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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 transforma- tion 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 mod- els present challenges that require more than just incre- mental 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 & invest- ment 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 an- alytics 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, digitaliza- tion 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

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