Commerzbank’s holistic approach to banking in the digital era

Commerzbank believes that being at the forefront of digitalisation requires an end-to-end strategy that sets new trends and weathers digital disruption

Commerzbank is investing around €700m ($822m) a year in IT and is on track to digitalise 80 percent of its everyday business processes by 2020
Commerzbank is investing around €700m ($822m) a year in IT and is on track to digitalise 80 percent of its everyday business processes by 2020 

The need to meet customers’ evolving demands is putting ever more pressure on banks to invest in digitalisation. But merely developing high-end products is not enough to stay ahead of the competition: those banks taking transformation seriously will implement change across their business.

Banks will also need to set, rather than merely catch up with, emerging digital trends. This means constantly refining existing tools and processes for customers, maximising the use of technology already on the market, and researching innovations that are yet to come.

As digitalisation grows in scope, some might warn that, with fintechs jostling for banks’ space, the financial status quo is being challenged. And yet, future-proof banks can weather such disruption by fostering productive collaboration with all players, from SMEs to innovative new start-ups.

Great expectations
Digital is not just for start-ups. Across industrial sectors, from carmakers to retailers, it is hard to imagine future business success without continued innovation. Digitalisation across the value chain is increasingly affecting revenues, profits and market opportunities.

According to McKinsey, the rate of digital penetration – the extent to which companies’ operations have been automated, connected and transformed – currently stands at about 37 percent across all industrial sectors. This means that, while companies have made some headway into transformation, digitalisation is yet to reach the mainstream. The race is on to reap the rewards of even greater digitalisation.

This puts the onus on banks to invest in digitalisation if they wish to meet their corporate customers’ demands. In the current environment, only the most modern, efficient financial services will do, as will only the most cutting-edge, secure and user-friendly products. A survey by Commerzbank recently found that as many as 52 percent of SMEs in Germany now expect to see an increase in intelligent systems that integrate banking services within their own IT infrastructure.

The ability to identify the technology that will bring about change is particularly important given that such changes will bring new – even as yet unidentified – disruptive challenges

At Commerzbank, corporate demand has spurred the development of new initiatives and products. The bank’s treasury management system – designed to boost companies’ liquidity, reduce overheads and optimise interest rates – is now integrated into the cloud. In addition, its new ‘photoTAN’ scanner app authenticates payment transactions straight from smartphones.

Holistic strategy
Products are not the whole story, however. Flashy smartphone apps alone will not drive the banking industry’s digitalisation. As impressive as new front-end developments and software interfaces may be, in the long term banks will struggle to meet their customers’ demands should their back-office infrastructure continue to rely on old, time-consuming manual processes.

Instead, banks need to adopt end-to-end innovation, transforming their very business models to embrace new trends. This means integrating digitalisation in a front-to-back manner by modernising both core processes in back-office systems and developing front-office platforms and client-facing systems. Only then can a bank truly enhance its customers’ digital experience.

This is why last year Commerzbank embarked on its new strategy, Commerzbank 4.0. By placing innovation at the heart of its business operations, the strategy aims to make the bank more efficient, digital and focused on the future needs of its clients. The bank is investing around €700m ($822m) a year in IT and is on track to digitalise 80 percent of its everyday business processes by 2020.

Under such a comprehensive strategy, no area of finance is immune to refinement. Transformation will not only reach mobile banking, digital authorisation and software interfaces, but also payments, trade finance, corporate credit, big data analytics, customer communication and cross-channel banking.

Driving innovation in all these areas is Commerzbank’s digital campus in Frankfurt, one of the pillars of Commerzbank 4.0. By 2018, some 1,000 business and IT experts will be working together on digitalisation projects, automating and optimising relevant everyday processes, and testing out new developments under the fail-fast principle.

Digitalisation in practice
The need for an overarching strategy for digital transformation is clear but a comprehensive plan is required for successful implementation. A three-tiered approach, based on improvement, adoption and innovation, is effective.

The first tier involves improving existing solutions and procedures to optimise internal banking processes. In this respect, corporate banking portals can be made more interactive, trading platforms more efficient and customer front-ends more user-friendly. Commerzbank, for example, is creating a digital credit lending platform that aims to cut the time needed to grant corporate loans from upwards of 72 hours to just 24.

On the second tier is the wider adoption of new technologies that, while already on the market, still have the potential to enhance customers’ experiences. The bank payment obligation (BPO) is a case in point. This trade settlement tool releases funds based on the automatic matching of data.

The BPO is able to balance the concerns of trading counterparties, such as exporters (who desire payment early) and importers (who prefer to pay late). While it has been in use for several years now, many companies are still getting to grips with the BPO, which is why Commerzbank has been a strong advocate for its uptake.

Commerzbank is also bringing cloud-based computing to customer relationship management, with a system for corporate clients set to be released this year. This can help preserve the human side of banking in the digital age.

The third tier includes researching new technologies that have the potential to transform the financial and corporate landscapes. To this end, Commerzbank participates in R3’s consortium of more than 70 banks that learn about distributed ledger technology through the Corda platform.

This allows banks to identify practicable use cases for blockchain and how it might add value to companies’ day-to-day operations.

On the lookout
Any bank aspiring to be at the forefront of digital developments needs to channel investment to all three tiers. However, the ability to identify at an early stage the technology that will bring about change in the financial sector is particularly important, given that such changes will bring new – even as yet unidentified – disruptive challenges to the table.

Already, headlines ask whether fintech start-ups pose a threat to the traditional dominance of banks. Agile young fintechs certainly react quickly to customer needs, taking advantage of their innovative strengths, familiarity with the digital space and command of new technologies.

Banks can find themselves hampered by the time and cost required to improve their IT infrastructure and navigate regulatory requirements and legal frameworks. Yet the banking sector has not been overwhelmed by disruptive fintechs.

On the contrary, established banks still enjoy crucial advantages over young upstarts, including experience in the markets, broad customer networks and security when dealing with finances.

Collaboration can help
Cooperation, rather than competition, might be the key to progress here. Across the financial industry, fintechs rely on cooperation with established market players for growth. Meanwhile, banks can learn a lot from the young upstarts about competing in the digital economy.

It is for this reason that, in 2013, Commerzbank established its ‘main incubator’. This is an early-stage investor in fintechs and a company-builder in banking. It helps to foster innovation within Commerzbank by extending the state-of-the-art services and products that can bring new value to its customers.

Commerzbank’s main incubator is the first to be set up by a major continental European bank, and already has several success stories to its name. One is the start-up Userlane, which directs users through all processes on web-based software or e-commerce websites.

The platform shows users where to click next in real time through interactive, step-by-step guides, just as a car’s GPS guides a driver turn-by-turn to their destination. This cuts out the need for specialist knowledge or extensive software training.

Another is the online payment platform OptioPay, which changes the way payees receive money by allowing the conversion of cash payments into higher value vouchers or gift cards.

The main incubator’s achievements do not end there: it also helped facilitate the development of Traxpay, a cloud-based B2B platform that offers integrated refinancing and investment products. The platform boasts fully flexible supply chain finance instruments for suppliers and capital optimisation instruments for buyers.

In addition, the incubator supported the platform Grover, which enables consumers and businesses to rent, upgrade and switch to the newest tech gadgets – clearly a platform well-suited to the switching economy brought about by the fast pace of digital change.

When it comes to digitalisation, all banks seek to charge ahead for the sake of their customers. With the right technology, a clear strategy and a collaborative mindset, they will be best placed to lead banking in the digital era.