Further loyalty systems are not enough

(Tech in Asia, CC By www.techinasia.com)

There are very few innovative projects directed towards large companies, and hardly any in the offer of the Polish FinTechs.

This sector of activity of companies that utilize modern technologies to offer financial services is very narrow. We cannot include in it the subsequent loyalty systems or platforms for the handling of purchases and e-commerce settlements. It’s not about solutions primarily addressed to retail customers of the bank, where the large companies would only serve as a necessary complement.

What matters are solutions which would support the functioning of the larger companies, created for them and with their interests in mind. It’s about an intelligent and useful application of modern technologies in the functioning or the servicing of corporations.

Why large companies? Primarily because in Poland, a country of relatively small companies, even small and medium-sized enterprises (SMEs) have been accustomed to the service standards which in more affluent countries are typical for corporations. In Poland, a company with an annual turnover of, for example, PLN30m often receives banking services of a quality similar to that which in some EU countries is provided to entities with turnovers of EUR50m and higher. And since there is such standards of service, other services addressed to Polish SMEs should also conform to a level adequate for large corporations in Europe.

Peculiar distribution

In the report “Digital Disruption. How FinTech is Forcing Banking to a Tipping Point”  the authors present the breakdown of the global capital involvement in the FinTech sector: as much as 73 per cent of the investment concerns personal finance and offers for small businesses, 10 per cent was allocated in the asset and insurance management projects, 4 per cent was put into investment banking, and only 3 per cent in services for large corporations. In the same summary, we can read that the global profits of the banking sector are obtained in 19 per cent from investment banking and market operations, in 46 per cent from retail banking and small businesses, and in 35 per cent from corporate banking.

The largest disparity concerns corporate banking. Only 3 per cent of the capital resources dedicated to FinTech is allocated in the potential of 35 per cent of the profits of the banking sector. Why is there such a great discrepancy?

First of all, due to what could be called semantic reasons. A significant part of the ideas and innovation addressed to the consumer is classified as retail banking services, although it is not strictly financial in nature. This is, among other things, because it is precisely retail banking which seems to be the most interested in such ideas and services.

This interest, in turn, could be explained by the conscious redefinition of retail banking by modern banks. They are effectively pursuing the ambition of being a versatile life companion for the modern consumer: not limited to providing financial services, they are increasingly delivering other services associated with communications, search for goods, tourism, entertainment, realization of dreams. Such a personal concierge is a concept much broader than a traditional bank.

Secondly, services directed to large corporations, especially concerning the sphere of finance, require relatively higher competencies and more unique experiences than innovation directed to consumers. In order to meet the needs of a large company, it is not enough to provide an intelligently conceived, but simple application for the smartphone or tablet, deprived of essential security features. What is needed is the knowledge about the processes, systems, scopes of authorizations, security policies which apply in the company. It is necessary to integrate into the complex and proven mechanisms of operation of a corporation. Procedural correctness and trust are no less important than the brilliance of the idea.

Thirdly, we have to conclude that the resources invested in innovative projects (e.g. venture capital) in Poland are a negligible fraction of the funds, which are available to start-ups in London, Paris, Frankfurt, Amsterdam, Barcelona or Tel Aviv. The implementation of more complex projects which meet higher standards of the demanding customers undoubtedly requires higher financial resources. Looking at the portfolio of entities which received financing from the Frankfurt venture capital companies belonging to the Commerzbank group, we can see clearly that the effective development of interesting financial solutions requires not only the professional selection of projects, but also significant capital expenditures. That is why innovative FinTech proposals addressed to corporations are – unfortunately – easier to find outside of Poland.

Fourthly ‒ and this is also reflected in the aforementioned studies ‒ even if only 3 per cent of venture capital resources invested in FinTech went to the projects from corporate banking, the vast majority of these funds still went to projects related to the broadly understood payments. This means that, although these could be really groundbreaking projects (e.g. on the basis of blockchain), the important potential of services for large corporations, such as, for example, financing, investing or capital markets, remains almost entirely outside the sphere of interest of FinTechs.

Stabilized or start-up

It is worth noting that interesting, challenging FinTech projects do not necessarily need to be developed in small and new companies. They often emerge ‒ taking the form of start-ups ‒ from the larger and more experienced companies in this sector. Companies with a stable position in the industry are willing to undertake more complex and demanding initiatives basing on experience, knowledge of the market and detailed knowledge about the needs of the target audience.

We should remember, however, that the matter of innovation, much like the community of start-ups, is susceptible to influences. One reason for this scarcity of projects directed to corporations lies in the expectation that they will emerge naturally. But perhaps we should be actively cultivating them, trying to influence their “farmers” to devote more attention and time to their “reproduction”?

A basic prerequisite would be to determine ‒ even in general terms ‒ the field of interest of those who expect a higher supply of the projects discussed here.

Large scale service

Corporate banking extends from the traditional services for large and medium-sized enterprises (especially meeting their financial needs) through corporate transactional banking (services available for business on the internet, cash settlements, including international settlements), investing of surplus funds; exchange and hedging transactions on currencies and interest rates; brokerage of a trusted party in real estate transactions; discount financing of trade; factoring; servicing of international trade; leasing; and/or structural financing.

These labels hide an entire conglomerate of competencies and services provided by banks and used by the companies. And from the point of view of the companies, these services provide, for example, short-term liquidity, optimize the cost of foreign exchange operations and settlements, support the identification of receivables, the scale of their potential expiration, provide a fully electronic financial trading, etc.

At the junction between companies and financial institutions, other companies or natural persons, there are opportunities to provide existing and entirely new services with the use of modern technologies. These do not have to be purely financial services. Sometimes it is enough that they allow the company, for example, to convert the documents and reports received from other entities to a uniform data format accepted by the main system used in the enterprise.

Perhaps a closer, more detailed dialogue between the creators of such solutions (FinTechs) and the entities seeking them about what is in demand would contribute to the creation of a larger number of more diverse projects for large corporations, instead of yet another loyalty or geolocation system designed with consumer card payments or mobile payments in mind?

Inspiration, suggesting demand for new services and solutions in a specific area, does not necessarily have to equate to the incubation and financing of the creation of such projects. There are many interested entities specializing in that, and the existence of demand seems to be the driving force behind other activities.

Directional development planning

An important role in the emergence or the lack of certain initiatives is also played by the broadly understood regulatory environment. The forthcoming implementation of the PSD2 Directive will certainly result in interesting ideas in the environment of payment services and e-commerce. On the other hand, the authorities of a country such as Poland, which is not the first one to come up with the idea of development through innovation, should consider in which areas they are already strong (e.g. computer games, life-saving systems…), in which they have a chance of leaving others behind, and in which there are slim chances to compete with the international leaders.

Specialization, especially in terms of competencies, and the ability to create new solutions based on the experience obtained in the previous projects would suggest a more directional support for the selected areas of innovation. It is difficult to predict today whether financial services are among those selected fields, but we can ask that question.

Is the position of corporate banking, even in the face of the coming regulatory revolution (i.a. as a result of the implementation of PSD2), less threatened by the FinTech revolution than other areas of financial intermediation? That would be a false conclusion. In the world of large corporations, there is a tendency to choose the general market standards and it could happen that a single FinTech turns out to be a worthy competitor for the entire sector of corporate banking.

On the other hand, the primary source of the current undermining of the traditional business models and the disruptive changes lies not in the FinTechs themselves, but in the fact that people have suddenly have become more creative and innovative than in previous eras. The source of the revolution is mainly the technology, to which corporate banks will have to quickly adapt. If they are not able to count on the offer of the FinTechs, they will be forced to do that on their own, within their traditional model of development of products and services. In that case a lot of the opportunities for a digital transformation of the financial services directed to corporations could be squandered.

The author is the Director for Strategy and Development in the Transactional Banking Department at mBank. He deals with the cooperation between corporate banking and the FinTech sector. The presented views reflect his individual opinions.

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