Commercial banks are at a critical turning point. They must modernize to drive growth or risk diminishing returns with the same large corporate customers that have sustained them for decades. Their best potential for growth is via serving their large business customers better and expanding by targeting the growing small and medium-sized enterprise (SMEs) segment. The path is not through new offerings but through better versions of existing offerings. Commercial banks are committed to improving digital interactions and are investing in intelligent automation for transactions and operational management; however, roadblocks like data, antiquated business practices, and ineffective partners impede progress. Commercial banking needs a digital reboot!
HFS Research, in partnership with Infosys, surveyed 150 commercial banking leaders across North America and Europe to better understand where commercial banks go from here. Commercial banks are exploring how to optimize innovation and technology to serve and interact with their existing customers better and target new customer segments.
Land on the right side of the divergence between macroeconomic challenges and innovation aspirations. Commercial banks face conflicting challenges and opportunities. While current macroeconomic forces are unfavorable to banks, the availability of innovation and technological advancements is the best it has ever been. Digital identity and trust (29%) and platformification (29%) of banking are the most impactful trends, while revenue growth (27%) and creating partnership ecosystems to generate new forms of value (26%) lead the ranks of traditional business objectives critical to enterprise success.
Unlock growth and value as commercial banks progress through each Horizon. Commercial banks ready to create new value are targeting ecosystem creation. They are investing across three Horizons of innovation: Horizon 1, functional digital transformation; Horizon 2, enterprise transformation; and Horizon 3, ecosystem transformation. Forty-seven percent (47%) of respondents are currently at Horizon 1, focused on digital optimization. The innovation outlook for two years from now shows aggressive progress plans. Respondents plan to flip their focus and investments from Horizon 1 to Horizon 3 as they court ecosystem development and associated new value.
Commercial banks are creating models fit for purpose for their target customer base of SMEs and start-ups. Sexy new offerings are not the growth mantra for commercial banks. The focus is on executing core offerings well. The top six offerings continue to be deposit accounts, lending and lines of credit, commercial cards, merchant services, treasury services, and trade finance now and in the next two years. While large corporations continue to make up the lion’s share (73%) of commercial customers served, we see promising growth potential in targeting customers in the overlooked and underserved segments targeting SMEs, start-ups, and scale-ups.
Win clients by improving customer onboarding time through digital—one of the worst pain points for clients is a complex onboarding process. The average onboarding time from our selective survey is 32 days. This overly long onboarding time is mainly attributable to implementation and integration challenges.
Out with the old and in with the new: APIs and virtual meetings will become the de facto way to engage with commercial banks in the future. Host-to-host technology is still widely used in commercial banks, with 65% of respondents still interacting with their customers through this method. It will soon be replaced by faster and more secure real-time technology provided by bank APIs.
A “Hurray!” moment, where planned investments align with offering enhancements to serve existing and targeted customer segments better. Commercial bank leaders currently prioritize intelligent automation in transactions and operations management. We expect the focus to shift to trade finance modernization and embedded finance in the next two years.
Antiquated business practices and legacy tech keep commercial banks from realizing value from their investments. Too many ineffective partners are part of the problem. Respondents indicate a lack of centralized data governance (39%), legacy technology and tech debt (35%), too many or ineffective tech and service provider partners (34%), and overly manual processes (28%) as the top challenges. Partners are a part of the problem because commercial banks have an imprecise and overly generous approach to strategic partnerships.
With the right approach, partnerships are the catalyst to unlock value across innovation horizons. Over the next two years, 67% of commercial banks favor full services firms with a growing need for fintech (65%) and IT outsourcing (55%) to help them grapple with roadblocks and drive progress.
Commercial banks’ use of strategic partners is growing, but they need to be more selective. Commercial banks work with 12 strategic partners on average, and 63% expect this baseline number to grow. Commercial banks have prioritized almost all attributes as strategic for partners, including cost savings, offering capabilities at scale, the ability to co-innovate and collaborate, and the duration and scale of the relationship.
The Bottom Line: Commercial banks need a digital reboot to better serve their existing customers and target new customers. Useless partners must get the boot, or banks risk staying stranded in Horizon 1.
This report is part three of a four-part series examining the growing importance of ecosystems in the BFS market through the lens of making practical progress across the innovation Horizons and the savvy use of partners to help drive modernization and create new forms of value. The series includes a broad view of banking and financial services trends complemented by drill-down spotlights on innovation and ecosystems in payments, commercial banking, and wealth and asset management.
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