How ‘digital’ will change commercial banking

June 1, 2018by Kevin Buehler, Paul Hyde, Christopher Paquette, and Vik Sohoni

Digitization, automation, and analytics have disrupted much of the retail banking and wealth-management worlds already. But large sections of the commercial banking world still rely on manual processes, despite their replacement by technology platforms at several banks. Relationship managers (RMs), underwriters, and portfolio managers still spend more than 40 percent or more of their time on “noncore” administrative, repetitive, and automatable tasks.

Some of this is cultural, related to the more personal nature of the commercial RM’s interaction with clients. But some is a byproduct of the relatively superior economics the segment has enjoyed over the past ten years. While many retail banks’ return on equity (ROE) in the US was averaging mid-to-high single digits, commercial banking was enjoying double-digit ROE. There was little incentive to change.

But the industry is evolving. Rising interest rates will impact originations, and the inevitable competition will likely pressure profitability. Expectations among clients and the salesforce are rising, given the trend to personalized digital experiences. The technology is available to digitize more retail-like functions, such as relatively simple documentation and simple deals, and often a commercial bank can leapfrog using a retail bank’s experience with digital transformation.

Commercial banks are experimenting with digital over the full scope of operational, policy, partnerships, analytics, data, innovation, and front- and back-end technology, but have yet to reach their full potential. We estimate that digitizing commercial processes can result in 25 percent improvements to commercial banks’ margins along with improved pull-through rate and experience for both RMs and clients (significantly improving customer satisfaction scores).

For example, one large North American bank announced the deployment of natural-language processing in its wholesale business, eliminating 360,000 lawyer hours. Other commercial banks are beginning to streamline and digitize as well. We expect that within 24 months, these changes will become competitive differentiators on cost, customer experience, and overall growth and margins.

Here’s how commercial banks could achieve this transformation:

1. Digitally enabling the RM. There are a few key ways that digital can make relationship management more effective and efficient, while avoiding any perception of channel conflict:
• Enhancing, visualizing, and presenting intelligence on a client or prospect accessed through CRM-system data, external data feeds, or “deals like this one”
• Highlighting granular share-of-wallet opportunities in the existing book to help RMs prioritize client outreach by revenue growth potential rather than by current revenue
• Analyzing transactional data for “other businesses like this” to help recommend products to clients
• Surfacing relevant product experts, marketing materials, and successful pitch books
• Showcasing comparable pricing benchmarks and data to help formulate better offers, including tools that dynamically calculate client-level rather than deal-level risk-adjusted return
• Delivering advice to the RM in real time during a client conversation, such as documents required for the deal type
• Simplifying deal construction so the RM can access and assemble “blocks” of pre-approved text via an easy interface—a term sheet that has in-built legal approval, automatic exception escalation, and review using AI & natural-language processing, for example
• Providing self-service online sales and fully digital underwriting for existing clients seeking small- ticket loans (< $250,000) and simple products, freeing the RM to focus on higher-value opportunities
  
  
2. Digitally and analytically enabling the “midoffice.” A surprising number of deals (or elements of deals) that come in for adjudication can be automatically evaluated. Deals for companies around the $20 million revenue mark.can be more efficiently processed by:
• Sequencing workflow, ensuring that tasks with long lead times such as appraisals are launched early in the process, that lawyers and other required personnel are involved to minimize “idle time,” and that required steps are “choreographed” before funding
• Taking financial feeds directly from the general ledger of the client (assuming effective APIs or data providers are in place); spreading financials in an automated way is the obvious first step
• Streamlining renewals and refinancing, particularly for clients with a deep history with the bank
  
  
3. Providing clients with access to deal status. Digital access to deal status, combined with easy-to-understand explanations for why certain documents are needed, can improve the client experience and eliminate the nervousness many feel as deals mature.
4. Streamlining key processes. Significant parts of the onboarding process can be automated, especially in add-on cash-management products where the bank already has much of the data required. Ingestion, parsing, entitlement management, product setup, and terms-and-conditions reporting are all ripe candidates for automation. Annual reviews, renewals, top-offs, and extensions can also be greatly streamlined. The technology to integrate various business-accounting or enterprise resource planning (ERP) platforms via APIs and automate manual tasks has advanced significantly over the past few years (assuming proper engagement and guardrails from risk).
5. Tailoring products. Analytics can drive greater insights for a specific segment (spend-optimization opportunities in pCard for a professional-services firm, for example) to tailor products. When combined with ecosystem partnerships, digitally delivered analytics can create compelling value-adding services (such as route efficiency for commercial fleet operators who are expense-card customers.
6. Deal monitoring. Using behavioral metrics to automate risk-rating updates can decrease the resources tied up in small-ticket-loan servicing while increasing the monitoring coverage. For larger deals, aggregating internal and external data on, for example, retail-consumer purchasing behavior, restaurant health ratings and reviews, or changing area demographics for professional services, can help portfolio managers make better decisions and stay ahead of potential risks.
7. Reporting and performance management. Data aggregation and unification can enable more effective conversation and coaching and minimize debate about data. For example, close-rate estimates based on historical data can provide a realistic valuation of the pipeline and raise awareness of performance issues early on.

A few key requirements are necessary to enable these improvements:

1. RMs and clients must be able to envision the experience directly. Too often, the product group, operations, or technology will invest in changes, only to find that field adoption is low or is threatening to RMs’ relationships. The best practicer is to run “concept sprints” – two-week exercises to develop a vision for what a transformed and digitized experience could look like—and then test and iterate with RMs and clients throughout development and implementation.
2. Foundational investments are based on value and focused on specific use cases. Many banks are pouring money into core-platform refreshes for credit origination, or servicing overhauls without seeing sufficient value. The best banks establish “product ownership” roles, or “value managers” (in lieu of project managers), whose daily mandate is to deliver on the business case. They have a hybrid business-tech background, and focus on creating value for the clients and the institution.
3. Cross-functionally skilled teams are the norm. A new set of skills and capabilities is required that comprises data, analytics, natural-language processing, UI/UX, hybrid legacy/cloud technology platforms, operational flows, relationship and sales, credit, compliance, legal, and other fields. The best practices are breaking down silos and traditional reporting lines and enabling colocated, multidiscipline teams to be at their most innovative. Senior executives are boldly relinquishing micromanagement of “their” domains in service of the cross-functional team, while maintaining “eyes-on, hands-off” oversight.
4. The work is rapid and ‘agile’. Executing a minimum viable product in 20 weeks with rollout of new features every two weeks should become the norm. While there are plenty of challenges in a large intracompany and cross-company/vendor environment, that is no excuse for adopting only the most compelling advantages of an agile process, such as short delivery cycles or working software delivery vs. documentation. The best banks use scrum and Kanban techniques as well to account for back-end technical challenges. They are also clearing the way for agile experimentation and risk taking by changing leadership rhythms (funding) and culture (test-and-learn acceptance, HR processes for staffing).

Commercial banks have always had the potential to become digital leaders. Now they have many incentives to get there.

Kevin Buehler and Paul Hyde are senior partners in McKinsey’s New York office, and Christopher Paquette is a partner in the Chicago office, where Vik Sohoni is a senior partner.