Multibank relationships increase demand for dedicated commercial banking platforms

Digital commercial and corporate banking is catching up to the retail side of the house from a user experience perspective. Urgent demand for increasingly easy experiences is met by demand for sophisticated utility and insights from those experiences and these developments have implications for banks that currently rely on a single digital banking platform to serve both consumer, small business, and commercial customers. 

In fact, it’s my contention that the attempt to combine commercial and retail platforms, which has come under scrutiny in the current obsession over liquidity, has had limited success as long as I’ve been in this business. Look at some numbers and you’ll see why my argument has urgency. According to McKinsey, this year the global commercial banking sector will generate $2.7 trillion in revenue in 2024, compared to $3.1 trillion in revenue for retail. And over the next three years commercial banking is expected to have a higher growth rate than retail at a 6.4% CAGR compared to a 6.2% CAGR.

With this expected growth it’s a good time for banks that are putting commercial accounts on retail platforms to reconsider that strategy. At first glance having a combined platform might make economic sense. But look a bit deeper and you’ll find that these two types of transaction banking models have very different application profiles and a completely different set of technology requirements. The two platforms are actually more different than alike. I would argue that in a world where commercial customers have relationships with multiple banks, require global B2B capabilities, having a dedicated platform can be a critical competitive differentiator. 

“Corporate and commercial clients are no longer satisfied with the traditional lineup of loan and credit options,” states a recent McKinsey report. “They are looking for personalized offerings drawn from a wider array of services—including transactional, fee-based services such as digital, real-time payments and beyond-banking features like spend analytics and granular liquidity and cash forecasting. Clients also expect banks to have the capabilities and industry-specific expertise to work with them across their global supply chains and help them tackle new challenges.”

Those challenges are hard to meet by simply expanding retail banking platforms for use with commercial clients. Why? The obvious reasons are the ability to scale and the ability to protect against fraud by restricting access credentials. But there are other more nuanced reasons for considering a dedicated commercial platform. I’ve identified six of them here: 

User Entitlements:  Retail platforms are designed to support individuals and families as well as sometimes micro businesses. This type of customer does not need to differentiate who is logged on and what they have access to.  Twenty years ago, one of our customers decided to build their own wire initiation system for their corporate customers. At the completion of the project, their summary statement was “The payments were easy to do, we spent $20MM building the entitlements around the payments.” Simply said, there are an infinite number of ways that organizations can choose (or are forced by their board of directors) to control the access to accounts, payment approval rights, limits, privacy rules, division or responsibilities and required workflows involving payment templates and beneficiary directories.  Having these capabilities are table stakes to support commercial customers while not even on the radar for retail customers.

Functionality and services: Retail banking services are straightforward and standardized. This includes basic financial transactions, loan applications, account management, and occasionally investment products. Commercial banking platforms will offer a broader range of complex services such as high-value transactions, treasury services, entitlements, commercial loans, and sophisticated investment services. A commercial platform will integrate with business accounting software, provide payroll services, and work with ERP systems.  It might also connect commercial customers to a labyrinth of related businesses services, such as payments networks, from provider across the B2B fintech ecosystem. 

Account reporting: Aside from sheer volume, commercial platforms are more agile when it comes to managing and measuring accounts. Retail banking is limited by showing one user account at a time. There’s no functionality to group accounts by department or subsidiary for example, which is a feature of commercial platforms. Data export is also embedded in commercial platforms and can be done manually or through automated processes. A commercial platform will also enable fraud alerts, transaction anomalies and other critical business events. Retail platforms do this on a much smaller and less reliable scale. 

Payment management: This is the most important area to focus on in this multibank relationship market. Let’s start with the payments directory. Retail banking platforms simply can’t accommodate the different settlement details needed across domestic and international wires, various types of ACH payments, real-time payments and account transfers.  The consequences for not having robust Straight Through Processing (STP) validation rules in place means at best substantial financial penalties, and at worse complete payment failure with all the business implications that it brings.   When it comes to uploading or importing batches of payment files, commercial platforms can accommodate messaging formats that the customer’s treasury workstations, Account Payable, and ERP systems produce – creating a complete STP solution.

Architecture: You don’t need to be a payments or coding geek to appreciate the differences in commercial and retail banking architecture. With retail banking, most instruction processing and reporting happens real-time in the back office where inaccuracies or permission mistakes can happen. With commercial banking payments transactions are only sent to accounting after they’re fully approved and routed to the correct client automatically. Data architecture is also important. On retail platforms, data comes directly from the DDA or other back-office applications. Commercial banking will store, index and optimize complex data sets that may have varying data access privileges. For commercial banking, data loading needs to be scalable and secure. Retail platforms won’t perform as well in that area. 

Customer lifetime value: We’re not going to get into a deep discussion on how to calculate customer lifetime value. There’s a good tutorial and calculator for that here. On a very general level it’s the projected revenue any given client will generate during their tenure at a bank. But on a very simple level, the lifetime value of a commercial customer is exponentially greater than a retail (consumer) customer. One Oliver Wyman report from 2020 put the average consumer lifetime value to a bank at $4,500. I haven’t seen an estimate for commercial accounts, and any exercise in determining CLTV will need to depend on the kind of data a bank would only get from a commercial banking platform.  

I could go on about more features like disbursements, Positive Pay for checks and direct debits. But at the end of the day the most important issue is futureproofing. Bottomline’s recent survey of 800 CFOs showed that futureproofing is the most important issue they face as they navigate the current macroeconomic conditions and needs to modernize payment technology and processes. The future is in commercial banking. And commercial banking’s future is on a platform that’s purpose-built for businesses.