Commercial banking is going digital

When you compare the world of commercial banking to retail banking, it can feel like stepping back in time. The convenience offered by consumer financial technology isn’t available for the majority of commercial transactions. In-person visits to the branch, phone calls, and fax machines are essential to most commercial relationship managers and their clients. Why is retail banking technology so far ahead of commercial banking tech?

One reason is scale. There are far more consumers than businesses, and most consumers’ financial needs are similar. That makes building apps and web interfaces easier and more profitable due to the ease of scaling and the size of the market.

Another reason is a lack of pressure on commercial bankers to increase efficiency. A simple measure for this pressure is return on equity (ROE), or net income divided by shareholder equity. For more than a decade, commercial banks in the US have enjoyed double-digit ROE, while retail banks in the US saw single-digit ROE. This level of profitability allowed commercial banks to sustain inefficient processes that smaller retail banks could not afford.

Manual processes are expensive to scale.

Manual banking processes only seem outdated when compared to the dramatic speed and certainty that digital technology offers. Combining that with commercial banks’ focus on high-touch service and doing things manually seems like an acceptable way to handle tens of millions of dollars. However, this is a classic example where “just because we’ve always done it this way” is a band-aid for institutional inefficiency.

According to a 2018 article from Mckinsey, “Relationship managers (RMs), underwriters, and portfolio managers still spend more than 40 percent or more of their time on ‘noncore’ administrative, repetitive, and automatable tasks.”

Although commercial banks have developed reliable processes to handle these tasks, there’s no question that staff could be working on higher-value tasks, especially if technology could automate mundane tasks and deliver a lower error rate.

“Automatable” tasks include:

• Mailing or faxing paperwork
• Collecting signatures
• Recording transactions and balances in master spreadsheets
• Generating ad hoc reports
• Verifying compliance requirements for special transactions
• Completing anti-fraud protocols
• Printing and mailing paper statements for special accounts
• Archiving paperwork
• Managing complex transactions that aren’t possible in the core software

Every one of these tasks exists for a reason and can’t be skipped or eliminated. Most commercial banking teams simply train staff on the correct procedure and hire additional employees to serve new clients. For more than a decade, this model has worked, but it’s showing signs of strain. Recently Bank of America shuttered the internal division that handled escrow and subaccounting for commercial clients. Ostensibly they decided that throwing manpower at the challenge wasn’t worthwhile.

These mundane administrative tasks are excellent candidates for digital automation.

The tech upgrade for commercial banking is underway.

A number of fintech companies, such as ZSuite Tech, Autobooks, Finosec, Hummingbird, Atomic, and Q2, are creating platforms to help businesses automate tedious financial tasks and integrate deeply with bank infrastructure.

This type of partnership allows banks to accelerate their business development efforts by offering advanced products and services as part of the banking relationship. It also puts banks more in line with client expectations. Quoting again from the same McKinsey article, “Expectations among clients and the salesforce are rising, given the trend to personalized digital experiences. The technology is available to digitize more retail-like functions, such as relatively simple documentation and simple deals, and often a commercial bank can leapfrog using a retail bank’s experience with digital transformation.”

Although advances in bank tech won’t erase the importance of interest rate and yield on deposits when it comes to winning commercial clients, they will shift the balance in favor of banks that can offer a more complete package.

Empower your team to drive digital transformation.

If you’re wondering how much of your commercial banking operation can be streamlined, ask your team. Encourage everyone to analyze their work on a daily basis and identify tasks or processes that feel tedious, backward or prone to error.

Whatever the future of artificial intelligence holds, we’re a long way from computers taking over the “relationship” part of serving commercial clients. What computers can do is execute tedious tasks faster and with fewer errors than human workers. Invite your team to suggest ways to embrace automation and free up time that would be better spent consulting and creating new value for clients.

For example, you could employ an advanced analytics engine to process client transaction data and highlight opportunities, such as loans or deposits that aren’t held at your institution. Once you identify those opportunities, your commercial team can reach out to those clients and negotiate for more of the banking relationship.

You could also implement software that allows clients to self-serve more of their routine or “low-touch” banking needs, thereby eliminating unnecessary trips to the branch or phone calls to your relationship managers. The best-case scenario, which is well within reach for most banks, is one where you establish secure, automated processes for administrative tasks, so your team can deliver more value where it matters the most: the human relationship with your clients.