Are corporate banks late transforming their Core-banking-system?

Corporate banking is at the precipice of transformation: Given the sluggish post covid recovery and volatile market conditions, it's time for banks to transform & modernize their corporate banking systems & processes. Moody's expects corporate defaults to peak at 5% in Q1-2024. Slowing GDP growth, financial stability risks, higher borrowing costs, and tight lending standards add pressure. The corporate banking space has become highly competitive, and the legacy wholesale lending systems & processes put banks at a competitive disadvantage. Additionally, FinTechs, TechFins, and Private Credit firms are offering similar financial products as traditional banks e.g., asset-based lending, line-of-credits, trade financing, escrow services, and payments. Legacy wholesale credit processes and infrastructures are a competitive threat ― underwriting and warning systems need to be faster to respond to borrowers, sectors, and loan portfolios' changing dynamics.

The question is how banks can increase their wallet share with their core client base and add new business in a nimble, fast-paced, and cost-effective way?

The future of corporate banking is dynamic, with rapid advancements in technology, shifting client expectations — the key focus areas are increased visibility via a business platform ecosystem, speed-to-market, customer-in vs. product-out strategy,  active engagement of customers in value creation cycle, smooth & efficient onboarding, client’s experience defined by convenience, and effective risk & compliance management. As corporate banks and their teams adapt to these changes, they will continue to play a vital role in meeting the financial needs of businesses, both large and small. By embracing innovation and fostering collaboration with other financial institutions and fintech companies, corporate banks can ensure a thriving and sustainable future for the industry.

Emerging Trends in Corporate Banking

As the world of corporate banking advances, a few key trends have emerged:

• Digital Transformation: Corporate banks are increasingly leveraging technology to streamline their banking services, automate processes, and offer personalized solutions to their corporate clients. This includes cash management, trade finance, and other basic financial services.
• Focus on Small Businesses Banking: In addition to catering to large corporations, corporate banks are also extending their services to small businesses. As smaller businesses continue to grow, they require a similar level of support as their larger counterparts, creating a demand for corporate banking services tailored to their needs.
• Collaboration with Fintech Companies: Traditional financial institutions, including corporate banks, are partnering with fintech companies to enhance their service offerings and stay competitive in the market.
• Evolving Role of Corporate Bankers: The role of corporate bankers is evolving as they adopt new skills, such as financial modeling, to meet the changing demands of their clients. This also includes diversifying their expertise to cater to the specific needs of small businesses and multinational corporations alike.
• Sustainable Finance: With a growing focus on environmental, social, and governance (ESG) factors, corporate banks are increasingly offering sustainable finance solutions to help their clients achieve their ESG goals.

As banks move to digitize their core banking platform, they need to consider how quickly they want to bring about change and understand the implications of their modernization journey. Most of the top US banks run their core banking operations on aging platforms that were deployed in the 1980s and 1990s. Leaving core platforms alone has also become untenable as the legacy Core-banking-system (CBS) is fraught with technical debts. These systems have gone through a generation of changes and upgrades related to removing or adding functional features as banks evolved their business strategies. These increment bolt-ons are either brake-fixing legacy COBOL programs or developing net-new codes. Consequently, many banks are faced with expiring maintenance and support contracts and a patchwork of poorly documented customizations and integrations that need to be revised to unravel. Banks also deal with increasingly scarce and expensive resources that have knowledge of COBOL and mainframe systems. Ultimately, given the heavy customization of most legacy platforms, upgrading may be nearly the equivalent of implementing an entirely new platform. The technical debts banks have incurred owing to the old legacy technologies drive down operation efficiency to serve their valued customer and win wallet-share over competitors.

Core-banking-system (CBS) transformation, particularly for corporate banking, have not yet achieved the stated objectives — only about 30 percent of CBS transformations succeeded in carrying out a complete migration of ledgers and products to a new system, suggesting that banks have not yet cracked the code on full implementation.

Despite the challenges, the financial services industry has, for the most part, embraced digital banking. Traditional banks are making progress with digital transformation, offering value-added services and streamlined experiences. There is one exception, however – corporate banking. The trouble corporate banking sector is having in delivering new customer services is understandable, considering the scale and complexity in providing robust and functional corporate banking solutions. Think of the massive commercial loans, the international transactions across banking systems, and the management and advice involved. It doesn’t seem congruent with the simplicity and speed of two-click banking.

What do corporate customers want?

Increased visibility: Clients want real-time visibility into each day’s financial transactions. With a view into their company’s liquidity position in real time, they can make better-informed cash management decisions.

Speed-to-Market: Speed-to-market is a new currency — clients want frictionless origination, faster credit decisions, underwriting, closing, and funding. As such, the complex corporate banking products and services spanning leverage financing, leverage and management buyouts, M&A syndications, project finance, trade finance, large-scale HVCRE Acquisition, Development and Construction (ADC) loans, C&I, and leasing should be standardized for their respective pricing and terms and should be made available via a business platform ecosystem to both clients and the bank’s CRM team for ease of deal structuring and planning. Today, banks take several days to weeks to finalize credit due diligence and decision processes, which inhibits clients from meeting their internal deal timelines. Consequently, the clients look for other faster options (e.g., FinTechs or private lenders), making banks lose wallet share.    

Smooth, efficient onboarding: Onboarding is a vital step in the client journey, but in corporate banking it can take days or several weeks. Many still rely on manual and paper-heavy processes that take too long to complete. Given that onboarding involves a lot of personal data and legal data, innovation is required to make onboarding secure, accurate – and carried out in a faster time.

Client’s experience defined by convenience: Corporate banking clients expect the service and convenience that makes up their customer experiences in every sphere of their life. Think of the CFO who receives a batch of wire transfers for approval. Rather than being tied to the office to finalize the transfers on a desktop, the CFO should be able to handle them instantly and securely on a mobile device.

Challenges:

Legacy Infrastructure Poses A Competitive Threat: The current legacy infrastructure is a greater hindrance to business than ineffective data strategies, compliance challenges, lack of digital experience and finding the right partners. The complexity of legacy systems and the technical debt that traditionally comes with it bring a high risk of change, resulting in a significantly slower time to market. Legacy infrastructure is a particular drag on the front office. Outdated back/middle-office processes and technologies are commercial banks’ top challenge to the front-office modernization efforts. Commercial banks recognize the fact that a spaghetti of legacy systems are difficult to untangle and update.

Many large commercial banks have initialed platform modernization and digital transformation of the lending processes either by replacing the existing legacy platform with a vendor solutions (e.g., nCino, FIS, AFS, and others) or by progressively transforming the monolithic legacy processes with a digital core by decoupling legacy processes to Cloud-based APIs & Microservices. Yet, the banks have not been able to achieve the desired stated objectives such as customer-centric, frictionless, speed to market, data & analytics-driven, straight-through processing, and cost-to-return efficiency — the primary reason is that the current business processes are not streamlined.        

Most of the time the teams that lead operations of existing systems in charge of implementing the new one without analyzing issues and gaps in the current lending processes. Therefore, they may unintentionally migrate legacy processes as-is into a modern core banking solution, creating delays.

• There is a significant overlap and duplication of CBS processes between Relationship Management (RM – responsible for deal making processes) team, Credit Analyst (CA – for credit due-diligence) team, Credit Officer (CO – for credit package and approval processes) team, and Portfolio Manager (PM – for risk transfer & hedging) team.
• The lift and shift methodology used by the next-gen CBS platform vendors and system integration consulting firms does not adequately address the process overlap and duplication issues working with the business owners. Hence, they propagate the problems to the new environment.

As a first step, the banks need to dedupe, streamline the wholesale credit lifecycle processes, and design consistent Microservices models collaborating with the business owners (e.g., RM, CA, CO, and PM). The Microservices models are extremely critical for the credit lifecycle management and optimal performance of the containerized cloud native digital core at scale. banks could set up agile implementation teams consisting of people who have experience working internally and people who have implemented CBS transformations at other banks and are knowledgeable about new technology.

Outdated Data Structures Impede Innovation: Modern banks are more than just savings and loan institutions. They’re in the data business. Most banking leaders agree that having “vast caches of customer data” is a major competitive advantage. Unfortunately, legacy banking systems were not designed to meet the needs of today’s data-intensive workflows. This makes it impossible to leverage these vast caches of data for new products and services. Ineffective data strategies are hampering efforts for banking leaders to pursue opportunities and address competitive threats. Not having real-time access to transaction data is a strategic business conundrum for most banks. Banks continue to use legacy batch SQL data and analytics platforms to support the next-gen CBS platform. These data and analytics platforms are not equipped to process data in motion and generate analytics in real-time. Banks need to implement next-gen could native data and analytics pipeline that can capture and parse structure & unstructured data as originated and combine with historical batch data to draw insights to serve intelligent Microservices (e.g., Next Best Action, Deal Scenarios & Pricing, Financial Spreading, Credit Analytics, and others).

Products, relationships, and platforms: Market changes will require banks to more carefully position themselves as value-adding, outcome-driven partners rather than product providers. They must also reengineer their business models to become end-to-end service providers to the customer through the combination of cloud, automation, and data analytics.

Call for action

To truly transform the corporate banking experience for bankers and corporates alike, today's financial institutions require a unified digital platform to manage the entire corporate lending lifecycle spanning origination, servicing, credit portfolio management, and regulatory compliance.

The areas in wholesale lending that are ripped to drive a successful transformation agenda

The future of corporate banking is dynamic, with rapid advancements in technology, shifting client expectations — the key focus areas are increased visibility via a business platform ecosystem, speed-to-market, customer-in vs. product-out strategy,  active engagement of customers in value creation cycle, smooth & efficient onboarding, client’s experience defined by convenience, and effective risk & compliance management. As corporate banks and their teams adapt to these changes, they will continue to play a vital role in meeting the financial needs of businesses, both large and small. By embracing innovation and fostering collaboration with other financial institutions and fintech companies, corporate banks can ensure a thriving and sustainable future for the industry.

Loan origination: Most banks have invested in a loan origination system (LOS) as a first step toward digitizing the customer journey. Still, most LOS cannot deliver a completely digital system for all loans, and most cannot handle loan servicing.

Unlocking the value trapped in commercial banking data assets and enabling Predictive insights through Big-data and Advanced Analytics for improving growth and profitability: Commercial banks have a wealth of data that they could be using to fuel better decision-making, empower relationship managers, automate processes and add value for their customers. In addition to a wealth of first-party and third-party data, they can also tap into ‘new or alternative data’ — the data that’s generated via bank’s digital interaction between customers and businesses. Banks have access to a lot more information than other companies in other industries. They collect data through onboarding, account openings, and the several transactions carried out. Meaningful insights can be drawn out from such data for boosting CRM, loan origination & underwriting, credit due-diligence & decisioning, loan processing, operations, and portfolio risk & compliance management effectiveness. Depicted below is a wholesale lending data landscape that banks can use to develop their holistic data strategy for business platform ecosystem transformation and modernization.

Credit risk management: The decision-making layer of wholesale lending requires deploying advanced analytics and machine learning models across the customer life cycle for automated, data-driven decisions. Banks may have to factor in new models to effectively risk rate credit products reflecting emerging risk such as macroeconomic stress, geopolitics, slump in equity & commodity market, supply chain & sector events, and climate risk factors. Banks may also need to rewire their credit risk monitoring systems to make them more responsive to the current crisis. A configurable, enterprise-wide risk management system, which enables business rule definition and brings together risk aspects for a given exposure, will help banks view risk holistically. Depicted below is an advanced credit exposure modeling solution to model the impact of portfolio idiosyncratic risk a well as emerging systemic risk events as they occur.

Integrated credit: An enterprise credit risk management system, integrated with the lending system, improves due diligence performance and lowers risk. Currently, credit information and associated credit ratings vary significantly across business lines and are maintained in silos. Many banks are undertaking enterprise credit MIS to aggregate credit information and make it available via various dashboards. Banks should extend automated credit decision-making to as many applications as possible so that credit underwriting teams can focus on exceptions and higher-risk cases.

Loan servicing: Corporate loan servicing requires complex workflows related to customer service, accounting, risk management, reporting, and more. Lack of automation means the process is typically labor-intensive, costly, and error-prone, factors that can inhibit scale and erode loan-portfolio quality. If the integrated credit function can support loan servicing, it can deliver improved customer service and even trigger early warning indicators for deteriorating credit quality.

As depicted below, a combination of banks’ existing data and industry’s emerging data encapsulates information value of multidimensional propensity that can, with the help of cloud computing and advanced analytics, unleash an unparalleled predictive power to catalyze a bank’s ability to optimize commercial credit portfolio, reduce or mitigate risk exposures, improve credit spread, retain lifetime economic value of loans, and improve fund transfer pricing (FTP) spread & loan level profitability.

Transformation objectives:

• Complexities of the back-office legacy system and processes need to be opaque to customers.
• Ensure Risk-based premiums are delivered in a fraction of the time they used to take. Simplify products and processes with customized risk and value profile. Embed risk decisions and approval into the customer journey by integrating 1st-line risk activities with high-speed data and analytics. Adopt a platform ecosystem to modernize legacy processes. Comprehensive data and analytics ecosystem with portfolio lifecycle, third-party, and marketplace data for breakthrough insights.
• A parallel and progressive transformation & modernization of the wholesale lending platform ecosystem and Centralized Online Real-Time Exchange ― the CORE banking system (CBS) to a digital-core to support corporate banking transaction processes spanning CRM, lending, trade finance, deposits, payments, cash & liquidity management, and collateral management. Banks should standardize & streamline their corporate banking products, services, and pricing in the next-gen CBS leveraging new technologies, e.g., Blockchain Smart Contract for ease of access and discerning by their clients ― Thought Machine's Vault Core offers this feature in their CBS digital-core module.

A parallel approach to modernize CBS and wholesale lending platform ecosystem: It’s paramount for corporate banks to modernize wholesale lending and CBS in tandem for synchronous D+1 or APIs-led real-time exchange as such the corporate clients can assess their credit lines & limits and liquidity & collateral position for either increasing credit lines or applying for new credits. Modernizing CBS to a digital-core along with the wholesale lending platform will enable banks to settle corporate banking transactions near real-time. Banks should approach these transformation & modernization by 1) Define a quantifiable wholesale lending & CBS transformation agenda; 2) Find areas where digitization creates the most value, map the entire credit workflow, and redesign by decomposing monolithic legacy application processes to next-gen wholesale lending & CBS digital-core platform ecosystems.

Wholesale lending business platform should be supported by digital-core banking ecosystem. Most banks use core banking applications to support their operations where CORE stands for "centralized online real-time exchange". This basically means that all the bank's branches access applications from centralized datacenters.

Core banking solutions are banking applications on a platform enabling a phased, strategic approach that is intended to allow banks to improve operations, reduce costs, and be prepared for growth. Implementing a modular, component-based enterprise solution facilitates integration with a bank's existing technologies. While developing tools for digital transformation in corporate banking, banks should consider these areas as it is one of the most important to customers:

• Risk management: Consider intuitive tools to help customers keep track of the constantly changing risks in credit, interest rates, operations, regulatory compliance, currency, and information security.
• Liquidity management: Develop methods by which customers can easily manage funds for financing, investment, and operations.
• Cash management: Look at easy-to-use solutions that make buying, lending, collections, letters of credit, payments, information reporting, investing, and foreign exchange easier.
• Data management: Develop tools that foster partnerships and collaboration with creditors, technology service providers, chief financial officer, investors, and banks.

CBS should be built upon next-generation technologies such cloud, mobile, big-data, Open APIs, Microservices, AI, ML, Generative AI, Blockchain Smart Contract, and others to reusable corporate banking service components such as:

• Customer Relationship Management
• Accounts opening services
• Products management and pricing
• Corporate lending standardized deal structuring & agreement structure
• Loan application & origination
• Collateral management
• Covenants and Conditions Libraries
• Demand Deposits
• Cash & liquidity management
• Treasury services
• Payments & disbursements
• Trade finance
• Risk & regulatory management
• Multi-currency support
• Data, analytics, and MIS reports

A new era of corporate lending has arrived, and financial institutions need to adjust. Corporate lending timelines must be reduced from a month or more to a matter of hours – while ensuring a seamless digital experience. Banks are searching for new ways of doing business to automate workflows, without sacrificing the personalized experience corporate banking clients expect.

Define an end-to-end transformation agenda and co-develop a holistic roadmap for design thinking to MVP build-out and production roll-out.

Transformation should encompass all products and the supporting processes throughout the credit lifecycle:

Goal of transform is to establish streamlined operating model which provides:

• Operational excellence and improved risk vs return decision with common processes, taxonomy, credit data elements and cost efficiencies.
• Improved risk-based decisions and compliance across LOBs while catering to specialty clients and meeting compliance requirements.
• Fit-for-purpose technology platforms reducing system maintenance costs and re-work, improving agility, automation (e.g., APIs & Microservices, Workflow & Intelligent Automation, Generative AI & AL/ML, Big-Data & Advanced Analytics, Intelligent Data Platform & Cloud Computing, Managed Services, and Self-Service BI, etc.)
• Enhanced client and employee experience by streamlining processes to  enhance visibility and interactions.
• Monolithic legacy business processes to optimized Microservices: Find areas where digitization creates the most value, map the entire credit workflow, and redesign by decomposing monolithic legacy business application processes to a cloud native, serverless, containerized, and  AI/ML-led, data-driven Streaming RESTful APIs & Microservices based digital-core architecture with is a set of functionally complete smaller interconnected lending service components.
• Define strategic focus areas for transformation based on leading industry practices: Operational effectiveness & efficiency; Organization structure; Client and employee experience; Better credit data quality; Fit-for-purpose technology platforms; Risk and regulatory management; Enhanced credit decisioning.

The deck enclosed herein outlines comprehensive CBS and wholesale lending business platform transformation and modernization frameworks with best-in-class next-generation technologies and industry standards. Banks, consulting firms, cloud vendors, and products development firms can greatly use my solution deck for either SaaS managed services or on-prem product offerings. Please follow the link below to get access and see the entire deck.

#Wholesalelending #CorporatebankingMordernization #DigitalCore #CoreBankingTransformation #CorporatebankingPaltformEcosystem #DigitalTransformation #CouldNative #AIML #GenerativeAI #BigDataAnalytics

About the author:

Saroj Das, Banking and Capital Market Business & Technology Transformation Consultant

Saroj led IBM’s business & technology digital transformation practice for financial services sector and has held leadership roles with PwC, KPMG, and EY. He is a seasoned Banking & Capital Market business platform, operations, and risk & compliance practitioner. Over 25 years, he has been advising both US-based regional banks and global corporate investment banks on their business platform ecosystem and risk transformation programs spanning Lending and Trading books of business, Wealth & Asset Management, Custody & Trust, Finance & Treasury, Balance Sheet Management, Risk & Regulatory Compliance. Saroj works with C-Suits and line of business owners to identify high-stake use cases. He drives solutions for these use cases leveraging next-gen digital technologies such as cloud computing, Big-data & enterprise data fabric, advanced analytics e.g., Natural Language Processing (NLP)/AI/ML/deep learning data science, predictive analytics, Generative AI, APIs & Microservices, intelligent workflows & process automation; Vendor solutions evaluation & integration; Metaverse, Blockchain, and Web3 enablement.

Please contact Saroj at: Email: sarojkdas1495@gmail.com; Cell#: 646-285-3166