Have bankers on the wholesale side of the business bst their edge?
With all the attention in recent years to the superior profits in consumer services, and the robust corporate financing growth of GE Capital and other nonbank companies, it might be easy to conclude that the banks are abandoning their once impregnable commercial bastion.
While there may be some good reasons to question the banking industry's strategy and resolve to keep its hold on corporate and business relationships, this special report gives 10 reasons to refute the naysayers: case studies of how banks of all sizes are using technology to innovate in the management and servicing of commercial accounts of all sizes.
The examples range from First American National Bank in Tennessee's automation of basic commercial lending processes, to Barnett Banks' adaptation of cash management systems for the smallbusiness segment, to the Federal Reserve System's efforts to bring a new generation of technology to bear on the most traditional of payment methods, the check.
To be sure, banks have seen their biggest, blue-chip commercial chents move most of their basic borrowing activity directly into the capital markets. And despite a lot of hp service, bankers have barely begun to tap the fee-income and small-business potential that was supposed to compensate.
These trends are not new. Commercial paper began to revolutionize corporate finance in the 1960s; small-business exploded in the 1980s. The banks are still chugging along, albeit mainly on the strength of retail spreads.
Just as surely, U.S. commercial banks have a distinguished tradition of technological innovation. Long before automated tellers, credit cards, and debit cards, the banking system was relying on electronic systems, notably the Fed Wire, to transfer wholesale quantifies of corporate funds. It was a short step from there to the computerized cash management services that flourished as the time value of money soared to unprecedented heights in the 1970s and early 1980s.
Bankers, especially those at the bigger money-centers and superregionals, are still reaping returns on those investments in cash management and related noncredit services,' though growth in revenues has slowed, the 1993 Ernst & Young cash management survey indicated.
Cash management programs, and banks' almost exclusive access to payment systems like Fed Wire and automated clearing house, give the industry its best hope to capitalize on electronic data interchange, which is shaping up as the Holy Grail of corporate data services.
"EDI is still a small world," Ernst & Young cash management consultant Larry Forman said of the notion of adding a banking component to the electronic exchange of corporate documentation, sometimes called electronic commerce.
An extensive analysis of financial EDI in the April 1994 Federal Reserve Bulletin concluded that despite its cost-reducing promise, "a significant conversion of business-to-business payments to electronic form may not occur for some time."
The problem today, the reason behind the apparent funk in wholesMe noncredit services, is that many bankers still have the early'80s cash management mind-set, according to consultant John Shain.
Perhaps that has been a hindrance to EDI and other possible breakthrough innovations.
Too many bankers are stuck "managing on the margin," said Mr. Sham, an expert in noncredit services who has merged his firm, Littlewood, Sham & Co. in Exton, Pa., with Automated Financial Systems Inc., the major commercial loan system provider.
To illustrate that times have changed much more decidedly than wholesale bankers, Mr. Sham shows a graph of interest rates dating back to 1970. The trend fine from various Federal Reserve charts specificed above 16% before Jimmy Carter left office, but the average over that entire period was 8%, and only in one year since 1985 has the fine gone above that level.
"The value of money is dynamic," Mr. Sham said. "But the processes underlying the support of service delivery haven't kept pace with the fact that we are in a low-interestrate environment, and will remain in one for some time."
Mr. Sham acknowledged that the major corporate and wholesale banks are in a tight bind, under pressure from a new breed of senior managers and shareholders to cut costs while responding to marketplace challenges that require investments in technology and marketing. Mr. Sham said the headlinemaking restructuring program revealed early this year by Fleet Financial Group targeting 20% to 30% cost reductions and a slaingent efficiency ratio, expenses to revenues, of 50% "changed the paradigre."
The lure of cost-cutting is obvious because it has an immediate bottom-fine benefit, while "fee income takes two years to ramp up," Mr. Sham said. "That's why we suggest a strategy aimed at doing both simultaneously."
Larry Marks, another longtime observer of the corporate banking scene, chides bankers for not getring past their obsession with efficiency, as other industries have, and for not asking basic questions about how to become more effective.
"Banks spend a minuscule amount of time and money on market research and strategic planning and talking to customers," said
Mr. Marks, president of the Sagnet/Marks division of Selz Seabolt, a Chicago-based marketing consultant and training firm. Mr. Marks, like Mr. Shain, said a few banks have made great strides in the last few years and are translating an attention to business and marketing fundamentals into innovative projects and profits. But the big picture is not as bright. Mr. Marks said many of the bankers in his training programs are focused inappropriately on finding a "magic bullet," the next big thing to pull their business out its doldrums. "What they really have to do is fix the basic system and make the analysis better," Mr. Marks said.
Typical, he said, was cash management banks' misadventures with product management in the 1980s. The concept, borrowed from the packaged-goods field, involved giving an individual or group full responsibility for the workings and profits of a corporate service.
Product management degenerated into being a liaison between opemfions and marketing, Mr. Marks said, and got distracted from the need to focus on returns on equity and investment.
"For the most pan, the industry is still very focused on itself, talking to itself. I would call it ethnocentric," the consultant added. Mr. Shain invokes two buzzwords reengineering and change management as keys to getting past the existing hurdles.
Corporate bankers, he said, are just now coming to grips with the methods and demands of statistical management of the cost mandates from above, and the fact that commercial accounts are not managed as much by face-to-face contact as they were in the past.
"There is a lot of work to be done in the next three to five years, parficularly as we get ready for another wave of mergers," Mr. Shain said. "Keep in mind that nonbank providers have made tremendous inroads into wholesale banking, and at a lower cost of delivery than the banks."
Among the competitors in that category, he said, are GE Capital, Primerica Corp., a number of capfive finance companies, and organizations like J.P. Morgan and Bankers Trust that have changed their traditional banking stripes. The strategic and reengineemag issues are so daunting that except for a few forward-looking pilots, "innovation in its grandest terms is not yet taking place," Mr. Shain said. Charles Wendel, of Mercer Management Consulting in New York, said the recovery from the last wave of loan problems provides an oppommity for streamlining that few banks have fully seized.
"In traditional reengineering, one looks first at process and then deals with the underlying technology," Mr. Wendel said. "Bankers tend to be looking at both.
"A lot of them have a technology platform for loan officers, for example, but they aren't using it because they haven't first dealt with the process."
When innovation does happen, Mr. Shain suggested it should should be along what his company calls the "value chain" muning from data acquisition, to processing and storage, to retrieval of the data.
The extracting of information from that chain, and its application to customer service, relationship management, and profitab'tlity measurement, is where the profits will come from, Mr. Shain said. That type of thinking leads in the direction of end-to-end creation and management of corporate and financial information-electronic data interchange, Mr. Shain said banks are investing in EDI but are limited to "the practical realities of today's [profit] performance. That's the management challenge."
Mr. Forman of Ernst & Young said there are too many benefits in end-to-end corporate automation for bankers to sit idly by.
"Almost any bank you look at has a technology innovation of some kind at least on the drawing board," said Mr. Forman.
Mr. Forman also pointed out that more accessible and reliable electronic payments dovetail with corporations' desire to improve management of bank relationships and banks' desire for faster and more secure payments.
Mr. Shain has put forth a laundry fist of what it will take to balance all the business pressures and move wholesale banking forward, with technology's help, into "value creation." This fist includes:
* Leveraging investments by lines of business.
* Enhancing income and product differentiation.
* Lowering long-term costs of service delivery.
* Enhancing customer service and relationship management.
* Making the loan delivery process more efficient.
* Qualifying and managing risk through automation.