Traditional financial institutions have been forced to look inward as they continue to face competition from alternative lenders and FinTech providers. And while partnerships, collaboration and internal product development have helped banks to improve their reputations for innovation among their corporate clients, a new report from Boston Consulting Group says it's not enough.
Analysts at the consulting firm released a new report that warns traditional banks need to make more radical changes to their approaches to innovation and technology if they are to remain viable.
"Our benchmarking data confirms the hazards of clinging to traditional credit-centric revenue models and static, inflexible operating practices," said BCG’s corporate banking segment global leader, Carsten Baumgärtner, in a statement. Baumgärtner also coauthored the report.
The analysis was drawn from a survey of 300 business banking units ranging in size. "Global Corporate Banking 2016: The Next-Generation Corporate Bank" found that less than a third of corporate banking divisions across North America and Asia, and less than half in Europe, experienced "positive and growing economic profit" between 2013 and 2015. The weakest performers fell below the returns hurdle rate across regions and across segments, the report noted.
Overall, the majority of corporate banking divisions in North America experienced shrinking economic profit during that timeframe. BCG described this as "a worrying trend that has been somewhat camouflaged by the fact that many divisions in the region still post relatively high returns on capital compared with those in other parts of the world."
Positive Developments, New Opportunities
The report found some good news for the corporate banking divisions of FIs, however.
According to BCG, about 70 percent of the units surveyed in Western Europe reported improvements during the 2013–2015 period, despite economic challenges.
But banks are facing massive disruption thanks to technology, which could be viewed as a threat or as an opportunity. Analysts found that most of the corporate banking divisions surveyed were not ready to embrace this change, and the narrow window of time available to them to integrate and adopt next-generation solutions continues to close. BCG identified the corporate banking space of the future as "Industry 4.0," in which the Internet of Things will continue to promote a hyperconnected world and change how various industries interact with and use their financial service providers.
Researchers agreed that corporate banking units have indeed taken some steps to ready themselves for this disruption, but few have created long-term strategies. The report suggested that banks take a long-term, broad view of a transformative future, rather than narrowing their focus on specific products and projects.
"Corporate banking divisions have emerged from the financial crisis only to be hit by massive digital disruption,” Baumgärtner said of the major challenges FIs continue to face. "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 banks that are already doing this, he added, have proven that embracing disruption and change is critical to success.
"The example of early movers makes clear that the next-generation bank is around the corner," continued Baumgärtner. "The only question is which banks will be among them."