The rise of edge banking in the era of digital commerce

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e-commerce requires new forms of embedded financial services

This transition towards e-commerce requires a new set of financial services in order to continue to grow revenues. The first requirement is to accept all forms of digital payments, whether through a credit card, a mobile wallet or an account to account transaction. This is what PSPs (Payment Service Providers) have been created for, like Nordea’s own solution Nordea Connect.

Ancillary services, like consumer financing, loyalty programmes and targeted offers are a natural addition to a payment platform, as are data analytics like merchant dashboards about consumer behaviour.

The list continues with foreign exchange exposure management at the transaction level. For instance Nordea Markets has developed a “list rate API” by which retailers are given a fixed Forex rate valid for 24 hours for their e-commerce sales in foreign currencies. The forex exposure management therefore happens at the same time as the commercial transaction takes place and is automated. We can then use the terminology “embedded banking” as it is integrated into the commercial flow.

Traditional banking products facilitating commerce will need to go digital

In B2B commerce, very traditional banking products are being re-invented to adjust to the digital era. For instance, when Trade Finance will be moved from an archaic, paper based process, to a digital one, it will be possible to also embed it into the commercial flow so that it becomes largely automated and invisible. It will then turn into “embedded counterparty risk management”.

The same goes with Working Capital Management (WCM) which is based on discounting old fashioned invoices. When digital payment methods are generalised also in B2B commerce, a receivable discounting programme will be integrated into the future B2B digital payment platform, in the same way as Buy-Now-Pay-Later schemes are today a natural part of retail e-commerce payment platforms. WCM will then have become “embedded financing”.

The rise of edge banking

Edge banking is banking which happens at the periphery of a company’s activity, i.e. where commerce takes place, like traditionally a performance guarantee or now Forex exposure management at the transaction level. In fact, most of the financial services needed to enable e-commerce belong to this category.

So far, corporate treasuries have mostly concentrated on managing the company’s daily banking related activity on a consolidated basis. For instance account management, batch payments, cash pooling, liquidity management, financing or foreign exchange exposure handling.

Edge banking has sometimes been centralised in the treasury, and sometime been handled directly by the business units. A good example is the issuance of guarantees and Letters of Credit to secure the counterparty risk of specific trade related transactions. Trade Finance counterparts are often not part of the treasury team.

In addition, corporate treasury teams probably prefer to handle financial flows, like Forex risk management, on a “bulk” basis at the treasury level, but this is maybe out of habit. When processes are integrated end-to-end and automated, micro transactions happening at the edge don’t need to be more expensive or complex to manage, whether it is about a micro Forex transaction, a micro payment or a micro financing.

Many corporate treasurers are already beginning to adjust the scope of their services, including supporting their companies’ new forms of commerce with a new set of financial products in order to ensure they stay relevant in their organisation.

Traditional daily relationship banking is being disrupted

In the same way as corporate treasurers need to re-invent their role, banks would be well advised to do the same. With the combined trends of treasury automation, the commoditisation of daily banking products and the dis-intermediation brought by multi-bank bidding portals and multi-banking platforms, banks risk being turned into middle and back-office infrastructure providers.

In such a case, their role will be limited to delivering the commoditised product or service in a way mostly invisible to the recipient. This will put pressure on the profitability of traditional daily banking products and services, and will greatly challenge the traditional daily relationship banking model based on human interactions and cross-selling.

Banks have a “once in a generation” opportunity to re-invent daily corporate banking

As companies continue their migration towards digital commerce, they will increasingly need to embed financial services into their own customer offering and value-chain process. Banks are in a unique position to play a major role, especially when e-commerce moves into the B2B segment and generally when it matures to becomes about more than just selling consumer goods.

Banks are well known as centres of expertise and trust, something essential when facilitating non-physical commerce. They also have a large customer base and access to unrivalled customer data sets, including KYC, payments and other financial transactions which can for instance be turned into valuable customer behaviour data analytics for merchants.

Furthermore, banks have well established relationships with their large corporate customers, an asset that non-bank players need to build from scratch. Also, banks have the needed experience to act as advisors in a more holistic way that benefits their customers along their whole value chain.

Banks need to complement traditional daily banking with embedded banking

The rise of digital commerce and the need for embedded financial services is also a great opportunity to develop a new form of daily relationship banking. It starts with the co-creation of tailor-made technical solutions fitted to a company’s unique needs. It also offers the potential to bundle different financial edge products, like check-out payments together with Forex management, data analytics and consumer financing.

And since embedded banking requires a system-to-system integration, mainly through APIs, it provides a strengthened customer relationship, simply because it means working interconnectedly and tightens the technical relationship once all of the data connections are implemented.

For a bank, being an embedded part of its customers’ commerce means also being closer to the “commercial hand-shakes” with their own customers, i.e. to be there when the sales takes place. It provides a much deeper level of understanding of their business. In fact, we can argue that the combination of customer co-creation, the bundling of products and the lock-in effect of systems integration will bring a novel form of strategic partnerships between banks and their corporate customers.

For more information on the themes discussed in this article, write to Marina at marina.repo [at] nordea.com (marina[dot]repo[at]nordea[dot]com) or Jean-Francois at jean-francois.tapprest [at] nordea.com (jean-francois[dot]tapprest[at]nordea[dot]com).