Alfredo Bresciani, UniCredit
Digitalization brings both challenges and opportunities for banks. On the one hand, it brings technology that can help them revolutionize their services to corporate clients; on the other, it brings the threat of disintermediation at the hands of new market entrants. To see off this threat and seize the opportunities, banks must develop innovative solutions for corporate challenges and promote robust, progressive, regulation for this new technology, says Alfredo Bresciani, head of trade finance international sales at UniCredit
Digitalization is here – and it’s changing everything. Bringing dynamic and efficient new technologies, it has the potential to revolutionize banks’ services for corporate clients. Yet, at the same time, it also lays the foundation for ambitious start-ups and technology companies to gain a footing in the transaction services market – potentially disintermediating banks.
To overcome this threat and capitalize on the potential of digital technology, banks must devise innovative products and services that play to their key strengths. For this approach to be sustainable, they will also need to inform the regulatory process – promoting robust legislation that accommodates innovation.
Averting the threat of disintermediation
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It’s a daunting task, but one that banks must grapple with quickly. Certainly, change is happening at a rapid pace. In 2012, Peter Ayliffe, then CEO of Visa Europe, predicted that by 2020 more than 50% of transactions would be executed via mobile phones. And in this environment of rapid change, many start-up and specialist technology firms are looking to take advantage of new possibilities to carve themselves a space in the transaction services market.
This is no small concern for banks, who now face the challenge of maintaining their intermediary position in the market as new competitors look to undercut their services with quick and cheap platforms for corporate transactions.
Even when non-bank market entrants aren’t threatening to supplant banks, they are still putting them in direct competition with one another. This is the case in trade finance, for instance, where new cross-bank bidding platforms are pitting banks against one another to provide the best rate for individual contracts.
From strength to strength
This development requires a response from banks. The key will be turning digital technology to their own advantage – using its inherent efficiencies to amplify their existing strengths. Certainly, operating in perhaps the most regulated industry in the world and with strong client relationships already in place, trust is an advantage banks can leverage by emphasising the robustness and reliability of their services.
Expertise is another key strength. In a complex market, banks stand as age-old repositories of knowledge and practical wisdom – and this expertise holds great value for corporates.
Exploiting these strengths will be critical for banks. In particular, they will want to put them at clients’ disposal in a convenient digital format – using intuitive web-based portals and IT solutions that can be seamlessly integrated into corporate value chains. Of course, integrating products in this way will require a high level of flexibility, with solutions tailored to meet companies’ individual needs. Banks must therefore develop a comprehensive toolbox of solutions – carefully selecting the necessary tools for each client.
This will require considerable investment. UniCredit, for example, plans to spend €1.2 billion on digital innovation between now and 2018, with a view to capitalizing on core strengths and bringing them to clients in a fast and convenient format.
The shape of things to come
One tool that is already building on these principles is the Bank Payment Obligation (BPO) – an innovative digital settlement tool, which enables corporates to execute payments quickly and securely. At the heart of this is the concept of bank mediation, which sees corporate counterparties transact through their respective banks, with each bank assuming only the risk of their familiar client.
In this way, the BPO provides robust protection against payment risks – a crucial benefit, yet one which is becoming dangerously scarce among global trades. Indeed, in 2014, we estimate that approximately 70% of all global exports were carried out with no risk mitigation whatsoever.
And with the volume of global trades carried out via open account settlement – which offers no risk mitigation – continuing to grow, we can expect even more unprotected trades in the future. This is undoubtedly a worrying trend, but it’s one the BPO can help to overturn. Indeed, it stands as an excellent example of how digital technology can be utilized to amplify bank strengths and resolve corporate problems.
What’s more, the BPO also generates significant quantities of data. Thanks to exponential increases in storage and processing capacity, this data can be gathered and combined with other sources of information to identify areas of weakness and potential.
Certainly, despite the much-vaunted promise of “big data”, many corporates have yet to take full advantage of the data already available to them. Banks can help them raise their game in this respect, perhaps by offering analyses of transaction data and other information in addition to existing payments services.
Of course, for digital innovation to achieve its full potential, it will require support from the industry as a whole. Common practice and conventions will need to be established in order for market participants to understand what is on offer, how products differ, and what can be expected of them.
The International Chamber of Commerce (ICC) has already made strides in this area by producing the Uniform Rules for Bank Payment Obligations (URBPO), aimed at harmonizing practices around the use of BPOs. This kind of initiative helps promote understanding and consistency throughout the market – greatly simplifying processes for all involved. Certainly, the banking industry should be looking at similar measure to cater for the full range of digital innovations on the market.
Meanwhile, as these digital practices set in, legislation will have a profound effect on the progress of digital innovation. It is not yet clear what shape any regulation would take, but, as policymakers and legislators debate the issue, it is imperative that banks take part in the discussion – setting out the importance and value of digital innovation for all involved.
In particular, the purpose of regulation – to ensure that banks are adequately capitalized, with strong balance sheets and robust risk management – must be kept in view. Banks can and must demonstrate that digital technology has no detrimental effect on these factors. In fact, digital technology brings greater transparency, harmonization and efficiency to the financial system – making it easier to uphold and check these standards.
These are points that banks need to communicate – just as they need to promote the principles of convenience, trust and expertise in their services. Certainly, if they can achieve these goals, they will have made significant strides towards an exciting future – one in which markets are more liquid, more efficient and more secure than ever before.