Finding a New Business Model Corporate and Investment Banking in Times of Fundamental Change 2 Roland Berger Focus

August 2018

Finding a new business model Corporate and investment banking in times of fundamental change 2 Roland Berger Focus – Finding a new business model

Management summary

Corporate and investment banking cannot go on with technology. To face this challenge head-on and deal with business as usual. Digitalization and the onslaught of the all-round digital impact, banks need to refocus their FinTechs and other new players put a question mark offering along the lines of the attack and assume one of over the very business model and structure of tradition- three positionings. al banks. So far, most firms have been confronting the challenge by incrementally introducing digital initia- With this new alignment, they will be able to withstand tives of three main types: sales enabling, efficiency in- the increased competition and take full advantage of creasing, and those that provide enhanced risk manage- their position as traditional banks with experience and ment. in-depth knowledge of their clients. This transformation will require a thorough digital strategy, uncompro- These adjustments are taking place within the current mising implementation focus, and a raft of technical setup. However, the entry of new players in the market, and cultural changes. the impact of digitalization on the clients' businesses as well as the emergence of platform-based business models present challenges that require more than just incremental change. They alter the setup under which banks operate. New players usually attack via three anchor points: the client interface, the product offering, and the Finding a new business model – Roland Berger Focus 3

Contents

1. A good start, but not enough ...... 4 Banks are adapting incrementally to digitalization.

2. Danger ahead ...... 6 Digitalization is disrupting the current corporate and investment banking model.

3. Reaction to the new market setup ...... 12 Choose the right business model. aluxum/iStockphoto Cover photo: photo: Cover 4 Roland Berger Focus – Finding a new business model

Chapter 1: A good start, but not enough Banks are adapting incrementally to digitalization. Finding a new business model – Roland Berger Focus 5

In a recent Roland Berger survey1 and in a series of in- terviews with representatives of 20 corporate & investment banks, most managers reckoned that digitaliza- Most banks are tion is about incremental change and the optimization of existing business models. In this sense, banks are developing and using mostly developing and using digital solutions in three main fields: digital solutions

1. Sales enabling in the fields of sales, Here, banks focus on moving closer to their clients. They use new technology such as API interfaces that en- efficiency and able individual configuration of data sets or big data analytics to understand the underlying dynamics and ad- risk management. just products and services accordingly. In doing so, banks can integrate ever more seamlessly in the client But will the incremen- journey and offer products beyond core banking. tal adaptation of 2. Efficiency increasing The availability of data and corresponding analytics fa- their business model cilitates greater efficiency, quality, and process speed. Automation initiatives that employ new technologies suffice? such as robotics and machine learning (and prospective- ly AI and the blockchain) are now a frequently used means of process optimization. Besides this, digitalization enables the use of industry utilities such as Know Your Customer (KYC) platforms that can improve client relations by offering seamless processes.

3. Providing enhanced risk management advanced portfolio management. Enhanced risk man- A range of initiatives can help banks reduce cost of risk. agement has an impact on all risk types: credit risk, Data analytical capabilities are leading to new ways of market risk, and non-financial risk. risk assessment. New technologies such as the Internet Most banks have begun to activate the three optimiza- of Things (IoT) enable real-time maintenance tracking. tion levers mentioned above. But will the incremental Enhanced analysis facilitates better risk decisions and adaptation of their business model suffice?

1 Cf. Roland Berger Focus: Corporate Banking 2020, 2017 (in German) https://www.rolandberger.com/de/Publications/pub_corporate_banking_2020.html. 6 Roland Berger Focus – Finding a new business model

Chapter 2: Danger ahead Digitalization is disrupting the current corporate and investment banking model. Finding a new business model – Roland Berger Focus 7

In corporate and investment banking, digitalization is were planning to engage the services of FinTechs and much more than just a facilitator of the current busi- non-banks in the future. These new players can be clus- ness. As it progresses, digitalization will change the tered according to their strategy for attacking tradition- structure of the market and the business model. Banks al banks: aggregators and multi-dealer platforms, prod- are facing three serious challenges. A uct specific intermediaries, and technology providers. Additional pressure arises from institutional investors 1st challenge: who – on the lookout for profitable investments – are ATTACK FROM NEW PLAYERS breaking into the credit business. Banks and their cli- New players are not limited by inflexible legacy systems ents are increasingly cooperating with new players in and are able to react to client needs effectively and effi- their day-to-day business. This is diminishing the banks' ciently. The deployment of new, easy-to-use, value-add- revenue pool. Non-banks and FinTechs are altering the ing functionalities is becoming a race against time for character of the CIB industry and increasing the pres- established players. In a recent Roland Berger survey2 sure on banks to modify their business model more among corporate clients, 68% of respondents said they than just incrementally.

A: Disruption on many fronts Three challenges of digitalization

2. Corporate clients are also facing digital challenges – rising risk for the bank

1. New players threaten 3. Platform economy leads to the revenues of tradi- a split of business models: tional banks along the focus on client interface or value chain product creation

SPECIFIC CHALLENGES OF DIGITALIZATION

2 Cf. Roland Berger Focus: Corporate Banking 2020, 2017 (in German) https://www.rolandberger.com/de/Publications/pub_corporate_banking_2020.html Source: Roland Berger 8 Roland Berger Focus – Finding a new business model

2nd challenge: 3rd challenge: IMPACT ON CLIENTS' BUSINESS MODELS SEPARATION OF BUSINESS MODELS IN THE The business model of the banks is not the only area PLATFORM ECONOMY impacted by digitalization – the impact on the banks' As in other industries, the separation of the business be- clients is also significant. It yields benefits for them, yet tween occupying the client interface (e.g. Uber, AirBnB) it poses significant risks to companies across all indus- and offering the underlying product (taxis, private car tries and sizes. If clients cannot cope with the digital owners, hotels, landlords, etc) is also taking place in the transformation and do not sufficiently adapt to it, other financial services industry. FinTechs and other compet- competitors that offer a better digital experience will itors are establishing platform models and posing a se- step in and, in the medium to long term, push them out rious threat to traditional banks by conquering the cli- of the market. This also holds true for entire industries. ent interface and putting customers in contact with The banks' concern in this case needs to be threefold: many different competitors and their products. Tradi- Banks need to understand client industry dynamics tional banks selling almost indistinguishable corporate thoroughly in order to a) avoid being trapped with banking products will find it more and more difficult to non-performing loans from clients who get left behind, compete in this platform-driven market with its en- b) be in a position to offer access to and solutions for hanced client journeys, comparison and solution-selec- new clients emerging as winners of industry trans- tion features, and quick access to many vendors. Being formation, and c) fully understand the changes to their just another provider of standardized products will not clients' business models in order to be able to support be enough. In the future, banks will need to specialize and advise clients along their transformation journey. to charge a price premium or focus on the platform Different industries will be impacted by digitalization to business themselves by providing broad access to prod- different degrees. ucts and advisory services from different sources. As Oil and gas, for example, will most likely be negatively such, they become more like coaches to their customers, affected in the long run by the reduced consumption concentrating on their needs and offering bespoke solu- brought about by electric vehicles and stronger compe- tions from different solution providers. In both cases, it tition from renewable energies. Commerce, on the oth- is important for banks to focus on high value-adding er hand, can benefit from digitalization allowing banks services along the value chain. For example, treasury to offer more tailored products to the customers in that subscription models for the operation of treasury de- area. With the experience that banks have, they could partments by the bank can be a strategic option for cer- become even more relevant advisors and facilitators for tain steps in the value chain, with tangible advantages their clients. Benchmarking based on the data collected for both the bank and the corporate client. from clients could be another inroad toward offering enhanced advisory solutions. Finding a new business model – Roland Berger Focus 9

Attack from new players Changes in the setup of the CIB industry.

B2C banking has already seen major disruption through Platforms are increasingly integrating the client coverage the emergence of FinTechs. Now it is the B2B segment's layer, especially for transaction banking and financing/ turn to be challenged. We have identified three main an- credit solutions. Providing cross-banking and price com- chor points where FinTechs and other new players are parison offerings, multi-bank aggregators could potential- attacking the incumbents in corporate banking. ly replace banks completely at the client interface. A market leader for integrated accounting as well as commercial and Anchor point 1: CLIENT INTERFACE sales management solutions, for example, developed a FinTechs attacking banks at the client interface aim to platform allowing the comparison of different banks (and have a direct business relationship with the corporate their individual conditions). The client is therefore able to client. A bank relies on keeping control of the client in- choose the bank with the best offer. The firm partners up terface in order to continually identify and satisfy the with a FinTech for factoring and a FinTech for foreign ex- clients' needs and serve as a quality gatekeeper for a change (FX) transactions. Without any banks involved, the whole set of financial services. But now there are a range client interface is completely covered by the FinTech. of non-banks and FinTechs beating a path to the client Additionally, FinTechs are developing banking and com- interface – through multi-bank platforms and solutions pliance platform business models that are based on con- sitting directly at the bank-client interface. B necting a global network of partner banks with compa-

B: Conquering the client interface New players offering multi-bank platforms and API solutions

MULTI-BANK PLATFORMS/ BANK-CLIENT DIGITAL INTERFACE INTERFACE AGGREGATORS OPTIMIZERS: CREATION OF APIs

Examples Sage; Compeon; Kyriba; 360T Trading Railsbank; treezor Networks

Value add & Cross-banking offering Improved integration services for corporates/ USP Price comparison/ease of exchange for links to banks commoditized products More fluid information exchange and stronger agility than banks to adapt APIs

Implications Danger of losing the client interface Need for enhanced agility at the client inter- for CIB Potential to force banks into a "price war" face: build specific support teams to help (similar to comparison portals in retail) clients link their systems or leverage external teams

Source: Roland Berger, company website, Crunchbase 10 Roland Berger Focus – Finding a new business model

nies that want access to global banking via an API. involvement of fronting banks. Moreover, they do not Banking services such as receiving money, issuing cards have complex credit approval processes. C or managing credit can be granted. Borrowers today can get finance via lending platforms or other alternative non-bank sources, all without the in- Anchor point 2: FOCUSED PRODUCT OFFERING volvement of banks. New players are also offering a wide While traditional banks often offer "everything" and try variety of services historically occupied by traditional to keep up with a diversified product portfolio, new play- banks: launching bonds, trading of notes and loans, ers provide single-purpose products focusing on specif- fundraising for municipal investment projects, com- ic customer groups. mercial real estate financing, etc. One major trend facilitated by the emergence of digital solutions is the development of the private debt indus- Anchor point 3: TECHNOLOGY PROVIDER try. Total assets under the management of private debt New players increasingly offer specific CIB services to funds in Europe and North America reached about USD established banks through the use of new technologies. 600 bn in June 2016, which equates to an average growth These services can be clustered into three main catego- rate of about 15% p.a. since 2006. Private debt funds are ries: data processing/aggregation, activity or functional able to raise funds and offer direct lending without the optimization, and process optimization. D

C: Rise in non-bank lenders Development of the private debt industry in Europe and North America

592 +14.9% p.a. 555 468 475 401 370 331 280 245 205 USD 147 bn

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 20161

1 As of June 2016 Source: 2017 Preqin global private debt report Finding a new business model – Roland Berger Focus 11

For the first category of services, FinTechs provide support their underlying risk exposures, can assess the true in predicting client behaviors and improving the efficiency costs of trading better, and significantly expand the ca- of credit decisions. They provide additional data points for pabilities of their in-house IT resources. trading decisions, consider external factors impacting per- The third category of services has many areas that add formance, and identify early warning indicators that are value for CIBs, such as increased efficiency of post- not systematically picked up by humans. One example is trade/collateral management and the KYC process. the detection of behavioral patterns in electronic commu- Some FinTechs already provide sophisticated global nications indicative of suspicious and unlawful activity. solutions for process optimization in the banking indus- The second category of services includes offering im- try. One FinTech joint venture, for example, launched proved functions across products, higher automation, KYC utility services for centralized client onboarding and more transparency for regulatory interactions. Fin- and KYC data management in 2014. Techs often find use cases in risk management, building While banks might benefit from these services in the their business models upon the development of soft- short run, they also pose a threat to their business in the ware and the provision of open platforms for analytics medium and long run: outsourcing key processes to ex- and risk management for the financial services industry. ternal service providers causes banks to become less rel- With such technology, customers gain more insight into evant in key tasks such as the analysis of large data sets.

D: Data, function, process New players offer technology to traditional banks

DATA PROCESSING/ ACTIVITY OR FUNCTIONAL PROCESS AGGREGATION OPTIMIZATION OPTIMIZATION

Examples AYASDI; Orbital Insight; Leverton; Symphony; FUNDAPPS; OPENLINK; blueprism; Digital Reasoning; Kensho; NOVUS OpenGamma GENPACT; markit Value add & Additional data points for trading decisions Improved function across Increased efficiency of selected USP Consideration of external factors impact- products processes: Post-trade/collateral ing performance Higher speed/automation management, KYC Identification of early warnings not system- Transparency for regulatory Allows/requires building of atically picked up by humans interactions industry consortium

Implications Predicts client behaviors and improves Valuable option for "make or Increases productivity for CIB efficiency of credit decisions buy" Reduces cycle time Scale is leveraged across partici- pants in a utility model Can be supported/utilized across multiple banks (consortiums)

Source: Roland Berger, company website, Crunchbase 12 Roland Berger Focus – Finding a new business model

Chapter 3: Reaction to the new market setup Choose the right business model. Finding a new business model – Roland Berger Focus 13

Banks need to develop competencies to understand digi- individual client's needs. The relationship expert man- talization's influence on their clients' business models. ages not only the client but also the providers of the Most importantly, though, banks need to rethink their products they offer since most of the products and ser- strategic positioning and rebuild their business model. vices are sourced externally. The bank thereby generates To cope with the altered setup in the industry, banks in- provisioning and intermediation fees. creasingly need to focus on being one of three archetypes: The product expert, on the other hand, focuses on pro- the relationship expert, the product expert, or the tech- viding specific best-in-class banking products to their nology service provider (for further insights regarding network partners and the client directly. This goes hand the application of these archetypes in the German mar- in hand with a strong focus on efficiency: Each product ket cf. Roland Berger Focus: Corporate Banking 2020, has to be profitable in itself and should not need to rely 2017). The discarded archetypes can still play a role in the on a cross-selling logic. banks' business model, but to a much lesser extent. E Lastly, the technology service provider supplies the in- The relationship expert strongly focuses on understand- frastructure that the clients and their network part - ing clients and offering the right products based on the ners need. To be successful with this positioning, the

E: Choosing a new business model Banks should opt for one of three archetypes

RELATIONSHIP PRODUCT TECHNOLOGY SERVICE EXPERT EXPERT PROVIDER

Client focus Client focus Client focus

Technology Product Technology Product Technology Product focus focus focus focus focus focus

Positioning on the interface to the client Positioning as specialist/ Positioning close to the clients' Focus on client service and identification provider of certain products technical systems of customer needs and services Focus on provisioning of Third party offerings of services/ Focus on production and provision the infrastructure products of products and services Standard setter and utilization of platforms Source: Roland Berger 14 Roland Berger Focus – Finding a new business model

bank needs a good understanding of technological some extent – enter areas formerly claimed by software/ changes and the way these changes will impact their tech companies. Software, cloud solutions, cyber secu- clients. It should furthermore identify automation rity, digital ID, or data analytics are fields beyond bank- possibilities and strive to automate to the largest ex - ing that banks might consider developing and offering. tent possible. The bank can then realize licensing and The basic idea for banks is to bundle these services with provisioning fees. their financial products and leverage banks' strengths Banks that decide to move toward capturing the client in IT and IT security. These services not only enlarge the interface or providing technical systems to their cus- service offering of banks but also raise banks' impor- tomers (archetypes 1 and 3) can consequently extend tance in their clients' ecosystem. In general, developing their offering by moving beyond traditional banking financial services into integrated services beyond CIB and offering integrated solutions to their corporate cli- can help banks capture a larger share of the client's wal- ents. If software providers and tech companies enter let and make sure banks remain meaningful partners to areas formerly claimed by banks, the banks should – to their clients. F

F: Services beyond banking Digitalization opens up new fields of activity for traditional banks

SITUATION POSSIBLE ENABLERS OF SERVICES BEYOND BANKING

How can 1. Software banks move Corporate information systems, office apps, treasury further away from management software, multi-banking apps Lack of stand- being mere FS alone customer providers? 2. Cloud value threatens to Infrastructure, interfaces and operational framework make banks easily exchangeable 3. Cyber security Industrial solutions – IT security, protection, threat intelligence, etc. Offering cross-functional integrated 4. Digital ID solutions and Single sign-on services, digital identity services beyond banking 5. Data analytics Advanced analytics and optimization services

Source: Roland Berger Finding a new business model – Roland Berger Focus 15

HOW TO MANAGE THE ADJUSTMENT OF THE G: Shifting the focus BUSINESS MODEL Measures for the creation of In order to successfully manage the transition toward a the digitally enabled bank digitally enabled company, banks not only need to change their strategy, but also ensure their transformation by defining a challenging and realistic roadmap and following through with its implementation. Fur- thermore, they have to work on the mindset and the technology expertise within the organization. G When it comes to drafting a digital strategy, the bank DIGITAL STRATEGY should first develop an ambitious vision taking into ac- count the three archetypes mentioned before. Whatever Formulate an ambitious vision and strategy to shape strategic risk-taking within the organization the outcome of this, banks will need to focus more on their research & development (R&D) capabilities as this Reinforce R&D capabilities to keep pace with is an integral success factor in a more digitalized world. innovation Otherwise banks will not be able to keep pace with their Utilize scenario planning and war gaming to innovative competition, namely tech giants and Fin- shape own future strategy Techs. Scenario planning and war gaming will provide an understanding of market dynamics. Based on their overall vision, each bank must formulate a detailed ROADMAP TO A LEADING BANK roadmap on how to achieve the transformation with OF THE DIGITAL AGE milestones and deliverables. The bank needs to adjust Draw up a detailed roadmap to the future its culture and organization to facilitate the transforma- target state of a digitalized bank tion process. This will be a challenging process that calls for vision Formulate clear milestones and deliverables along the way and bold strategic decisions. But it would be riskier still not to act, as the future demands a modern bank ready for the digital age. The winners will not be those waiting and watching from the sidelines. CULTURAL AND TECHNICAL LEVERS

Create a digital mindset in the organization

Reinforce technology expertise in the organization by setting up dedicated teams (e.g. "power users") to create positive impact

Source: Roland Berger WE WELCOME YOUR QUESTIONS, COMMENTS AND SUGGESTIONS

AUTHORS PUBLISHER

DR. DOMINIK LÖBER Roland Berger GmbH Senior Partner Sederanger 1 +49 160 744-6105 80538 Munich [email protected] Germany +49 89 9230-0 ROBERT BUESS www.rolandberger.com Senior Partner +41 79 714-4445 [email protected]

KLAUS JUCHEM Senior Partner +49 160 744-6323 [email protected]

Additional support by DR. WENTING ZHAO

More information to be found here: www.rolandberger.com

Disclaimer This publication has been prepared for general guidance only. The reader should not act according to any information provided in this publication without receiving specific professional advice. Roland Berger GmbH shall not be liable for any damages resulting from any use of the information contained in the publication.