While commercial clients account for, on average, less than 15% of bank’s clients, their deposits often represent over 50% of total deposits. So why aren’t banks innovating and modernizing their treasury products and offerings to better serve this important commercial base?
Driven by the need to keep up with consumer expectations around payments and mobile apps, banks have prioritized innovation around their personal banking divisions. Think of how drastically payments have changed in just a short time, with seamless payment processes of an Uber ride, P2P e-transfers, and mobile payments such as Starbucks to make consumers lives easier.
Commercial Clients Are Expecting More
Commercial clients are beginning to request these same innovations for their finance teams. “Why can’t we have business payments and mobile apps like I have in my everyday consumer life?” The shiny new toys in retail banking are now giving way to the need to innovate on the commercial, side as commercial client expectations are changing.
In speaking with many of the banks in attendance at this year’s NACHA Payments and Finovate fintech shows, treasury departments are starting to accelerate research around commercial innovation and fintech solutions. What was “18 months down the road” is happening now with projects being funded.
Why is this? Many banks are now hearing from commercial clients that there is a need to modernize their finance team’s capabilities especially around payments. According to a recent payments survey by The Association for Financial Professionals, 70% of business respondents believe it is very likely their organizations will convert the majority of their payments to electronic within the next three years and 94% consider it important that faster payments are “smart” and are able to carry extensive remittance information. As well, cash flow forecasting and improving cash management are in the top 3 priorities according to a 2017 survey by Treasury Today.
Banks are realizing that they’re lacking in modernization and future readiness of cash management offerings. The result is that commercial finance teams are searching for solutions but they are being overwhelmed wading through the many new fintech solutions available. Part of the issue is that they don’t have the necessary expertise or time to decipher the true value of these products. Inevitably, they’re turning to their bank’s trusted treasury teams for guidance.
Problem is, most treasury and cash management teams are also trying to figure out the ever- changing fintech landscape. Add in compliance, security, and cloud, and the evaluation process becomes much more complex.
So why aren’t banks actively pursuing partnerships?
What are the issues preventing the banks from partnering with fintechs and offering modern treasury and cash management products?
1. Treasury teams are constrained by limiting their scope to the current products their bank is offering.
In the case of cash management, services around what banks call ‘Integrated Receivables’, offer the same standard lockbox and disjointed cash app process. While these payments offerings are sufficient, the entire invoice to cash process lacks efficiencies, and commercial clients are still burdened with manual processes. There is also a lack of real-time AR data and analytical value, something banks currently get from dated AR reports. This need to innovate and modernize the bank’s current cash management products thru partnerships with fintechs offering ‘Automated Receivables’ should be a priority as competitor banks are innovating and differentiating with treasury modernization as a priority.
2. Most treasury teams are not technically savvy or aware of the benefits of new fintech products like automated receivables.
Banks often turn to current vendors and core platform providers as inputs to guide their decisions. These vendors can often be self-serving, not wanting to open their partner to other vendors. Treasury needs to be educated on the technical nature of the implementations that are required. It is vital for larger banks to have developer programs. For smaller to midsize banks, developer programs, SDKs and vendor management processes are typically lacking or nonexistent. It is incumbent upon the bank to ensure that a full spectrum of stakeholders are included in the decision making process.
3. Some banks are cloud-averse.
Most of the fintech innovations offered today are cloud-based. While some banks (albeit slowly and cautiously) are now making a shift towards cloud or hybrid cloud platforms, there are others that are constrained by legacy systems and don’t fully understand the connectivity and security implications. Fintech companies need to educate the bank’s treasury teams and engage the bank’s digital and technical teams to ensure seamless integration with the bank’s platform, other vendors, and the customer information it will be accessing. In order for banks to offer best-in-breed solutions and respond to market changes and commercial client requests, they will have to become aggregators of these fintech products and services and do so seamlessly and quickly to market.
These issues collectively point to two challenges. The first is the bank’s mindset. A continuous improvement mindset is required in order to adapt to the ever-changing Fintech solutions available and respond to new challenges that will arise from commercial customers requesting more advanced solutions; like the payments and automated receivables example mentioned earlier. The second is the need for banks to optimize legacy workflows. The constrained paradigms of ‘what is’ vs ‘what could be’ in a large organization is no small feat to change. Any digitization or technological change with an FI must be driven from the top and will require budget and resource support and will involve amending policies and procedures.
Ultimately, banks and commercial customers are very similar. Some are forward-thinking in their approach, embrace technology and leverage innovation to improve their business, save costs and improve their customer relationships. Others are happy to be followers and see how the market pans out. These banks lack to act at their own peril. By the time the followers decide to take action, they’ll be another 6-18 months behind. The time is now for the bank’s cash management and treasury teams to embrace the future of partnering with fintechs and implement innovation for their valuable commercial client base and their large deposits.