Dominic Broom | Head of Treasury Services EMEA, BNY Mellon Treasury Services
The wind of change in the payments world is gaining in strength as financial technology’s (“fintech”) potential to alter how, where and when payments are made – as well as who it is that facilitates them – is further explored and leveraged. This paper examines the growing capabilities of fintech in both the consumer/retail and wholesale/corporate payments arenas, and discusses the monumental role fintech – and the array of solutions it presents – will play in shaping the course of the payments industry as a whole.
Without a doubt, the “era of fintech” is upon us and banks can’t merely be mindful of this; they must also have a clear plan in place in order to adapt to and benefit from fintech-fuelled changes. While the banking industry is traditionally more “conservative” to change – certainly fast-moving change – any hesitation or ambivalence here could be costly, particularly as new technology introduces not just new solutions, but also potential contenders to banks’ long-standing reign as payment processors. In order to position themselves at the centre of the payments industry of tomorrow, banks must act today to understand, interact with, and cherry-pick from the full smorgasbord of fintech developments.
The range of options to choose from is broad and diverse. As the number and type of fintech players, developments and offshoots gather pace, the emergence of new tools and solutions (such as digital currencies and biometric security) are in turn gaining traction and reaching the market with ever-greater speed. To date, the impact of these new entrants has been far more profound in the retail and consumer payments space (more of which in the following pages), yet these new payment capabilities and ideas are already diffusing into the area of corporate payments, as personal preferences influence corporate demand. Furthermore, in the continually-evolving payments sector, the impact of the fintech “revolution” isn’t something occurring in isolation. It is important to remember that the corporate and wholesale payments industry isn’t static, and that technology is already being leveraged to drive industry-wide improvements with regard to harmonisation, standardisation, centralisation and the development and application of increasingly sophisticated solutions.
Following on from our wider analysis of the payments industry (please see “Global Payments 2020: Transformation and Convergence”), this report hones in on the influence of fintech, to assess the direct (and indirect) impact of new technology on payments; the way in which it is moulding client behaviour and fuelling expectations for better, faster, more innovative solutions across the payments spectrum, and how industry changes are set to re-shape the corporate payments landscape. This report also examines what these advances mean for banks, and the strategies they should now adopt (in particular, far closer engagement with the fintech community) in order to understand and access these exciting developments, and thereby future-proof their long-held position at the heart of global payments.
Dominic Broom Head of Treasury Services EMEA BNY Mellon Treasury Services
Fintech is changing the face of global payments. Global investment in fintech ventures tripled in 2014 to US$12 billion.1 As new payment capabilities come to the fore, cutting-edge technology is transforming how transactions are initiated and processed. This is no longer just a case of new currencies or faster payment methods, but an entire rethinking of transfers of “value” and how these are undertaken. This presents both a challenge and an opportunity for banks.
A new breed of non-bank payment provider has kick-started a surge in payments innovation, ranging from fintech start-ups (those looking to leverage technology to bring advancements to the payments space) to established non-payments industry operators (such as Facebook and Apple). More fintechs are graduating from the ranks of start-ups to multi-billion dollar listed companies: at least 4,000 fintech start-ups are active and more than a dozen of these are valued at over US$1 billion.2 These new players are seeking to improve the payments experience of their customers in order to support their core (non-payments) business. From all angles, they are leading the charge in taking payments to the next level in terms of speed, convenience, efficiency and multichannel accessibility.
We are seeing innovation in different forms depending on the payments sector and market. The most significant changes are in retail payments, resulting in the unbundling of a range of financial services. The foreign exchange (FX) market in particular is being explored by non-bank providers, which are taking advantage of the cost-saving opportunities. In the wholesale and corporate payments sector, innovation and new solutions have been helped by industry-wide initiatives such as SEPA and TARGET2, which have established market standards and increased payment harmonisation. However, in spite of this progress, some banks are currently underprepared when it comes to adjusting to such changes. This is due in part to the plethora of new regulation in the wake of the global financial crisis, diverting precious funds away from research and innovation, into compliance-related projects. But it is important to remember that high standards of regulation mean that banks are typically able to provide much greater levels of security and risk mitigation than non-bank players. Few non-bank providers want to take on the heavily regulated parts of finance. It’s also worth pointing out that you still need a bank account to use most fintech services.
While obligatory regulatory changes have placed pressure on bank resources, banks must now prioritise adopting a new technology-focused strategy. A recent report by Accenture revealed that 72% of senior industry executives felt their bank had only a fragmented or an opportunistic strategy in place for digital innovation.3 The speed of fintech-fuelled change in the payments arena means banks need to shake off their reputation as being slow to adapt by implementing swifter technology development cycles and replacing legacy payments systems.
The financial services industry already has one of the highest ratios of IT spend as a proportion of revenue,4 with levels expected to reach US$197 billion in 2015.5 That said, over three quarters of this is estimated to be in maintenance rather than new services. Banks need to redress this imbalance.
Indeed, digital currency-based solutions and the potential they hold in terms of settlement mechanisms and exchange of value are forecast to act as a disruptive force in the wholesale payments sector as various fintech start-ups launch their offerings in the medium- to long-term.
In recognition of the growing role of fintech in the world of corporate payments, banks are exploring allegiances with some of these tech-savvy start-up companies, in order to expand their knowledge and understanding of potential developments, and to be a real part of the new digital direction of payments. Banks are doing this through a number of methods, including venture capital investment and accelerator/incubator programmes.
As heightened demand for enhanced user-friendly payment experiences filters through from the retail space into the wholesale and corporate sector, banks – regardless of size or market – must ensure they are positioned to tap into these exciting fintech developments, and leverage the creativity and flexibility of non-bank players. Failure to do so brings the risk of being outmanoeuvred by more nimble competitors, who will be quick to leverage the numerous opportunities this new payments landscape has to offer.
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