From the September 2017 Special Report issue of Treasury & Risk magazine

Banking Technology as Competitive Advantage

Why innovations such as AI, the blockchain, and APIs may replace credit as the glue holding corporates in their banking relationships.

As banks seek to develop new business opportunities and maintain relationships with corporate clients, while answering the industry mandate of moving toward real-time payments, technology has become the driving strategy. The tactics: to improve customer interfaces while developing new capabilities that utilize artificial intelligence, the blockchain, and application programming interfaces (APIs).

The stakes are high. Corporate customer satisfaction is at a nadir, according to the results of the 2016 Transaction Banking Survey published by GTNews in connection with CGI. The survey found that just 38 percent of respondents planned to stay with their primary bank. That’s down substantially from a year earlier, when 52 percent of respondents said they would remain with their bank. Why? According to the survey, the desire for better digital products and services is one reason corporate banking customers are jumping ship.

“There is a distinct difference between what corporates want and what banks are giving them,” said Jerry Norton, head of financial services strategy at CGI. “That is the message we’re hearing. Corporates are saying ‘We want this,’ ‘We want that,’ but they’re not getting it from the corporate banking sector.”

Corporate treasurers told GTNews that they planned to look around for better services, particularly in the area of cash management, with 80 percent of respondents indicating they would be reviewing their banking relationships as a result of dissatisfaction in that area.

Given pressures from customers and regulators, as well as the constant threat of cybersecurity breaches, banks are facing a perfect storm, Norton said. “That is why banks are not satisfying some of their corporate clients. And the longer they go on in this way, the more potential there is to lose out to nonbank competitors.”

One example of an entity that has already disrupted the banking industry is Amazon, which is providing loans to smaller businesses. For their part, large corporates may be able to bypass banks not only by issuing their own debt, but also by developing in-house solutions such as payment factories.


Harnessing Banking Data

In response to this new competitive landscape, banks are striving to think two or three steps beyond the offerings they currently provide to corporate customers. Many are exploring the ways in which technology can help them advance their business model, so that they shift from credit provider and deposit holder to the role of a knowledgeable consultancy that can make strategic and useful recommendations to corporate treasury departments.

According to GTNews, corporate treasurers would, in fact, value a bank that could offer services more in line with those of a strategic partner. Almost all survey respondents (96 percent) said that banks’ ability to be a strategic partner—one that could come up with solutions to troublesome issues—was either “quite” or “very” valuable to them.

To move in that direction, some banks are training their staffs in the field of artificial intelligence (AI), which comprises technologies such as machine learning, in which computers analyze data without human interaction or even “think” like brains by applying logic algorithms to data and refining the resultant analysis to a greater and greater degree as the exercise is repeated. “AI is where a lot of the real money is going,” Norton said.

A bank’s AI technologies may be able to help corporate customers uncover patterns in their cash management or payment data that the corporate treasurer can use to improve forecast accuracy or to reveal, for example, optimal times to make payments in far-flung countries. In addition to these analytics opportunities, banks may also be able to provide benchmarking services, aggregating data across their many customers to generate industry benchmarks in areas such as payment cycle, or levels of cash and debt.

Citi is one example of a bank that is prioritizing AI and taking a consulting approach to service and product development. Tapodyuti Bose, global head of channels and enterprise services at Citi Treasury and Trade Solutions, said his bank is striving to become more of a consultant than just a provider of loans and deposits. Bose said Citi is also looking at the industry data it has in a new way, with an eye to presenting it to corporate clients.

“It’s easy for us to create benchmarks around industry best practices, based on the tremendous amount of information we have,” Bose said. “It allows us to have insightful conversations with our clients, in terms of where we see that they can increase their efficiency.”

Don Raftery, managing director, banking, and head of the commercial and corporate banking practice at Greenwich Associates, agreed that AI has the potential to “significantly improve the quality of advice that [treasurers] get from their banks.” He added, “Banks are going to be able to leverage AI to help bankers come up with smart recommendations for their clients.”

Raftery cited cash management as one “pain point” that AI machine learning technologies might help soothe. These systems could be used to quickly analyze how a corporate uses cash around the globe, facilitating recommendations for improvements in timing and execution. “While each one of those little inputs may only be $5,000, $20,000, or $50,000,” Raftery said, “you start making smart decisions around the globe with your cash, and you can have meaningful impact.”

Given that the role of the treasurer is likely to continue becoming more complex and strategic in the near future, “the more computing power you can put to the problem, the better,” said Linda Coven, senior analyst at Aite Group and formerly a treasury management executive with Capital One. Coven added that AI innovations could make treasurers’ jobs easier if, for example, banks offer ways to alert corporate customers to potential fraud.

Bose agreed, saying banks may be able to harness AI systems to help uncover fraudulent payments based on automated analyses of payment patterns. “Anything outside the pattern, we can flag for [treasurers’] attention,” he said. “It’s literally being able to spot a needle in a haystack.”

In a highly competitive environment, where banks are dealing with disruption to traditional business models, computing power has the potential to save, even strengthen, banks’ relationships with corporates.

“The more value banks can provide, the stickier the relationship” may be with treasurers, Coven said. “Anyone can do an ACH or a wire, but the more value-added banking services become, the more afraid [treasurers] will be to pull the plug on that relationship.”

According to its annual report, JPMorgan Chase spent about a third of its $9.6 billion technology budget on new initiatives in 2016. “Machine learning/AI is one of our top priorities,” said Umar Farooq, head of channels, analytics, and innovation at J.P. Morgan Treasury Services. Farooq noted that AI technologies will prove “increasingly relevant to corporate clients in order to drive insights and strategy.”

Indeed, so much could be done for corporates and treasury departments with AI technologies that AI is seen by industry analysts as “revolutionary” for the banking model, said CGI’s Norton.


Preparing for the Blockchain

Blockchain technology, which is currently used in niche corporate banking areas such as bank-to-bank transactions and trade finance, is also poised to improve payment speed and security, but it is more on the “evolutionary” side of the innovation spectrum, Norton said.

Nevertheless, as they see the potential for blockchain technology to speed up payments and cut down on paperwork, banks are increasingly developing blockchain “use case” projects. According to studies IBM conducted last fall, about 65 percent of global banks intend to develop blockchain projects over the next three years.

One of those is Kasikornbank Public Company Limited, one of Thailand’s largest banks, which announced in early August a blockchain project designed with IBM. The project allows for letters of guarantee to be shared quickly and easily among relevant parties, which improves the speed and accuracy of the whole process.

Citi is also investing in blockchain technology. In May it announced a joint venture with Nasdaq that enables the exchange to connect its payment platform directly into Citi’s payment system using blockchain technology in connection with APIs.

By enabling financial counterparties to share information securely through a distributed ledger, blockchain technology may spur a significant shift in how banks, and their corporate customers, do business and interact with one another, said Martha Bennett, principal analyst at Forrester Research.

“When you look at some of the characteristics of where things are going in terms of how business is being done, how customers relate to the companies from whom they’re purchasing, with whom they’re interacting, we’re looking at multi-stakeholder relationships, we’re looking at dynamic ecosystems that are replacing existing ways of doing business,” Bennett said in a Forrester podcast about blockchain.


Putting APIs to Work

Many banks are also investing in the development of application programming interfaces. An API is a set of technology guidelines and tools that enables software developers to build connections between two systems, allowing for speedier transactions and facilitating data access and analysis. For the treasury end user, and indeed for banks, APIs represent an important improvement in tools such as payment hubs and treasury workstations.

APIs are increasingly becoming an essential part of banks’ corporate offerings, because they solve some challenges in meeting individual companies’ needs around bank connectivity. APIs also have the potential to accelerate transactions, just in time for real-time payments. “API is at the heart of real-time banking,” Citi’s Bose said. “We are seeing a significant amount of interest from our clients.”

Banks may offer APIs directly, such as the payment APIs Citi offers customers of its CitiConnect platform. Alternatively, banks may move toward an open architecture and open up their technology specifications to third-party developers. In February, Standard Chartered Plc opened up a developer hub for corporate applications, to encourage third-party financial technology companies to develop APIs. Other banks, including JPMorgan Chase, are exploring similar capabilities.

Fintechs are working with banks to help clients optimize their cash management and other capabilities. TreasuryXpress, for example, uses APIs to provide treasury management solutions.

“The benefit we see in APIs is in the speed of connectivity and therefore the speed of the messaging,” said Thomas Leitch, vice president of business development at TreasuryXpress. “Having these types of technologies allows customers to be much more nimble with payments and to know what to do to optimize the cash they have.”

From the point of view of banks and technology providers, APIs can minimize issues of having to tweak systems for each separate corporate client.


Focusing on the Front End

Still, one risk for banks is that with open APIs, clients may no longer see the bank’s role in a transaction, said Greenwich Associates’ Raftery. “They can get disintermediated from the front end,” he said. Companies such as PayPal, and Betterment in the wealth management area, may become the visible entities in transactions even though they are not owners of the data. “What it does is turn banks into commodities,” he said.

That is why banks are also working on their user experience and interfaces, to try to maintain that visibility by being the best and easiest to use. “It’s a question of who is going to own that customer front end,” Raftery said. “Each of the major banks is fighting to create a terrific digital client experience.”

Indeed, the look and feel of the corporate interface with a bank’s digital offerings has become more of a priority for banks, and “user interface” and “user experience” have become buzzwords. The focus tends to be on developing designs that are as intuitive and elegant as applications found on consumer tools such as smart phones. As a result of this trend, corporate end users such as treasurers may notice a new level of attention to detail in banks’ approach to corporates’ interaction with digital services.

“When you look at your experience [as a treasurer], you are now measuring it against what you experience on your phone or in your personal life,” said J.P. Morgan Treasury Services’ Farooq. “We don’t want to say, ‘It’s okay to be clunky because it’s commercial.’ We want to have interfaces, apps, and capabilities that stand up against the best of any that someone uses.” Farooq added that JPMorgan Chase has teams across the bank that are dedicated to refining design, understanding the user experience, and improving user interfaces.


New Technologies for a Better Treasury

Seen as a whole, these technology trends indicate more than just new gadgets and products. They are indicative of a shift in the way that banks, and their clients, update their treasury processes and systems.

Corporate treasurers have been eager for better services from their banks because they see the opportunity to improve core functions such as cash management. For banks, that means taking a new approach to corporate business, to help clients take advantage of the possibilities. “It’s no longer about designing the IT for my business; it’s designing the business to the IT,” said Norton of CGI. “That’s really what’s going on.”

For banks, which are seeing disruption to their business, as well as high levels of corporate-customer churn and lingering dissatisfaction with their services and capabilities, the possibilities inherent in new technologies offer a way to retain existing customers and attract new ones—if only they can keep abreast of the rapid pace of digital change.

Corporate banking relationships used to be driven by credit, but that can no longer be an anchor for corporate business, said Citi’s Bose. “Now it is connectivity, and it’s about ‘How quickly can you help me expand?’ ‘How quickly can you allow me to do payments, and how efficiently?’” Given the disruption in the traditional banking model, Bose added, “these [technology] tools are very timely.”

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