A new generation of bankers and customers is driving the digitalisation of corporate banking. Key technologies and their applications are now mature enough to meet the multifaceted needs of banks and their customers. The regulators are also catching up.

These developments will significantly impact corporate banking. New opportunities and sources of income will appear for market participants who are well-prepared and capable of meeting the requirements, be they legacy players, newcomers to the sector, ecosystem partners, or pure disruptors.

This article discusses some of the key topics in this context.

• Using the example of the 3rd edition of the European Payment Services Directive, we show how regulation can create the conditions for new business models.
• We cover the potential role of digital currencies in corporate banking and why we aren't quite there yet.
• We take a look at generative artificial intelligence, acknowledging that some specific questions have yet to be fully answered.

There is one topic that we encounter time and again. The promising technologies will likely lead to a revolution sooner or later. However, we have not yet reached the decisive turning point at which tech capacities, business models, regulations and customer needs coincide to such an extent that an explosive acceleration can occur. The answers to the questions "But how exactly does this work?" and "Which customer needs are at the heart of this?" are too often still unsatisfactory.

One theme that comes up repeatedly is the fact that modern technologies are definitely promising and likely to lead to a revolution sooner or later. However, we have not yet reached the decisive turning point where tech capacities, business models, regulations, and customer needs align to such an extent that game-changing acceleration can take off. Too often, answers to questions about how exactly it all works and which customer needs are being catered are unsatisfactory.

This presents a dilemma for corporate banking. Decision-makers know that major upheavals will bring enormous opportunities but also existential threats down the road. However, due to the complex interaction of various factors, the timing is impossible to predict.

Meanwhile, disruptors from outside the industry, fintechs, international competitors, and niche players, are positioning themselves and will be ready to step forward should incumbent banks hesitate or stumble at the pivotal moment.

The only remedy is targeted preparation, building know-how and capacities, as well as having a clear idea of how you want to position yourself and where partnerships can fill crucial gaps.

Read about possible developments below. Or check out our Late Afternoon Banking Talk (available in German) for a deeper dive: 

PSD3 will bring more clarity and enhance standardisation: A basic need of corporate customers is fast, reliable, and smooth payments and transactions. This is exactly where the relatively modest digitalisation in corporate banking began. In the EU, for 15 years now, it has occurred under the Payment Services Directive or PSD, which regulates digital invoicing. PSD2 is the second iteration of these rules and the one which currently applies, even as discussions around PSD3 are already quite advanced.

The direction of travel is clear – more precise specifications and broader standardisation, such as for access-to-account interfaces. Once this is in place, asset holders could, provided the customer consents, share transaction data to asset brokers for a fee. What at first glance seems like a relatively small step, opens the door to a new world of open finance with unfettered access to data across the entire financial sector. Besides PSD3, the discussion about the Financial Data Access (FIDA) regulation must also be followed closely in this context. Currently, it’s not really happening. Many banks barely have FIDA on their radar even though it’s likely to have a very big impact on the sector.

Creating the conditions for open finance

Open finance not only includes banking, but also other financial products and services such as insurance, investments, and loans. Thus, open finance enables interoperability and data sharing between institutions to ensure seamless integration across financial services. Corporate customers now suddenly have the opportunity to access all financial matters through a single (digital) source.

From the provider's perspective, it is important to develop and offer the appropriate solutions. An open finance platform allows for virtually endless variations – from app-based solutions and individualised approaches to AI-driven interactions. If the data is secure and the regulator is satisfied, there are very few limits to innovation in this space.

This is likely to invigorate the industry and also attract other players. In corporate banking, due to the higher complexity of processes, the hurdles for new entrants are larger – but not insurmountable. In addition, for many customers, international competition is just a click away. Access to cross-border, and possibly global, providers becomes increasingly easy as more points of friction are eliminated.

An important step in this direction will come with a stable and reliable digital currency.

There are promising aspects to all of these approaches, be it in Europe or elsewhere, but the finishing touches for full implementation are missing. The digital euro does not yet exist, bank money tokens, stable coins, or other currencies issued by banks have not yet made it into widespread use, and conventional cryptocurrencies have proven to be too volatile to be attractive for large industrial companies.

This being said, there is definitely an opening for a reliable and simple solution. Many financial processes are still carried out in an old-fashioned and inefficient manner. We are not just thinking about payment transactions, where digitalisation is already somewhat advanced, but about issuing a bond for example. Today, days and weeks pass before the money appears in company accounts. This ties up capital, slows down supply chains, and drives up costs. Companies would beat a path to the door of any bank (or other provider) offering a viable solution at the push of a button.

The danger and opportunity of sudden acceleration

This all suggests that we are approaching a tipping point. The winners will be those providers who can bring reliable and simple products to the market in a timely manner. Due to network effects, we can also assume that certain solutions will then establish themselves quickly and almost exclusively.

Existing providers from the retail sector are well positioned. There is no reason why PayPal and its competitors should fail to advance, especially among SMEs. They have the market presence, the brand, and the know-how. This is a foundation on which they can build and become a real threat for banks.

Putting it a different way – PayPal and its peers have the technology. Corporate banks, on the other hand, have the experience and the footprint in banking. The question is, which gap is easier to close and does the ecosystem with its varying forms of cooperation and co-opetition represents a viable path?

The digital euro and a possible bank money token

The introduction of the digital euro, which will take place in 2028 at the earliest according to the European Commission, poses special challenges for corporate banking.

Several unresolved issues revolve around the responsibilities of corporate banks and retailers in the context of the digital euro. Clear regulations are needed for a smooth integration and use of this currency in the business sector. Creating customer value will be crucial to winning over companies. In addition to technological adjustments, legal and regulatory clarifications are required to ensure compliance with existing laws.

The idea of a programmable bank money token, a Commercial Bank Money Token (CBMT), offers interesting perspectives. This approach could open up new opportunities in the business space, such as linking payments to deliveries and supporting complex payment processing.

Despite this potential, many questions remain unanswered. The exact functioning of a CBMT and the associated legal aspects still need to be worked out. Corporate banks should closely monitor developments related to the digital euro and prepare for possible changes as they await further clarification from the Commission and national regulators.

Artificial intelligence in corporate banking

The rapid progress of artificial intelligence is promising for corporate banking. However, the applications are still in their infancy, with considerable potential for further development and process optimisation through the use of AI. Often-mentioned examples include credit scoring, risk management, and abuse prevention.

AI remains in the background for now

Currently, AI use is focused on simplifying background processes and increasing efficiency. AI applications structure large amounts of data and act as internal search engines. They analyse documents such as rating reports, financial analyses, and credit documentation to efficiently extract relevant information.

However, mere process optimisation, increased efficiency, and the like fail to leverage the depths of generative AI's potential. These applications view AI as a more or less conventional technology – i.e. a technology that can reduce costs or save time in one way or another within an existing business model, like email.

However, the possibilities of AI far exceed this. AI must be brought out of the back office and to the forefront. When used directly, it can connect customers to banking processes, significantly improve the user experience, and enable profound personalisation in real time. It can independently obtain, prepare, and reproduce information as well as make crucial contributions to application development, unleashing innovation, and networking within a bank or ecosystem. AI can lead to radically new business models.

Blind enthusiasm would be rash

There are many euphoric predictions about AI right now. We have been here before. A few years ago, there was great enthusiasm about chatbots, but disappointment quickly followed – they were too cumbersome and error-prone. So, it's incumbent on us to take a closer look and ask: "How, exactly, is this going to work?"

Experience must be gained, e.g. in business analysis via AI, in the ability of these tools to process large amounts of complex and specialised content, or in customer service and advisor support. In most cases, the answer to the question above is not entirely clear yet.

Nevertheless, corporate banks should keep an eye on developments, be aware of the capabilities of AI, and build the corresponding capacities, in order to be ready for the big leap when it comes.

By the way – customers also increasingly use AI. For example, they sometimes get investment ideas and financial advice from ChatGPT. This is another reason why banks need to be on top of things.

Data quality and trust in AI

Without data, nothing works. On a foundation of a reliable, legally compliant, secure, fungible, and broadly accepted data landscape, the new AI world can be built.

Customers not only have to trust the bank in financial matters but will also expect that their personal data is treated just as securely. Ensuring data protection and security will become a crucial factor in facilitating customer trust in a bank’s AI-powered services.

Data must be as secure as money.

Apps and identification for corporate banking

By now, retail banking customers are used to being identified digitally and then carrying out all their banking transactions via an app. People who work in the finance, accounting, and back-office departments of various companies are also retail banking customers. They may wonder why it doesn't work just as smoothly there – especially the younger generation, who have never known anything else.

(Try explaining to 19-year-old interns why they should type in an invoice number by hand...)

The prerequisite is digital identification, for which there is currently no uniform standard in Europe. Retail banking can just about get away with this, but for the more international corporate banking world it represents a crucial hurdle. The European Commission is in the process of resolving the situation with the EU Digital Identity.

Once this prerequisite is in place, solutions will quickly appear on the market. (International) apps are likely to play a central role here. The extent to which the functions will be bundled (similar to the super apps that are particularly popular in Asia) or remain separate is to be seen and depends on the needs of the customers and their trust in the providers.

Anticipate the future and stay grounded

The interdependent spheres of technology, regulation, and customer needs are evolving rapidly. This results in some insights and key questions for corporate banking.

• Don't just fulfill regulatory requirements – fill them with life! The question is not how can I overcome this hurdle most efficiently, but rather what new opportunities arise from it?
• Digital money is coming – one way or another! The (digital) euro is important, but not (yet) the digital reserve currency! What other currencies are there and how are they relevant to me?
• Artificial intelligence can reduce costs, make processes more efficient, and much more! The question is not only how does AI accelerate my existing business, but also how can AI use cases benefit my customer?
• Data protection and data use(s) – how can I resolve contradictions early and transparently?
• How does the distribution of roles in the ecosystem change and how do its boundaries shift as standardisation advances?

Corporate banks are facing challenges all around – rising costs, complex customer relationships, regulatory demands, and competitive pressure from all directions. And this is without taking into consideration the rapid technological progress. So, will technology help overcome these challenges, or will it become another hurdle?

Don't hesitate to get in touch with our team. We are happy to support you – from analysis of your position from technological and organisational perspectives, through strategic planning to concrete implementation and a possible choice of partner. Prepare yourself with our help – and you will stride successfully into the future.