The Commercial Banking & Payments (CB&P) team recently published its analysis of 10 key trends impacting the industry in 2023, covering topics such as payments infrastructure enabling real-time everything, virtual account management, M&A activity, and IT spend. While most of these trends impact one vertical to a greater degree than others, there are broad issues impacting nearly every facet of commercial banking.
One discussed in a recent blog post is the increasingly complex relationship between financial institutions (FIs) and fintech vendors. FI-fintech competition, disintermediation, innovation, and partnership were threaded throughout the many subtopics discussed at our 2022 Innovation in Cash Management & Payments Forum (ICMP). Another horizontal trend of great interest at ICMP that also cuts across the top trends of 2023 is client-bank relationships.
Sometimes called relationship banking, this strategy boils down to banks forming a client relationship—often through a business opening one or more depository accounts or through a business loan—then assessing that customer’s needs and pain points to cross-sell various products and services.
In the process, FIs obviously stand to profit, but that profit is dependent on increasing client satisfaction and loyalty, which most likely develops because the business has increased efficiencies and improved processes related to various facets of the company’s finances. Put simply, FIs care about cash management products because they can increase client satisfaction by offering better cash management products. Likewise, readers of our 2023 Top 10 Trends report want to learn more about embedded lending because clients (or prospective clients) want a better borrowing experience.
All of this should sound intuitive since offering products and services that help customers is inherent to how businesses grow. While in theory relationship banking should be simple, numerous hurdles translate to many potential failures in client-bank relationships, resulting in expected outcomes like clients taking their business to other FIs or bypassing banks entirely through the use of fintech products and services. One perfect example of a failure in client-bank relationships is the process of cross-selling new products and services.
Cross-selling products comes down to finding out what clients want or figuring out problems that clients have based on other products the client has utilized, such as a loan or online banking services. When clients’ wants or problems can be resolved by existing products and services, it should be simple enough to offer them these products and services, a process typically relegated to account management and sales teams. However, consider what happens when a disconnect exists between what clients want and their knowledge of what products are available to them.
Small Businesses and Payments Products
Payments modernization has been a key trend impacting commercial banking for several years, and Aite-Novarica Group considers both payments infrastructure transformations that enable real-time features and sustainability-linked payments products two key trends to watch in 2023. Payments products also were discussed at 2022 ICMP, especially the complexities of determining when certain payment types should be used, the accelerating rate of new payment types coupled with the persistence of legacy payment types, and how the market perceives use cases for payment types.
Modernization includes digitizing payments, embedded and real-time features, and a host of other products that can simplify business operations and better protect against fraud. New payment products can also impact transaction fees, an important consideration when small businesses choose their payments products and services.
For example, when Aite-Novarica Group asked small businesses whether they were interested in changing their back-end payment processes to be more digital and automated, about 75% were either interested or very interested. Fewer than 5% of respondents were not at all interested. Clearly, when it comes to client-bank relationships, banks should happily offer digital and automated products to their small business clients, which in turn would increase client satisfaction and loyalty to their FI.
However, when asked what has been the most effective at educating their businesses about different payment types and options, only 15%-20% of small businesses responded that it was their banker. Bank websites have proven somewhat effective in improving these numbers, since 25%-30% responded that their bank’s online banking site has helped educate them on payment options.
Avoiding Missed Opportunities
But that means roughly half of small businesses get their information on payment processes elsewhere. Over 20% of small businesses responded that they learned about payment types and options through self-help, self-directed research, or reading articles, with the remainder getting their information from industry conferences, webinars, family and friends, and other businesses—not from their FI.
Part of cross-selling within client-bank relationships relies on clients learning about new products and services available to them or on banks digging into a business’s cash management and payments processes to uncover pain points that could be resolved through FI-provided products and services. The latter is the most effective strategy since it enables problem-solving rather than just selling a list of products. Inevitably, business clients will learn about products and services elsewhere, but the primary source should be the client’s banker or material provided directly from their FI.
Most alarming for client-bank relationships are SMB owners who are unaware that their FIs should be the definitive source of information to learn about payments products and services available to them. This includes the respondents who conducted their own research to learn about payments products or relied on industry conferences, webinars, and other sources for information. It is these small businesses that are likely to switch FIs or bypass an FI altogether for various payments services since they don’t know what is available to them from their existing FI. They may be tempted to try external products or services discovered through an internet search or suggested by someone at another small business.
The result for banks? Missed opportunities, perhaps losing business to other banks or fintech startups. For clients? Unnecessary work and time spent researching payments products when the bank could have, in many situations, happily helped.
Improving Client-Bank Relationships
The above data points illustrate that FIs should pay greater attention to how they communicate product and service offerings to clients. Perhaps small businesses are given less attention than midsized or large organizations at some FIs, or the methods of communication are proving ineffective. As technical solutions grow more sophisticated, it is increasingly imperative that account managers and sales teams are provided with additional training not only on technical knowledge, but also on how to communicate technical jargon in a way clients can understand. Along with other improvements, banks should be able to better understand the current wants and predict the future needs of their business clients.
Client-bank relationships are behind many of the pressing issues transforming commercial banking and payments. Important components of this relationship include customer demand for real-time capabilities, pathways to sustainable financial products because clients need help improving their ESG ratings, ERP integration, embedded lending, accounts payable solutions, and the many other topics addressed in our Top Trends report.
These trends are critical because business clients, now more than ever, need FIs that understand their need for solutions and products that improve their workflows and ultimately improve their business processes.
To learn more about our Top 10 Trends or to further discuss improving client-bank relationships, please reach out to me at firstname.lastname@example.org.