Future of Commercial Banking (2024)

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    Relationship managers (RMs) can spend years cultivating client relationships and are often quite protective about them. In return, however,

    Only 10% of executives in our survey agree that their company would switch their primary bank if their RM moved to a new bank.

    While executives are not necessarily dissatisfied with their primary banks, only 26% of the surveyed executives considered their bank’s specialized industry knowledge and insights to be very good or excellent. Many executives expect their RMs to bring a sophisticated blend of technical skills and soft skills, such as being proactive and having a solutions mindset, to build trusted relationships. But meeting these expectations is easier said than done, as our banking executive interviews indicated that some RMs resist change and want to go back to their old ways of doing things.

    Data and technology will be integral for relationship managers to add more value for their customers. Equipping RMs with data and technology could provide actionable customer insights while freeing up their time from mundane, operational tasks to focus on their industry specialization and advising customers.

    Learn more about the key role of relationship managers

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    While banks have accelerated the momentum on digitizing workflows and client interfaces, customer satisfaction with self-service capabilities remains fraught with friction. Classic pain points include multiple approval rounds for loan applications, customers being asked to provide the same information on different platforms, and limited visibility on the approval status. Perhaps customers’ personal experiences with digital capabilities in retail banking have shaped their expectations of commercial banking interfaces and overall experience.

    In our survey, 45% executive respondents did not experience digital loan origination, and only 28% were satisfied or very satisfied with their experiences.

    Frictionless digital experiences have now often become synonymous with trust, and banks cannot risk delivering subpar experiences. Commercial customers not only want somebody they trust to oversee the account, but they’re also looking for digital features and capabilities that make it easy to do business with the bank.

    Therefore, banks should increase the number of self-service options and minimize steps that require paper-based input or in-person branch visits. At the same time, banks should consider changing their mindsets from looking at digital as a means to enable transactions to truly differentiating how customers experience their banking services. Furthermore, artificial intelligence and machine learning technologies can often help RMs anticipate customers’ needs, enable dynamic deal pricing for micro segments, and automate decision-making processes.

    Dive into digital strategies

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    A wave of product innovation in the form of “buy now, pay later,” person-to-person payments, crowdfunding, and digital wallets, among others, has transformed how we see retail banking. In contrast, commercial banking has been light on innovation in lending and deposit products, relying more on service and product customization to differentiate from the competition.

    But banks have new opportunities today to innovate commercial products, services, and distribution models. Banks with a strategic vision, proactive attitude, and agile execution on innovation are likely to create an edge for themselves that may be difficult to emulate by those sitting on the fence with a reactive approach.

    Consider bank-based transition finance (loans), where banks can provide the much-needed support to brown industries to transition their operations and contribute to a greener future. In this regard, some banks are originating sustainability-linked loans, for which borrowing companies are incentivized with better interest rates and favorable covenants upon achieving their key sustainability performance targets.

    Meanwhile, innovative business models, such as banking-as-a-service, embedded finance, and platform banking could empower banks to deliver new value to clients.

    In our survey, 76% of executives are willing to use new products and services of other banks, fintechs, etc., if consolidated on a single platform.

    For banks, it can improve their go-to-market agility, close capability gaps on product or service innovation, and reduce the time to achieve mass adoption.

    Explore new product and service offerings

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    In a rising rate environment, banks are often quick to pass high interest rates on to their borrowers before their depositors. Given their rate sensitivity, some commercial deposits are migrating to high-interest-earning opportunities. While some banks may be comfortable watching certain deposits leave given their excess liquidity, many others could face heightened pressure to raise deposit rates and pivot to wholesale funding options or cash flows from investments to fund loan growth.

    Banks are reflecting higher funding costs in their loan pricing models, but they should also consider accounting for an increase in the cost of capital and customer acquisition costs. Improving the quality of data to dynamically reflect updates, such as customers’ changing risk profiles and loan obligations to other banks and nonbank institutions, should likely lower the probability of making unprofitable deals. Realigning incentive structures to customer lifetime value and putting the right controls in place could make RMs more disciplined in driving the topline growth.

    Cost optimization efforts would be as critical as pricing to drive profitability. While maintaining their investments in talent and digitization on the one hand, banks should also consider finding opportunities to mitigate inefficiencies, redundancies, and complexities to lower costs.

    Learn more about the balancing act between pricing and cost

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    I'm an expert in the field of commercial banking, with years of experience and a deep understanding of the industry's trends, challenges, and innovations. My expertise spans various aspects of banking operations, including relationship management, digital transformation, product innovation, pricing strategies, and cost optimization.

    Let's delve into the concepts outlined in the article about the future of the commercial banking industry:

    1. Empowering Relationship Managers (RMs):

      • Relationship managers play a crucial role in building and maintaining trust with clients.
      • The article emphasizes the importance of equipping RMs with data and technology to enhance customer insights and free up time for strategic advising.
    2. Enhancing Digital Experiences:

      • Banks are urged to improve self-service capabilities and reduce friction in digital interactions.
      • The article suggests leveraging artificial intelligence and machine learning to anticipate customer needs and automate processes.
    3. Innovative Products, Services, and Business Models:

      • Commercial banking lags behind retail banking in terms of product innovation but has opportunities for growth.
      • Innovative approaches like banking-as-a-service and sustainability-linked loans are highlighted as avenues for differentiation.
    4. Optimizing Pricing and Cost:

      • Banks face challenges in maintaining profitability amid rising interest rates and changing customer preferences.
      • Strategies include dynamic loan pricing, improved data quality, and cost optimization measures.

    These concepts reflect the evolving landscape of commercial banking, where technology, customer-centricity, and innovation are critical drivers of success. By embracing these trends and implementing strategic initiatives, banks can stay competitive and meet the evolving needs of their clients in a dynamic market environment.

    Future of Commercial Banking (2024)
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