The future of commercial banking

Canadian commercial banks have a lot on their plate. The digitization of the economy is heightening customer expectations and changing how business is done across sectors. An influx of financial technology companies is crowding the market and regulatory updates are demanding renewed attention.

To stay relevant and grow in today’s financial climate, banks need to find ways to maintain the trust of customers and serve them better. Commercial banks in Canada should focus new approaches on small and medium-sized businesses (SMBs). For too long, this segment has been considered a “no-man’s land” for investment as the clients are considered not large enough to pursue with high-touch relationship models. The segment is considered too small, with needs that are too specific to target with mass market approaches. To get ahead, commercial banks need to recognize the signals of change, explore new business models, and accelerate their technology investments.

The client relationship in commercial banking has traditionally been managed using an expensive, high-touch model. While that model may still hold for large corporate clients, other client segments, including Canadian SMBs, are choosing banks that offer the seamless, end-to-end, multi-channel experiences they’re getting through retail commerce and banking.
That pressure is encouraging commercial banks to rethink their sales, service, and distribution propositions. They’re exploring tailored solutions to meet client needs and developing new self-service products, adaptable platforms, and integrated experiences. Many will tap into new revenue streams and reach new customers by embedding their services inside third party platforms.

Customer data remains crucial. The more fine-grained it is, the more proactive banks can be in providing tailored services and automating decisioning processes that anticipate client needs. For instance, equipped with real-time financial and transaction data, leading commercial banks are able to offer SMB customers valuable insights on areas of market, competitive positioning on investment opportunities and lending based on the business’ cash flow and not just its balance sheet.

The Government of Canada is currently developing its framework for open banking, which is set to begin in 2023. To take advantage of new opportunities, traditional banks and new entrants alike will need to align their infrastructures to comply with new accreditation standards, certification processes, and privacy and liability protections.

Commercial banks will also need to review their innovation strategies. Open banking will bring new players to the banking ecosystem and add to the current competition from niche providers with specialized offerings. To stay strong and grow value in a transformed financial services landscape, banks are upping their data, digital, and technology game. To prepare for the opportunities and counter the threats that Open Banking will bring, banks must focus on increased connectivity, enhanced data sharing, open routes to integration, and information security.

Sustainability concerns remain top of mind throughout society and commercial banking is no exception. Greening one’s business processes is more than a compliance exercise; it’s emerging as a business opportunity. Funding and capital allocations are already shifting towards sustainable enterprises.

Aligning banking operations with Environmental, Social, and Governance (ESG) principles accelerates the road to net-zero for banks and their clients. It helps commercial banks meet their Scope 1, 2, and 3 emissions targets, builds customer trust and reduces long-tail risk.

Digitization, open banking, and customer needs are coalescing to foster three new business models in commercial banking:

The re-imagined digital bank: Most commercial banks are already partway to becoming digital banks. The re-imagined digital commercial bank will be streamlined with digital processes. Data-driven capabilities and decision-making provide deeper customer insights, help design personalized customer service and solutions, and drive revenue.

Embedded finance, or “Banking as a Service” (BaaS): Banks around the world are entering into strategic partnerships with third parties to distribute financial products in new ways. For example, many have built relationships with cloud-based accounting software providers to leverage data for faster decisions on working capital and loans and to build out tailored products and services for SMB clients. Banks have also found success partnering with tech and gig economy firms to forge new integrations between payroll management, lending, and other bank offerings. Many banks are currently building out their API infrastructure so they’re ready for opportunities to integrate with platform players as they arise. Embedded finance has the potential to greatly expand the reach and penetration of banks’ offerings into new commercial sectors, and to provide innovative and niche services to customers within a package of offerings from an ecosystem of providers.

Bank as platform provider: the inverse of BaaS, in this model, a commercial banking platform provides a core marketplace, through which customers gain access to a range of third-party complementary services, from insurance products, to loans, or even non-financial products, such as utilities. In essence the platform serves as the hub for a range of financial transactions and relationships.

With open banking set to begin in Canada in 2023, commercial banks need to stay receptive, nimble and informed. As the banking landscape transforms and cross-border payments are simplified, banks could be looking at competition not only from challenger banks, but from established banks from other jurisdictions.

While embedded and platform finance might seem unorthodox to established banks, these new models represent formidable opportunities. Banks that make the right strategic partnerships and leverage their strengths at the right time can benefit from new revenue streams and gain important new market share.

To prepare for change, commercial banks should work with trusted advisors to determine where they are best positioned within these emerging ecosystems and what tools they need to thrive. They should also start developing the right kind of open API infrastructure – one that creates “stickiness,” deepens the customer relationship and sets banks up on a new course for success.

In addition to the new business models, there are several key trends on the horizon:

Banking will become increasingly invisible, and service and platform-based
Banks will pursue new revenue streams by embedding their services and products inside third party platforms and software offerings. While bank brands may become less prominent, they will substantially expand their reach and gain access to a new customer base. Increased data inputs from customers will help them get proactive in providing products and services that anticipate client needs.

SMBs will have more control and consent over their data
SMBs often need to share their financial data with other accredited participants in their financial ecosystems. With consent at the heart of open banking, SMBs will have far more control over their current and historical data.

Banking will be done at lightning speed
Artificial Intelligence (AI) and machine learning are increasingly powerful and quantum computing is expected to accelerate processes even more. As data is shared instantaneously and more decisioning is performed automatically, commercial banks will need to invest in cyber capabilities to keep pace with the market. They’ll need to beef up their information security to keep their infrastructure and clients secure.

Your bucks will be bytes
As people and businesses transact online instead of with cold hard cash, the speed of finance is accelerating. Future-looking commercial banks are looking for ways to harness the potential of digital finance to enhance the service proposition for their customers.

ROI on capital will be measured by financial, environmental, and social impact
Financial institutions have changed their mindsets over the past few years and are seeking a higher purpose. Maximizing total shareholder returns is no longer the sole priority. Sustainability and ethical considerations are becoming more central for commercial banks in lending decisions and portfolio balances.

Bank tellers will be data analysts
Interpersonal contact between banks and commercial customers will diminish as banking activities move to digital channels. For commercial banks, that increase in high-quality, real-time customer data through those transactions will help improve and accelerate their service proposition.

Our experience shows that adopting a connected operating model enables banking organizations to anticipate and respond to customer and market trends. We’ve developed KPMG Connected Enterprise, an approach to digital transformation, that helps commercial banks connect the data, processes, people, and technology they need to align their organizations and maximize value in the modern economy.

Are you ready to embrace the future with KPMG Connected Enterprise? Contact our Advisory professionals in our Financial Services and Management Consulting practice to get connected and gain the capabilities to help drive success.