Corporate banking remains a very a tough business. Players everywhere are facing increasing competition, declining revenues, surging regulatory costs, spiking loan losses, and rising capital requirements. But not everyone is being dragged down. In fact, BCG’s most recent Corporate Banking Performance Benchmarking survey—of 300 corporate banking divisions around the world serving the small, midmarket, and large business segments—found a dramatic split between the best and the rest. How can the leading players maintain their edge, and how can those lagging behind regain lost ground?
Overall, banks face an urgent need to radically optimize performance and commit to a continuous digital transformation. Our benchmark data confirms the hazards of clinging to traditional credit-centric revenue models and static, inflexible operating practices. Incumbent banks must embrace deep, systemic digitization to stay relevant, open up new paths to sustained economic profit generation, and overhaul all key levers. Clearly, top players have expanded beyond credit.
The time for this radical shift is now. To reshape their business and operating models and meet the challenges and opportunities presented by the postcrisis environment, corporate banking divisions must move swiftly to do the following:
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.
Winning in Today's Corporate Banking Environment