5 Threats Banks Face to Commercial Business (And How to Respond)

The major revenue stream banks and credit unions derive from small business and corporate clients is under siege from several quarters including new digital competitors and low interest rates. Each challenge can be met through a combination of operational and strategic decisions and by embracing digital channels.

Subscribe Now!

Stay on top of all the latest news and trends in banking industry.


Financial institutions that serve the commercial space face many obstacles. Even before the COVID-19 pandemic dramatically impacted the economic landscape, their challenges were growing. The last decade has seen a massive influx of new technology and competitors, both of which have given rise to higher customer expectations, shrinking market share and a need to manage costs and maximize efficiency. Banks and credit unions that hope to retain existing account holders, as well as develop new long-term customer relationships need to find ways to address these changes and position themselves to be ready for whatever additional challenges emerge in the years ahead.

In this article, we synthesize some of the key concerns, challenges and opportunities we commonly hear from our hundreds of commercial banking clients.

1. Meeting New Market Competition

The digital age has enabled new entrants to compete with banks and credit unions for primary financial relationships with commercial and corporate businesses. But this isn’t simply a case of shinier bells and whistles from experience-focused upstarts. These new market entrants are offering solutions that solve specific business problems with embedded banking functions that may actually transform financial institutions into generic transaction processors — rendering the customer relationship inert.

To compete, banks and credit unions need to solve for these specific business problems themselves. But a majority of traditional commercial offerings consist of relatively inflexible one-size-fits-all cash management platforms. Small businesses have their options reduced to choosing a consumer platform with little to no business functionality or a costly, hard-to-understand treasury platform with functionality they’ll never need. Financial institutions hoping to connect with their business accounts — of any size — need to offer tailored solutions that fit the size and vertical of the customer.

“A marketplace strategy … transforms the [banking] relationship from transactional to experiential.”
— Debbie Smart, Q2

At the same time, financial institutions can develop a marketplace strategy, extending their digital platform to connect to the broader financial ecosystem, including the ability to integrate enterprise resource planning (ERP) solutions directly into their banking platforms. This serves the dual purpose of demonstrating that they understand businesses’ needs — including the tools they require — and turning their platform into a one-stop-shop for all their customers’ needs. This creates the opportunity to become not just the primary relationship for financial needs and solutions, but virtually the only one. In essence, the banking platform becomes part of a larger consultative approach, transforming the relationship from functional and transactional to experiential and personal.

2. Impact of Low Interest Rates on Fee Income

With interest rates low, margins are compressed on interest income products, increasing the importance of non-interest income for financial institutions. Decreased deposit interest rates will result in a reduced earnings credit rate (ECR), making cash management fees hard charges for some customers and adding pressure to cash management fees. Increased visibility and hard costs associated with cash management products may push commercial and corporate customers to shop cash management services with other financial institutions or non-bank providers.

If banks and credit unions lose mindshare to fintechs and other providers, they will face additional pressure on transactional product fees, which will significantly impact non-interest income.

There is an opportunity, though, to grow additional non-interest revenue. Aite’s July 2019 report, “Meeting Small Businesses’ Needs Through a Consolidated Offering”, suggests that businesses are willing to pay for services that they value. More than half are willing to pay for financial management tools, almost two-thirds for data automation and three-quarters report a willingness to pay for cash flow forecasting solutions.

And they aren’t just willing — businesses are, in fact, already paying for these types of services; they just aren’t paying banks and credit unions. But by employing a marketplace strategy, as mentioned above, your institution can build a revenue-share model with third parties that earns income while strengthening the relationship and creating deeper engagement in your commercial solution set.

3. Growing Preference for Digitization of Commercial Lending

The compressed interest margins discussed above increase the importance of pricing loan products more effectively to optimize value, and increase the importance of digitalization of lending overall.

Even after the COVID-19 pandemic passes, face-to-face meetings may no longer be the default method for meeting with commercial and corporate business clients. Because in-person sessions often occur during the loan application process, a decreased ability to meet in person could delay the process and result in lost lending opportunities. Demand and urgency for lending will likely remain high throughout the pandemic and should continue into the following years as businesses recover. Most financial institutions do not have digital lending processes, making them entirely dependent on staff to generate and decision loans.

Bringing lending processes into the digital channel will increase banks’ and credit unions’ ability to serve businesses, expand relationships, and create opportunities — for themselves and their business customers. Digitizing lending can improve lending capacity by automating the many steps in the process that don’t actually benefit from human intervention. Freeing commercial lenders’ bandwidth by automating these manual tasks helps them process more loans and, more importantly, enables them to spend more time interacting with commercial clients to better understand their needs and deepen the relationship.

4. Need to Enhance Market Segmentation

Many financial institutions have a product-centric go-to-market approach, focusing on product features rather than comprehensive business solutions that solve specific challenges. Simultaneously many businesses don’t trust their financial institution to understand their particular needs.

Many banks and credit unions have created specialty sales groups focusing on government, healthcare, and property management, but haven’t necessarily aligned product functionality or digital experiences with these segments. As the frequency of in-person interactions remains lower than the pre-COVID-19 environment, institutions will need to demonstrate their understanding of commercial and corporate customer needs through digital channels to remain competitive.

5. Rethink Manual Onboarding

The onboarding processes for most banks and credit unions are still highly manual, resulting in delays that can stretch for weeks, deferring revenue for the institution, postponing access to money or services for the business, and jeopardizing the quality of the customer’s first experience.

Manual onboarding for commercial accounts and products takes even longer. In fact, Q2 research suggests that processing forms between financial institutions and their business clients comprises about 70% of the delay; the remainder occurs while setting up the client within the institution’s banking systems.

These onboarding delays and bad experiences aren’t just limited to new clients; existing customers experience similar delays when adding new products or new accounts. Traditional paper-based manual processes associated with onboarding commercial and corporate clients and products result in lost revenue and hurt client relationships. To remain competitive, it is essential to modernize these processes with digital solutions that improve the client experience while decreasing time-to-value for the financial institution.

These common industry challenges are just some of the issues banks and credit unions are grappling with as they compete for commercial and corporate customers. Helping institutions address these challenges is a key component for informing Q2’s product roadmap strategies. It’s why we’ve developed comprehensive solutions sets that span the entire financial institution/commercial customer relationship — from a customizable, right-sized banking platform to configurable lending and leasing, and more.

This article was originally published on . All content © 2023 by The Financial Brand and may not be reproduced by any means without permission.