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Another example of physical and financial chains meeting

The banking industry has become a buyer's market, where corporate treasurers carefully select their bank relationship partners and demand more added-value services. Should banks stay on separate product lines or offering packaged solutions in order to meet customer needs?

One of the frequent topics debated in transaction banking (and, in particular, in supply chain finance) today relates as to whether banks can remain profitable once they start selling integrated packages rather than separate (a.k.a. ‘vertical’) product lines (e.g. cash management, trade finance, open accounting, etc). The greatest fear suffered by banks is that they might start losing revenue and cannibalise product lines.

The approach I always recommend is to learn from the successful practices of the ones that have had similar experience in the past. There’s no need for banks to ‘reinvent the wheel’ if they can learn best practices from others, even if these come from completely different industry sectors. One valuable source of good practices is from the IT industry in the physical supply chain. This is a sector in constant evolution - a buyer’s market heavily exposed to customer demands and standards compliance. Not so dissimilar from the banking world, after all. I found the paradigm of IT extremely helpful to illustrate how banks can take inspiration from software vendors when deciding how to best deploy a business plan strategy to build and install electronic platforms (e-platforms) for global transaction services. To answer corporate banking product managers as to whether profit is lost when abandoning vertical product lines, I refer to my preferred area of corporate IT: the supply chain marketplace of enterprise systems.

During the late 70’s, supply chain management application software vendors had to decide whether they would stay with a portfolio of separate software applications product lines (e.g. production planning and execution, warehouse management, logistics, parts purchasing, inventory control, product distribution, order tracking, etc) or merge them into an integrated multi-module software system. The latter option was chosen, which eventually opened up the era of the materials requirement planning (MRP) systems. MRP, in turn, evolved in the late 80’s into enterprise resource planning (ERP) systems. Players like SAP, Oracle, JD Edwards, Baan, and Peoplesoft, expanded the footprint of the MRP and moved from co-ordination of manufacturing processes to the integration of enterprise-wide backend financial applications and human resources processes (e.g. finance, accounting, accounts payables (A/P), accounts receivables (A/R), HR, etc) to provide a complete solution to a company for managing their inventory, cash and people resources.

The decision criteria used to opt for MRP first and, subsequently, for ERP weighted the risks of operating in a competitive market and offering a piecemeal of separate software ‘verticals’. These risks entailed:

  • Commoditisation, as a consequence of stiff competition on functionally restricted software applications.
  • Loss of market share, due to the presence of ‘best-of-breed’ providers with more functionally rich, performing and ‘mission critical’ applications.
  • Higher total cost of ownership (TCO) for the client, due to the subsequent (and inevitable) need to integrate the various originally separate software modules.

ERP vendors also learned that they might have lost some revenue by blurring the lines between rewarding vertical product lines, but gained in profitability because they were able to attach lucrative (and more scalable) added-value services to the selling of the ERP ‘product’: post implementation maintenance, system integration, consulting, and training. The enterprise software vendors also evolved their supply chain management products into the ERP because they had to follow their corporate clients who were also evolving: modern organised companies started to integrate their various internal functions. The manufacturing sector, particularly automotive, was the first to experience this trend thanks to the influence of Japanese ‘just-in-time’ and ‘total quality management’ practices which revolutionised the work organisation structures still centred around the predicaments of Taylor and Ford (i.e. mass production, segregated duties, quality at the end of the line, and ‘any colour the customer wants, as long as it’s black’).

In summary, the lessons learned from the ERP vendors are:

  • Vertical solutions can generate revenue, but integrated (i.e. packaged) solutions (e.g. ERP) ensure profitability.
  • Vertical solutions are not scalable in terms of added-value services and add-ons. ERP solutions are.
  • The integration of IT applications followed the integration of duties at corporate organisations.

Turning back to banks (i.e., the financial chain) and to the focus theme of this article regarding staying on separate product lines or offering packaged solutions, an overview of the major business imperatives pressuring the banking industry can help:

  • All banks today claims they want to sell solutions and not just products.
  • The banking industry has become a buyer’s market, where corporate treasurers carefully select their bank relationship partners and demand more added-value services.
  • Corporate treasurers are accountable for enterprise-wide visibility of cash and are integrating functions once separate (e.g. cash, trade, payments and FX).
  • Banks are claiming they are serious about putting the customer at the centre of their business.

If there’s only one thing we should take from the ERP ‘lessons’ is that the key heart of an ERP lays in its ability to improve the performance of the internal (physical chain) business processes of a company. The magic word is ‘processes’.

This for banks (i.e., financial chain) means that:

  1. Putting the customer at the centre means putting his processes at the centre of gravity of any future offering. A corporate treasurer (i.e. the customer) has the need to finance its company’s working capital regardless of the product name of the financial instruments offered by the bank to accomplish the result. Whether it’s a letter of credit (LC), an open account trade, an invoice- or purchase order-based financing it does not matter, as long as it fulfils the expectations of solving the problem and responding to the treasurer’s cost/ benefit prospect.
  2. Corporate treasurers are accountable for the processes in the financial value chain. As these cross end-to-end the functions of the entire organisation, integration is the only means to secure visibility and control.
  3. Integrated financial value chain processes require integrated financial instruments.
  4. There’s no risk for a bank to lose profit if it sells integrated product lines. That’s what the customer wants.

Comments: (1)

Ketharaman Swaminathan
Ketharaman Swaminathan - GTM360 Marketing Solutions - Pune 28 October, 2011, 17:23Be the first to give this comment the thumbs up 0 likes

Interesting analogy but SAP, Oracle, JDE and other ERP leaders disrupted the incumbent best-of-breed players with their integrated MRP / MRP-II / ERP solutions. Whereas, banks are the leaders in the best-of-breed approach. Notwithstanding the benefits of making the shift, it seems far-fetched for banks to disrupt themselves by adopting an integrated approach. It would necessarily take someone else to disrupt banks' best-of-breed approach by providing integrated solutions. Financial services diversifications by retailers are probably the best bet to do this.     

Enrico Camerinelli

Enrico Camerinelli

Supply Chain Blockchain Personal Coach

Aite Group

Member since

26 May 2008



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This post is from a series of posts in the group:

Financial Supply Chain

In the world of international trade, the process of exchanging payments, information and documents between buyers, sellers, banks, and other involved parties is becoming increasingly important for financial institutions. This community aims at presenting views and innovative ideas related to this financial supply chain space.

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