Other parts of this series:
I am excited to have Tim O’Donnell join our Payments team as a managing director and draw on his insights in developing this blog. Tim brings a unique perspective to treasury management services, having worked in industry, for solution providers and in consulting, helping commercial banks meet changing client expectations with new product and market strategies.
For years, banks have enjoyed a low bar on CFO expectations around payment product sophistication and innovation. As a result, most bank business interactions are the same as they were 20 years ago. But the pendulum has swung in the other direction. Large corporations and small- and medium-sized businesses are being more explicit with banks demanding more capabilities, more information and ease of access when it comes to payments.
In fact, our survey reveals that commercial banking customers put payments in the top three areas where their businesses could be improved in partnership with their bank.1 For banks to satisfy this unmet need, they will need to reinvent their commercial payments customer relationships and adapt quickly to a changing environment where the old rules of competitiveness no longer apply.
The big squeeze on revenue
The stress on traditional revenue models is one of the most significant forces of change in commercial banking. The deposit spread is both core and critical for banks. The math speaks for itself: Banks can pull in deposits at less than 1 percent interest, and the money can be redeployed at 10 percent. Deposits, more than transaction fees, are critical to banks’ economic models. In fact, a recent Accenture study examined digital-focused banks versus the rest. It found that from 2011 to 2017, net interest income for digital leaders shifted away from fee income, down 7 percent, to interest net income, up 7 percent, while the rest saw the exact opposite effect with fee income increasing and net income decreasing.2
Today, we are seeing a slowdown in commercial deposit growth broadly with flat or negative growth in pockets as deposits shift to the national banks. The Federal Reserve reports that growth of commercial deposits slowed to 3.8 percent between 2017 and 2019, down from 5.1 percent between 2014 and 2016.3 And the crème de la crème for banks—large, time deposits that cannot be withdrawn for a specified period—have not shown significant growth over the past five years.4
Companies are moving cash off the balance sheet and investing in areas like wages, capital expansion and innovation. The domino effect on banks’ revenue is undeniable. Banks are losing yield on deposits, and the free cash they have for loans is not keeping pace with their other asset growth strategies. This intensifies the pressure on banks to provide better commercial payments experiences and offers to keep their low-cost deposits and maintain their interest rate spread revenue streams.
Corporates want their banks to help them run their businesses better, both within and around money positioning and movements.
When you look at the income statement, banks are being threatened by new entrants poised to devour banks’ revenue. Digital-only banks, fintechs and bigtechs have the right mix of entrepreneurial ingenuity and technology capability to make irreversible inroads into corporate banking—including corporate payments. For example, Stripe offers online payment processing for e-commerce businesses of all sizes through a suite of payment APIs.5
Digital-native new entrants have distinct advantages in corporate payments. Customer experience mastery is core to their business models. And the cost of entry into the market is low for them. They just need to zero-in on selling the last-mile connectivity to provide solutions to corporate customers. The threat is real. In the next three years, corporate banking executives we surveyed as part of the Accenture 2019 Global Payments Survey most commonly expect up to 15 percent of the payments revenue pool to migrate to new entrants.6
The consumerization of corporate
More and more, consumer expectations are driving corporate payments expectations. After all, CFOs and treasurers are digital consumers in their everyday lives. So imagine this: A treasurer takes an Uber to work listening to a personalized playlist on Pandora while ordering from Amazon. All this takes just a few clicks. No cash, check or credit card required. Payment is almost invisible in the exchange.
Now imagine what happens when the treasurer gets into work. Legacy systems deliver two-dimensional customer experiences. The vast majority of outgoing payments are manually entered or sent in a file for batch processing in the “black box” of B2B settlements. Clients often only know the payment was sent when they receive their statements and have to take on faith that it was received. Even today, more than half of corporate payments are paper-based.7
Corporate payments customers will have little patience for this frustrating customer experience gap, which will worsen with the impact of other complications. For example, commercial payments are getting very complex. There are suddenly new payment options. Clients are left confused and needing more information about more products. Instead of getting consultative assistance in their preferred channels, they have to rely on a relationship manager, at best, or more often, a 1-800 number for answers. With new entrants offering innovative value propositions rooted in convenience, transparency and simplicity, banks will pay the price if they don’t up their game.
The birth of the virtual CFO
Banks cannot rely on brand reputation, price or even relationships to differentiate themselves anymore. Transactional execution is a commodity and the basis of competition in corporate payments is shifting to digital interactions. These digital interactions are very different from the electronic and semi-automated current world of traditional commercial interactions. The competitive edge will come from the quality of customer experience, interfaces and the valued-added services wrapped around transactions. Everything else is like bottled water—very difficult to differentiate.
But here’s the million-dollar question. What do commercial payments clients want from their banks? Corporates want their banks to help them run their businesses better, both within and around money positioning and movements. This means real-time services and information including immediate payments, account balances and status updates that improve efficiency and inform decisions. Alerts, aggregated data and analytics, cashflow forecasting and integrated payables and receivables are just the tip of the iceberg of what’s possible.
All this adds up to banks providing corporate payments clients with a virtual CFO or virtual treasurer function. Clients would get ready access to a suite of intuitive and sophisticated payments and business services, including plugging bank services into the company’s financial management system enabled by APIs. Data and advice become the real products to manage risk, maximize working capital and optimize money movements.
The road ahead
This kind of one-stop shop for corporates is a far cry from today’s treasury management work stations. These status-quo banking portals came onto the scene about a decade ago—a century in digital years. With only 45 percent of companies fully satisfied with their organization’s business software in payments and banking8, there is a need in the market for next-generation portals.
In our next blog, we’ll talk more about the future of corporate portals and the other fundamentals that banks need to master the new competitiveness in corporate payments. In the meantime, we encourage you to explore more of Accenture’s thinking on the topic.
1 Accenture, “Accenture Open Banking for Businesses Survey 2018”
2 Accenture Research on S&P Capital IQ data
3 Accenture Research; Federal Reserve, H.8 Assets and Liabilities of Commercial Banks in the United States
6 Accenture 2019 Global Payments Survey
7 PYMNTS, “B2B Payments: Digitally Connected, Cross Border and Ditching the Paper” 4/26/2019
8 Accenture, “Accenture Open Banking for Businesses Survey 2018”