01.12.2021 – 10:00
Bain & Company
- Falling margins, new competitors and strongly changed customer needs are putting banks under pressure when doing business with small and medium-sized enterprises
- Revenues are only expected to grow by up to 1 percent per year through 2025
- New providers are attacking particularly in the lending business and transaction banking
- With a consistently hybrid business model, the financial institutions can counteract and defend their current strong position among Swiss medium-sized companies
The corporate customer business is traditionally one of the most important disciplines of the banks on Zurich’s Paradeplatz and in all cantons. So far, the income from small and medium-sized businesses has risen continuously, the margins have been more than satisfactory and customer loyalty has been high. But now the financial institutions are coming under increasing pressure: margins are shrinking, the number of competitors is growing and the needs of the clientele are changing. On the basis of a market analysis, the international management consultancy Bain & Company shows how the domestic institutes can defend their traditional business over the next few years.
The intensity of competition is higher than ever
With revenues of around five billion Swiss francs in 2020, business with small and medium-sized enterprises remains one of the main sources of income for local banks. The majority of this is attributable to loans and transaction banking. However, it is precisely on these two business areas that new players, including neobanks and fintechs, are increasingly concentrating. “The intensity of competition in corporate banking is higher than ever,” explains Bain partner and banking expert Stephan Erni from the Zurich office. “That puts the margins under pressure and forces established providers to act.”
This is all the more true as the situation is likely to worsen in the coming years. According to a recent Bain forecast, earnings in corporate banking will more or less stagnate through 2025. The reason: The times of robust, continuous growth are coming to an end in the core business with credit and in transaction banking (Figure). Bain partner Dr. Dirk Vater, who heads the Financial Services practice group in the Europe, Middle East and Africa (EMEA) region, sees Swiss banks in a similar situation to their competitors in the EU: “Digitization is changing the rules of the game in banking, making it easier for new providers Market entry and increases price sensitivity and willingness to switch on the customer side. As a result, earnings and margins are eroding. ”
Protection against digital attackers is crumbling
The force of the digital attackers hits Switzerland relatively late. This is due, among other things, to national regulations and the previously noticeable reluctance of customers to use digital services. Added to this is the small size by international comparison and the fragmentation of the market. German-speaking Switzerland, French-speaking Switzerland and Ticino not only each have their own rules of the game, but there are also strong regional institutes there.
But now the signs point to change – and the decisive driver is the company. Industry expert Erni emphasizes: “The new generation of corporate customers think and work digitally. If this clientele is not convinced by the services of their local bank, they are not afraid to try out offers from neo-banks or fintechs.” In addition, it differentiates less and less between banking services and other financial services. “The trend is clearly in the direction of product bundles,” says Erni. This affects the integration of insurance benefits as well as the merging of payment transactions with accounting.
On the way to the hybrid bank
The established Swiss financial institutions are well advised to respond as quickly as possible to the changed expectations of their customers. Instead of continuing to invest primarily in the branch network, they should also massively expand their digital offerings for small and medium-sized businesses and integrate services from other companies. “The future of corporate banking is hybrid and integrates partners,” states Bain expert Erni. “The banks have to reconcile the strengths of the branches with a convincing digital presence. It is important to cover all of the needs of companies and to offer them an excellent experience across all channels.”
There is a profound rethinking associated with a hybrid business model. This ranges from customer segmentation to the portfolio of offers and pricing. In essence, it is about anticipating the needs of specific customer groups, developing appropriate product bundles and price concepts, for example in the form of subscription models, and breaking away from thinking in terms of sales channels.
Bain banking specialist Vater refers to the successes of foreign institutions with such hybrid business models. A large part of the product deals and routine transactions there already run very efficiently via digital channels, without the direct line to customers suffering. “A hybrid concept gives the banks the chance to concentrate on the crucial questions of their corporate customers,” says Vater. “If they find convincing solutions here and the digital processes run quickly and easily, new providers have hardly any target areas.”
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