Digital disruption, which began reshaping retail banking years ago, has finally come to corporate banking—with a vengeance. The disruption started with new competition from digitally nimble fintechs that offered standalone products such as low-cost international transfers and supply-chain financing solutions. Such developments were followed by an accelerating wave of digital innovations—most notably involving platforms, artificial intelligence, and blockchain—as well as by product and service enhancements generated in response to clients’ changing expectations.
The financial stakes are high for corporate banks, whose profitability varies significantly by region. Over the next five years, we expect new digital platforms and channels to attract 30% of traditional corporate banking revenues. In order to keep up, corporate banks need to undertake front-to-back digital transformations. Only those institutions that adeptly manage this extraordinarily challenging transition will survive and thrive.
Corporate banks can get on the right trajectory by acting on the following four imperatives:
In the movie Moneyball, an American major-league baseball coach transforms the way his team trades players, replacing the judgment of experienced “scouts” with statistical analyses of players’ performance. Indeed, from sports to advertising to law enforcement, we are seeing a shift from gut feel to statistical science. Price setting is no exception.
Yet the commercial lending business has been behind the curveball, so to speak. Loan prices are still largely the result of negotiation between business clients and the bank’s relationship managers, who hesitate to change their behavior in ways that can seemingly undervalue their discretion and experience. Unfortunately, their traditional approach causes inconsistency and forgone revenue.
How should banks go about moving to best practice in commercial loan pricing? The first step is to diagnose where prices and practices are falling short — and where the biggest opportunities lie. The next step is to design a new, statistical pricing model that includes target setting on both rates and fees, well-defined discounting rules based on the true price sensitivity of clients, strict governance, and incentives aligned with price realization. The reward can be a home run: a 7% to 10% rise in commercial lending revenues.