Digital fluency in commercial banking and its impact on businesses
Over the past decade, the banking industry has made tremendous strides in establishing secure and convenient technology solutions like online and mobile banking, chip technology and touchless banking platforms. In 2020, as the global economy faced unprecedented challenges, the industry got a significant push to accelerate its investments in digital fluency. Many banks were able to make the adjustment, transitioning end-to-end digital loan and grant disbursement programs designed to support their commercial clients. While businesses are starting to focus on new, yet equally pressing matters, the demand for banks to evolve their digital solutions continues. Companies in the financial technology space are a great indicator of corporate need, having raised $200 billion in venture capital funding since 2014. It’s important to note that while those early years were mainly driven by consumer solutions, such as digital wallets for mobile phones or robo-advisor apps to guide investing, there has been a significant uptick in emerging technologies focused on corporate banking capabilities.
When we consider how blockchain and, subsequently, cryptocurrencies have challenged financial services, it makes sense that banks continue to pursue solutions that deliver a seamless client experience within a multifaceted digital environment. Digital platforms also allow commercial banks to provide smaller or growing customers with insights, expertise and personalization that was previously only accessible to large corporations. At Texas Capital Bank, the team works to serve its broad commercial client base that spans from small- and medium-sized enterprises to large national businesses. With digitalization in mind, the bank has recently updated its treasury platform to enable better reporting and data management for commercial card clients, rolled out an electronic foreign exchange platform that transitions international wires and introduces efficiencies around converting funds from one currency to another, as well as developed a road map for integrating application program interfaces (APIs) into other banking services.
As more banks follow suit and grow their digital fluency, three digital trends have emerged that commercial businesses should be made aware of — both to explore the broader benefits of doing more digitally, as well as to use as a marker when considering a banking partner.
Digital payments and receipts
A digital payment system allows corporate treasures to send or receive payments in a digital format, such as automated clearing house (ACH), virtual card or wire. The world has been moving toward 24/7 real-time payments for the past few years, but new capabilities are enabling data and dollars to travel together, giving businesses visibility into insights they can use to advance strategic plans like selling more to customers that are in good financial standing or buying inventory earlier based on predictable cash flow. Payment digitalization gives businesses better control over disbursements, increases back-office efficiencies and provides the opportunity to earn rebates on transaction volume.
In addition to being cheaper and faster, most forms of digital payments are also safer. Many banks are leveraging platforms with built-in features to better protect against fraud. Equally important, ACH and commercial cards offer a closed-loop, total recon situation, meaning that return capability adds an additional layer of risk mitigation.
Just as businesses must modernize their payment systems to remain competitive, commercial banks must shift away from legacy systems in favor of digitalization. In addition to creating a secure and effective digital payment platform, Texas Capital Bank has embraced real change by designing a payment solution to support commercial clients with complex revenue cycle systems, such as hospitals.
Open banking and Banking as a Service (BaaS)
The concept of open banking — initially thought of as a regulatory compliance requirement in the retail banking space — has grown over the past several years into a valuable business opportunity in commercial banking. Open banking is a global technology-based initiative that gives financial services providers like Texas Capital Bank open access to financial data from bank and non-bank institutions using an API, which ultimately allows for better networking of accounts and data across multiple institutions. For corporate entities, the benefits of open banking include:
- More effective liquidity management: In open banking, payments can be made exactly when they are due, and the entire financial supply chain can potentially be orchestrated in real time or near real time. The infrastructure of the platform, along with the visibility it enables, gives corporate treasurers the power to make preventive liquidity shifts, averting shortages and optimizing the use of surpluses.
- Easier access to loans: Rather than submitting financial statements and other necessary documents manually, open banking allows financial lenders to review a company’s books digitally and determine their eligibility to receive loans. This saves both the business owners and the lending institution significant time and effort.
- Aggregated views and automated efficiencies: Open banking platforms allow the ability to view consolidated, aggregated accounts across banks or geographies with links to expenses. When combined with cash-flow forecasting tools and data analytics, it positions commercial banks as advisors who can drive data-driven conversations with clients to recommend strategies and solutions designed to improve working capital.
An additional outcome from the use of APIs is BaaS. This model allows licensed banks to integrate digital banking services directly into the products of their commercial clients. So, if a business wanted to offer debit cards, digital lending or payment services to its customers through its app or website, it could do so without needing to acquire a banking license. Therefore, BaaS is sometimes referred to as white-label banking — and the phrase “every business is a fintech business” is growing in popularity.
The benefits of open banking and BaaS to commercial businesses are profound, and with many U.S. banks creating API channels for corporate clients, the proliferation of end-to-end data will further improve decision-making in even more new ways in the future.
New solutions — especially those in the digital realm — can create new risks, which demands new risk controls. A renewed focus on the protection of payments has increased along with the occurrences of business fraud. The Association for Financial Professionals (AFP) reported that 75% of organizations were targets of payment fraud in 20201. This puts banks and specifically their treasury teams in a critical role to educate commercial clients about the risks of fraud, along with providing services designed to help protect them in the event of a fraud attack. The two most noteworthy fraud scenarios involve ACH and wires.
In 2020, ACH debits and credits accounted for 34% and 19% of reported fraud, respectively2. Fraudsters only need two pieces of information to pull off ACH fraud: a checking account number and a bank routing number. There are certainly a number of ways these may be obtained, but one of the most popular is email phishing. This is when an employee receives an email that tricks them into downloading malicious software that enables fraudsters to steal account information. There are certainly solutions that commercial banks offer to combat loss, such as ACH positive pay and ACH blocks and filters. But given the origins of most ACH fraud events, an additional layer of preventive care should be found in your relationship with your bank. Maintaining an open dialogue with your bank’s treasury experts and allowing them to serve as advisors and educators on what to look for in advance of a fraud event can make all the difference.
Similarly, wire fraudsters often utilize a method of attack called business email compromise (BEC) to initiate an illegitimate transfer of funds. There are two general buckets that BEC attacks fall into: email phishing, which involves malicious links and/or attachments like in the case of the aforementioned ACH fraud and, more commonly, social engineering attacks. In the latter, an employee receives an email that looks to be from a legitimate sender, often from a high-level leader within the company such as a CEO or CFO. The posing business leader will request with some urgency that a wire transfer be made while providing believable reasons behind the need, such as a new acquisition that cannot yet be made public. Within minutes, businesses can lose a fortune. To make matters worse, this scheme can be difficult to detect, which may be why it was the largest single source of payment fraud attacks in 20203. While there are services that commercial banks can put into place to help reduce the risk of BEC to commercial clients, such as systematic approvals on wire transfers, the real value of intervention comes before the fraud event in the form of preventive training. The value of that training is largely determined by the expertise of your bank’s treasury team.
Texas Capital Bank has deep experience in protecting its commercial clients from cybersecurity risks. In addition to identifying where businesses may be vulnerable, our team of experts can help implement new protocols and solutions designed to protect your capital. Make an appointment to learn more today.
1 2021 AFP Payments Fraud and Control Survey Report, AFP, published March 2021.