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A newsletter from Ward | Dean

We are well into Q2 of 2022, as well as 24+ months into the pandemic and it’s myriad of economic impacts. War, inflation, uncertainty are present, but so are opportunities. Here is a digest of what we are seeing as we interact with commercial banking executives in Middle Market and SME sectors, picking their brains for real-time insights.

The big takeaway is that the pandemic accelerated the digitization of banking, as well as the expectations of customers and the professionals that directly interface with them. Keeping your customers, and keeping your top performers, will depend on how well your bank adapts and adopts technology.

Relationship Management

The all-important link to your customers, RMs are on the front line, and their roles are more important now, than ever. More than 60% of SMEs value their RM’s understanding of their business and their personal relationship with them. Keeping your client happy and keeping your RMs productive often come down to the same solutions. The market is looking for well-informed RMs, equipped with the right tools and data to lead high-value conversations.

CRMs are the tool chest, equipping your RMs with the data and integrations they need to be effective in their jobs, but if the data isn’t trusted or easy to consume, then RMs are unlikely to adopt the tools.

Here are some key highlights:

  • Banks that bring data and insights to life for their RMs are going to attract a higher caliber of RM.
  • RM adoption of a CRM increases when a pilot-based “test and learn” approach is used to roll out analytical insights, and when these are embedded into the tools.
  • Banks have focused on building insights for RMs without giving thought to how they will use or interact with the information. The best data in the word is irrelevant if the CRM is clunky and slows the RM down. Show them how the tools make their jobs easier. News aggregation tools cut research time from hours to minutes. Analytics insights can translate into more sales.
  • Data that is easy to access and manipulate will change the way RMs operate and add value for their clients
  • Embedded insights from external and internal data sources into CRM platforms and other data aggregation applications are creating powerful new insights for RMs

According to Accenture, by putting insights directly into the CRM tool and other daily used applications, banks are seeing not only a 3% to 5% increase in cross-selling, but also a 2% to 3% increase in new client acquisition.

Additionally, by empowering their RMs and harnessing the benefits of data analytics, they estimate that banks will see topline growth of 5% to 8%, which for a mid-size bank could translate to an upside in the tens of millions of dollars.

Credit

The changing landscape is creating a new type of credit professional. This new breed wants to be more integrated into their bank’s growth strategy. Many are expanding their role to include metrics that encourage responsible risk-taking, ensuring they help grow the bank rather than simply protecting it. New technology tools are able to extract and analyze data at a deeper level, generating more precise insights. These insights are helping forward-thinking credit professionals make intelligent decisions faster and with more data, giving them a greater ability to contribute meaningfully in real time.

Digital Banking

As interest rates have risen for the first time in over a decade, and more hikes are expected, banks are becoming flush with capital. Investing those funds in digital acceleration will allow banks to capture more market share, as well as become magnets for top performers.

Here are the areas that we are seeing the highest concentration of interest:

  • Digital customer portals have emerged amid the pandemic as must-haves for client engagement. Up until 2020, the focus for commercial banks was on digital tools that optimized internal performance. The pandemic forced a change, and banks moved quickly to implement digital portals for their clients.
  • Clients expect the same ease of use and intuitive UI that they have in the tools they use other parts of their lives. Features like biometric identification, digital signatures, customized alerts and tailored insights are not considered “luxuries”, they are expected. Simplicity and speed are not negotiable, or customers will move to fintechs or other banks with more robust digital tools.
  • Customer portals need to integrate other features and apps like QuickBooks for accounting, Zapier for marketing and Stripe for payment processing. New technology makes it possible to use AI-based facial recognition and automatic speech recognition to reduce loan application times for business customers. Seamless, integrated ecosystems that reduce a client’s friction interacting with the bank’s tools will be key.
  • Deeper data analysis will glean greater insights into customers, reducing costs by digitizing lower-value customer interactions, and helping open new revenue streams with new products and services.
  • Expect to see more Open Banking concepts materialize through embedded third-party services
  • In order to avert losing clients and market share, expect to see small-to-medium sized banks acquire, merge, or partner with fintechs, leveraging vendor tech solutions and joining forces on their technology innovation through strategic partnerships. These banks are realizing they need to act decisively or the gap will widen, and it will become even more difficult to stay competitive.
  • Expect to see more disruption from fintechs, Open Banking, and blockchain enablement, rapidly accelerating digital transformation. Currently, banks lack the data and systems capabilities to provide SMEs with timely access to the products they need. But the tech is available: data, analytics, distributed ledger technology, digital channels for UX and blockchain, and supply chain finance.

Growth Sectors

  • Embedded finance is providing tools to customers on the platforms they use daily. This is considered a primary channel to reach smaller customers- freelancers, entrepreneurs, small businesses- where only 9% of customers are happy with their business bank, and nearly two thirds still use retail bank accounts. Embedded finance places the banking services that small businesses need, when they need them, on the platforms they’re already using. It’s estimated that embedded banking for SMEs could capture around a quarter of the SME banking market by 2025, representing nearly $124 billion in value.
  • Global trade finance is an enormous opportunity, in that while it is a very complex market, it is still primarily analog. The global financing gap for importers, and for SME exporters in developing regions, is ~$3.6 trillion. Coalition forecasts the total trade finance revenue pool for banks will reach $54 billion in 2022, putting it above pre-COVID levels, and technologies like blockchain, machine learning and AI are finally making automation possible in this segment. Open Banking, the availability of APIs, and the real-time exchange of data are making KYC and onboarding simple and fast. They are also providing better and more reliable data for faster credit decisions. As the technology evolves, we are seeing it speed up manual processes like onboarding, and presenting products that SMEs demand, like invoice-level financing.
  • In supply chain finance (SCF), technology is automating the onboarding and underwriting processes, and deepening the integration between buyers and sellers. This reduces costs and enables deeper penetration into the mid-size and SME markets, a place banks have traditionally avoided due to cost.
  • Sustainability has pivoted from a regulatory issue to a compelling and significant revenue stream for banks. Sustainability-linked lending leapt from $5 billion in 2017 to $120 billion in 2021. Data reveals that firms with better ESG records than their peers produce higher three-year returns. Greater access to capital for underbanked groups, credit portfolios that include socially and environmentally conscious funding, and increased capital to sustainability-linked loans are some examples we are seeing. Banks should integrate sustainability into their client engagement strategies, starting with the RM engagement. But the vision and promise of action have to come from the top, and it better be authentic, or the market will view it as “greenwashing”. Banks that treat sustainability as an opportunity rather than an obligation will succeed.
  • Related to sustainability, there is also tremendous opportunity for banks in transition financing. GFANZ estimates the transition finance required over the next 30 years is $100 — $150 trillion. Either through government-backed capital or via a bank’s balance sheet, the funding to support customers’ transition to a green or sustainable business model will be a significant revenue stream.

Talent Acquisition & Retention

Commercial banks are facing a watershed moment, as the fight for talent grows more pitched. Technology experts are being poached by Silicon Valley, and RMs are leaving for competitors who offer the tools and technology that feel modern and enable growth.

The banks that win this battle will be those that think and act like tech companies: focus on innovation, offer flexible work arrangements, have targeted ESG initiatives, and make digital the core. Now is the time to re-focus and define themselves as tech-forward, embracing innovation. This will help banking regain its appeal to young, ambitious talent as an industry of choice.

By 2025, Millennials will comprise 75% of the global workforce . They want flexible hours and location, and the ability to engage with co-workers and clients on multiple platforms, not just phone/email/on site. Banks that have sophisticated client portals and market their technology will win them over. 64% say they won’t work at a company that does not have a strong sustainability policy. Have one, and market it to them on platforms that they use.

Gen Z has big environmental concerns, desires to improve local communities, and everything in between. Messaging should highlight how the bank supports the social and cultural issues that they care about, as well as the plans for real-world results. Incorporate the efforts the bank is making in embedded finance and the huge impact it is likely to have on market growth, as well as the opportunities that will emerge.

That wraps up our snapshot of the commercial banking market. What are some of the trends that you are seeing? What topics would like to see covered in future BankShots? Let us know in the comments, and thanks for taking the time to read this.