July 2016

Dux or Flunk? Business Banking Report Card
As we hurtle into yet another new financial year business banking markets are braced for a fresh wave of turbulent change on several fronts. Customer experience is positioned firmly at the forefront of new product development and service calibration.

First and foremost however, the most pressing challenge for Australian banks is keeping up with customer expectations. This is highlighted by Australia’s biggest business lender, National Australia Bank’s (NAB) divisional restructure expressly driven by “customer focus”.

Key headwinds set to buffet the banking sector in FY17 include:

  • Regulatory change, capital adequacy requirements

  • Digital disruption, winning the ‘fintech race’

  • Low interest rates, flat or falling revenue growth

  • Expense control, rising cost-to-income ratios, narrowing Net Interest Margins

  • Steadily rising bad and doubtful debts, impairments

  • Skills shortage and rising competition for talent, both within financial markets and externally

The relative success Australian banks are achieving in overcoming industry challenges and keeping pace with rising customer expectations varies significantly. The voice of the customer has never been more important in assessing client pain points, service gaps and streamlining operations.

Comparing and grading the banks’ relative performances using E&P’s demand side analysis, based on thousands of direct interviews with CFOs and corporate treasurers Australia-wide, reveals a mid-year business banking report card with surprising results.

Businesses are increasingly turning to their bank in a transaction banking (TB) capacity as opposed to sourcing credit, refinancing or new lending facilities according to E&P research. NAB and Commonwealth Bank of Australia (CBA) have traditionally outperformed in terms of transactional market share and wallet share outcomes.

The two groups cumulatively secure one in two core cash management, payment processing and internet banking relationships. Despite rising customer churn intentions, average wallet share remains relatively high, particularly among small businesses who continue to bank in a holistic way across disparate product lines.

The key TB battleground however is the mid-market. Within this segment the incumbent Big Four are facing concerted competition from HSBC. The global bank is shifting from a ‘foot in the door’ approach of converting secondary relationships into primary relationships towards a more defined cross sell proposition, headlined by the group’s standout cross border payments and international TB customer satisfaction ratings.

Asset and equipment finance volumes are forecasted to flat line in the coming year, however businesses’ use of the facility as proportion of total borrowings continues to trend higher, increasing 6.1 percent since 2013.

Reflecting the high level of cross sell activity in equipment finance markets into underling transaction banking relationships, CBA and NAB top the mid-year score card, however significant variance is exhibited by segment, state and sector verticals.

Australian businesses cited the need for online functionality and improved digital processes within their trade finance products, indicating that market share growth is heavily dependent upon those features.

  According to E&P’s Trade Finance research, based on interviews with over 1,800 importers and exporters twice a year, international banks outperform the domestic majors by a considerable margin for international eTrade solutions, in particular Citigroup and HSBC. The results also emphasise the importance of developing further “mind share”, gauged from research respondents nominating which trade finance brand springs to mind first.

The chase for lower fees and execution costs continues to entice businesses into adopting a ‘multibanking’ approach for Spot FX. Despite a fragmented market, and falling wallet share, The Business FX report shows that non-bank providers have largely been unable to capitalise on recent market share gains, in particular OFX, American Express and Western Union.

However, falling wallet share trends are not as prevalent in more sophisticated hedging products such as FX Options and Forward FX. Customers’ individual dealer relationships, online experiences and the bank’s respective digital prowess are driving exceptional wallet share outcomes for three of Australia’s Big Four providers for these products.

Customer satisfaction continues to become disconnected from customer engagement and buying behaviour, no longer representing actionable predictive power for future changes in output measures such as market share, wallet share and cross sell performance.

Advocacy is now deemed as the most valuable view of likely customer engagement. Alarmingly for two prominent providers in ANZ and Westpac, business owners, CFOs and treasurers are not prepared to recommend their services to colleagues or associates. Both banks have experienced considerable declines (around 71 percent and 66 percent respectively) over the last decade, well beyond the market-wide average of 55 percent.

Despite business advocacy of financial products plummeting to new lows in E&P’s Business Banking Index (BBI), a limited number of providers, including NAB, HSBC, and St George are bucking the trend, while BOQ leads by example; achieving outstanding customer sentiment scores.

In many instances client expectations are shaped by positive personal banking experiences, retail innovations and behavioural shifts underway in other industries. Further research from the BBI indicated one in two institutional enterprises felt their business banking experience exceeded their experience as a personal banking customer. This figure fell dramatically to only 14.5 percent for SMEs and 9.7 percent for Micro businesses.

Institutional bank clients’ satisfaction can be attributed to their VIP treatment, whereby they are granted early or first access to advanced prototype technology and innovative processes. Blockchain technology currently in development is an excellent example – the Top 500 Australian enterprises by revenue will be exposed to the newest releases up to five or ten years before small businesses.

Importantly though, small businesses are now frequently offered ‘institutional standard’ products and services by non-bank competitors. They are doing so via cloud technology and other ‘digitally enhanced’ processes aimed at improving efficiency and revenue growth.

New strategic initiatives designed to overcome key challenges are proceeding ‘out of kilter’ with client needs advancing at a much faster rate. What was previously “nice to have” functionality is rapidly becoming “need to have”. It is within these margins fintechs and disrupters are successfully targeting a firmer foothold and moving beyond established ‘happy hunting grounds’ of payments, foreign exchange (FX), online lending and data analytics.

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