising for municipal investment projects, com-
ic customer groups.                                               mercial real estate financing, etc.
One major trend facilitated by the emergence of digital
solutions is the development of the private debt indus-           Anchor point 3: TECHNOLOGY PROVIDER
try. Total assets under the management of private debt            New players increasingly offer specific CIB services to
funds in Europe and North America reached about USD               established banks through the use of new technologies.
600 bn in June 2016, which equates to an average growth           These services can be clustered into three main catego-
rate of about 15% p.a. since 2006. Private debt funds are         ries: data processing/aggregation, activity or functional
able to raise funds and offer direct lending without the          optimization, and process optimization. D

C: Rise in non-bank lenders
Development of the private debt industry in Europe and North America
                                                                                                                  592
                                                                                                        555
                +14.9% p.a.
                                                                                   468       475

                                                                         401
                                                               370
                                                        331
                                                 280
                                      245
                       205
USD 147
bn

       2006           2007           2008        2009   2010   2011     2012      2013       2014      2015      20161
1 As of June 2016
Source: 2017 Preqin global private debt report
Finding a new business model – Roland Berger Focus 11

For the first category of services, FinTechs provide support            their underlying risk exposures, can assess the true
in predicting client behaviors and improving the efficiency             costs of trading better, and significantly expand the ca-
of credit decisions. They provide additional data points for            pabilities of their in-house IT resources.
trading decisions, consider external factors impacting per-             The third category of services has many areas that add
formance, and identify early warning indicators that are                value for CIBs, such as increased efficiency of post-
not systematically picked up by humans. One example is                  trade/collateral management and the KYC process.
the detection of behavioral patterns in electronic commu-               Some FinTechs already provide sophisticated global
nications indicative of suspicious and unlawful activity.               solutions for process optimization in the banking indus-
The second category of services includes offering im-                   try. One FinTech joint venture, for example, launched
proved functions across products, higher automation,                    KYC utility services for centralized client onboarding
and more transparency for regulatory interactions. Fin-                 and KYC data management in 2014.
Techs often find use cases in risk management, building                 While banks might benefit from these services in the
their business models upon the development of soft-                     short run, they also pose a threat to their business in the
ware and the provision of open platforms for analytics                  medium and long run: outsourcing key processes to ex-
and risk management for the financial services industry.                ternal service providers causes banks to become less rel-
With such technology, customers gain more insight into                  evant in key tasks such as the analysis of large data sets.

D: Data, function, process
New players offer technology to traditional banks
                    DATA PROCESSING/                               ACTIVITY OR FUNCTIONAL            PROCESS
                    AGGREGATION                                    OPTIMIZATION                      OPTIMIZATION

Examples            AYASDI; Orbital Insight; Leverton;             Symphony; FUNDAPPS;               OPENLINK; blueprism;
                    Digital Reasoning; Kensho; NOVUS               OpenGamma                         GENPACT; markit
Value add &         Additional data points for trading decisions   Improved function across          Increased efficiency of selected
USP                 Consideration of external factors impact-      products                          processes: Post-trade/collateral
                    ing performance                                Higher speed/automation           management, KYC
                    Identification of early warnings not system-   Transparency for regulatory       Allows/requires building of
                    atically picked up by humans                   interactions                      industry consortium

Implications        Predicts client behaviors and improves         Valuable option for "make or      Increases productivity
for CIB             efficiency of credit decisions                 buy"                              Reduces cycle time
                                                                                                     Scale is leveraged across partici-
                                                                                                     pants in a utility model
                                                                                                     Can be supported/utilized across
                                                                                                     multiple banks (consortiums)

Source: Roland Berger, company website, Crunchbase
12 Roland Berger Focus – Finding a new business model

Chapter 3:

Reaction to the new
market setup
Choose the right business model.
Finding a new business model – Roland Berger Focus 13

Banks need to develop competencies to understand digi-          individual client's needs. The relationship expert man-
talization's influence on their clients' business models.       ages not only the client but also the providers of the
Most importantly, though, banks need to rethink their           products they offer since most of the products and ser-
strategic positioning and rebuild their business model.         vices are sourced externally. The bank thereby generates
To cope with the altered setup in the industry, banks in-       provisioning and intermediation fees.
creasingly need to focus on being one of three archetypes:      The product expert, on the other hand, focuses on pro-
the relationship expert, the product expert, or the tech-       viding specific best-in-class banking products to their
nology service provider (for further insights regarding         network partners and the client directly. This goes hand
the application of these archetypes in the German mar-          in hand with a strong focus on efficiency: Each product
ket cf. Roland Berger Focus: Corporate Banking 2020,            has to be profitable in itself and should not need to rely
2017). The discarded archetypes can still play a role in the    on a cross-selling logic.
banks' business model, but to a much lesser extent. E           Lastly, the technology service provider supplies the in-
The relationship expert strongly focuses on understand-         frastructure that the clients and their network part-
ing clients and offering the right products based on the        ners need. To be successful with this positioning, the

E: Choosing a new business model
Banks should opt for one of three archetypes

             RELATIONSHIP                               PRODUCT                              TECHNOLOGY SERVICE
                EXPERT                                   EXPERT                                  PROVIDER

                 Client focus                           Client focus                                 Client focus

      Technology                Product        Technology              Product             Technology               Product
      focus                       focus        focus                     focus             focus                      focus

 Positioning on the interface to the client       Positioning as specialist/                Positioning close to the clients'
 Focus on client service and identification      provider of certain products                      technical systems
            of customer needs                           and services                           Focus on provisioning of
    Third party offerings of services/        Focus on production and provision                    the infrastructure
                 products                         of products and services                  Standard setter and utilization
                                                                                                      of platforms
Source: Roland Berger
14 Roland Berger Focus – Finding a new business model

bank needs a good understanding of technological                some extent – enter areas formerly claimed by software/
changes and the way these changes will impact their             tech companies. Software, cloud solutions, cyber secu-
clients. It should furthermore identify automation              rity, digital ID, or data analytics are fields beyond bank-
possibilities and strive to automate to the largest ex-         ing that banks might consider developing and offering.
tent possible. The bank can then realize licensing and          The basic idea for banks is to bundle these services with
provisioning fees.                                              their financial products and leverage banks' strengths
Banks that decide to move toward capturing the client           in IT and IT security. These services not only enlarge the
interface or providing technical systems to their cus-          service offering of banks but also raise banks' impor-
tomers (archetypes 1 and 3) can consequently extend             tance in their clients' ecosystem. In general, developing
their offering by moving beyond traditional banking             financial services into integrated services beyond CIB
and offering integrated solutions to their corporate cli-       can help banks capture a larger share of the client's wal-
ents. If software providers and tech companies enter            let and make sure banks remain meaningful partners to
areas formerly claimed by banks, the banks should – to          their clients. F

F: Services beyond banking
Digitalization opens up new fields of activity for traditional banks

SITUATION                                                   POSSIBLE ENABLERS OF SERVICES BEYOND BANKING

                                   How can                  1. Software
                                 banks move                 Corporate information systems, office apps, treasury
                              further away from             management software, multi-banking apps
     Lack of stand-             being mere FS
    alone customer                providers?                2. Cloud
   value threatens to                                       Infrastructure, interfaces and operational framework
   make banks easily
     exchangeable
                                                            3. Cyber security
                                                            Industrial solutions – IT security, protection, threat
                                                            intelligence, etc.
                            Offering
                        cross-functional
                           integrated                       4. Digital ID
                         solutions and                      Single sign-on services, digital identity
                        services beyond
                            banking                         5. Data analytics
                                                            Advanced analytics and optimization services

Source: Roland Berger
Finding a new business model – Roland Berger Focus 15

                                                                  HOW TO MANAGE THE ADJUSTMENT OF THE
G: Shifting the focus                                             BUSINESS MODEL
Measures for the creation of                                      In order to successfully manage the transition toward a
the digitally enabled bank                                        digitally enabled company, banks not only need to
                                                                  change their strategy, but also ensure their transforma-
                                                                  tion by defining a challenging and realistic roadmap
                                                                  and following through with its implementation. Fur-
                                                                  thermore, they have to work on the mindset and the
                                                                  technology expertise within the organization. G
                                                                  When it comes to drafting a digital strategy, the bank
            DIGITAL STRATEGY                                      should first develop an ambitious vision taking into ac-
                                                                  count the three archetypes mentioned before. Whatever
            Formulate an ambitious vision and strategy to shape
                                                                  the outcome of this, banks will need to focus more on
            strategic risk-taking within the organization
                                                                  their research & development (R&D) capabilities as this
            Reinforce R&D capabilities to keep pace with          is an integral success factor in a more digitalized world.
            innovation
                                                                  Otherwise banks will not be able to keep pace with their
            Utilize scenario planning and war gaming to           innovative competition, namely tech giants and Fin-
            shape own future strategy
                                                                  Techs. Scenario planning and war gaming will provide
                                                                  an understanding of market dynamics. Based on their
                                                                  overall vision, each bank must formulate a detailed
            ROADMAP TO A LEADING BANK                             roadmap on how to achieve the transformation with
            OF THE DIGITAL AGE                                    milestones and deliverables. The bank needs to adjust
                                                                  its culture and organization to facilitate the transforma-
            Draw up a detailed roadmap to the future
            target state of a digitalized bank                    tion process.
                                                                  This will be a challenging process that calls for vision
            Formulate clear milestones and deliverables
            along the way                                         and bold strategic decisions. But it would be riskier still
                                                                  not to act, as the future demands a modern bank ready
                                                                  for the digital age. The winners will not be those waiting
                                                                  and watching from the sidelines.
            CULTURAL AND TECHNICAL LEVERS
            Create a digital mindset in the organization

            Reinforce technology expertise in the organization
            by setting up dedicated teams (e.g. "power users")
            to create positive impact

Source: Roland Berger
WE WELCOME YOUR QUESTIONS, COMMENTS
AND SUGGESTIONS

AUTHORS                                                               PUBLISHER

DR. DOMINIK LÖBER                                                     Roland Berger GmbH
Senior Partner                                                        Sederanger 1
+49 160 744-6105                                                      80538 Munich
dominik.loeber@rolandberger.com                                       Germany
                                                                      +49 89 9230-0
ROBERT BUESS                                                          www.rolandberger.com
Senior Partner
+41 79 714-4445
robert.buess@rolandberger.com

KLAUS JUCHEM
Senior Partner
+49 160 744-6323
klaus.juchem@rolandberger.com

Additional support by
DR. WENTING ZHAO

More information to be found here:
www.rolandberger.com

Disclaimer
This publication has been prepared for general guidance only.
The reader should not act according to any information provided
                                                                                             RB_PUB_18_036

in this publication without receiving specific professional advice.
Roland Berger GmbH shall not be liable for any damages resulting
from any use of the information contained in the publication.

© 2018 ROLAND BERGER GMBH. ALL RIGHTS RESERVED.
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