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Commercial Banking Growth: Innovating Working Capital Management Solutions

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Role: liquidity product manager
Industry: Commercial Banking, product management & development

Situation: Regional commercial bank with over $220 billion in assets that serves consumer, small business, mid size commercial and large commercial businesses. We provide services for deposit holding, lending, cash management services and working capital management. These services generate net interest income, monthly service fees and interest revenue from lines of credit. As a regional bank we compete with other local regional banks, small banks as well as large money center banks. Small banks compete by offering low prices for services. Large banks compete by providing a larger array of services including trade management, specialized lines of credit and cross-border banking. Primary challenge is identifying new product opportunities or new features to help commercial clients optimize working capital. Additional challenges include evaluating ideas that improve working capital optimization, problems solved with new products as well what problems are important to treasurers and commercial financial officers. Commercial clients are traditional C&I, franchise, CRE, bio tech and early stage fintech. Revenue sizes for client base is concentrated between $500 million in revenue and $75 million in revenue. Commercial clients are concentrated in the eastern US with fewer clients from across the US. We have very few international clients. We are strong across our core product sets and provide very few if any market leading products. Our products are basic. Opportunities include identifying new markets and leveraging technology to provide new services and solutions for our expanding commercial market. Threats include technology companies as well as larger banking service providers who a broader array of services. I am seeking opportunities to allow us to grow our market share, capture greater share of client treasury spend and new markets that are under penetrated.

Question to Marcus:

What product trends are increasing in importance related to working capital management? What competitors are providing new working capital products? What opportunities or products are available for a bank to improve their internal product development process?

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Based on your specific organizational details captured above, Marcus recommends the following areas for evaluation (in roughly decreasing priority). If you need any further clarification or details on the specific frameworks and concepts described below, please contact us: support@flevy.com.

Digital Transformation

For a regional commercial bank, incorporating Digital Transformation is critical to address the challenge of optimizing working capital for commercial clients. The integration of advanced Data Analytics, AI, and Machine Learning can provide actionable insights into Cash Flow Management, enabling the development of personalized liquidity products tailored to the specific needs of each client segment.

Invest in fintech partnerships or acquisitions that can bring innovative technologies and solutions such as real-time payments, blockchain for trade finance, and predictive analytics for cash flow forecasting. This can improve client satisfaction, differentiate the bank's offerings, and capture a larger market share by staying ahead of the technology curve leveraged by competitors.

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Innovation Management

To stay competitive, the bank must foster a culture of innovation, encouraging the exploration of new ideas for working capital products. By establishing a formal Innovation Management process, the bank can systematically generate, evaluate, and implement new product ideas.

Consider creating a cross-functional innovation team or an innovation lab that focuses on the development of financial products. This team should engage with customers to understand their pain points, collaborate with technology providers, and test prototypes quickly. Agile methodologies should be employed to iterate on product features based on user feedback, ensuring that the final offerings are closely aligned with client needs.

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Risk Management

Effective Risk Management is crucial in developing new liquidity products. While striving to offer competitive services and interest rates, it is essential to balance profitability with credit risk.

Leverage advanced risk assessment tools that incorporate real-time data and predictive modeling to evaluate the creditworthiness of clients and the potential impact of new working capital products on the bank's risk profile. This will allow for more informed decision-making when setting terms for lines of credit and other lending products, helping to safeguard the bank's financial stability while still fulfilling client needs.

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Strategy Development Example

Working capital optimization for commercial clients requires a well-thought-out strategy that comprehensively addresses their diverse needs. For each client segment, the bank should develop tailored strategies considering industry-specific cycles and cash flow patterns.

Partnership strategies with technology providers and sector specialists can offer value-added services such as Supply Chain financing and invoice discounting platforms. Additionally, Competitive Analysis is essential to understand the offerings of both smaller and larger banks, which will help in identifying strategic gaps and opportunities in the market.

Learn more about Supply Chain Competitive Analysis Strategy Development Example

Financial Modeling

To evaluate the feasibility and profitability of new working capital products, robust financial models are necessary. These models should project cash flows, net interest margins, fee-based revenues, and the cost of capital for each new product under consideration.

Scenario analysis can help understand the potential impact of market changes on product performance. Financial Modeling will also be instrumental in developing the Business Cases for investment in new technologies or partnerships, presenting a clear picture of expected returns.

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Adopting an Agile approach to product development can significantly enhance the bank's ability to respond to market changes and client demands. Agile practices enable the rapid iteration of product prototypes based on continuous feedback, reducing the time-to-market for new offerings.

Agile teams should work in close collaboration with clients to refine product features and functionalities, ensuring that the end product is highly suited to the market's needs. This methodology also promotes internal collaboration and can improve cross-departmental synergies.

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Customer Experience

Improving the Customer Experience is at the heart of increasing market share and customer wallet capture. This means not only developing new working capital management tools but also ensuring these tools are user-friendly, integrate seamlessly with clients' existing systems, and provide a unified view of their financial health.

Use customer feedback and usage data to refine digital interfaces, and provide training and support to ensure clients can maximize the benefits of new products. This focus on customer experience can create a strong Competitive Advantage and increase client loyalty.

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Business Transformation

As the banking sector evolves, the bank must undertake a Business Transformation to stay relevant and competitive. This involves rethinking existing processes, Organizational Structures, and product offerings in the context of digitalization and changing customer expectations.

Explore new business models, such as Banking-as-a-Service (BaaS), which may open up revenue streams by allowing third-party providers to offer their own financial services using the bank's infrastructure and licensing.

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Data & Analytics

Data and analytics are central to understanding client behaviors, preferences, and needs. Invest in advanced analytics to gain deeper insights into working capital cycles and to create predictive models that can offer proactive advice to clients.

Data-driven decision-making can also be applied to internal processes, optimizing pricing strategies and identifying operational efficiencies. Ensure that Data Governance policies are in place to maintain the security and privacy of client information as you leverage this data to create more tailored and responsive products.

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Supply Chain Analysis

As commercial clients often rely heavily on efficient Supply Chain Management, offering products that enhance supply chain visibility and finance could be highly beneficial. Explore the development of supply chain financing solutions that provide clients with better payment terms, reduce the risk of supplier bankruptcy, and improve cash flow management.

Such services can strengthen the bank's relationships with commercial customers by integrating deeply into their operational needs.

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