Fintech is having a powerful impact on the transaction sector, presenting new capabilities that have the potential to redefine the very culture of payments. Driven by technology developments, and the increasingly competitive landscape as a result of the influx of fintech companies into the payments space, banks are positioning themselves at the forefront of change and adopting new strategies in order to deliver enhanced experiences to clients. With the corporate-payments space braced for dramatic digital enhancement, fintech is not only altering payments, it is transforming banks’ approaches to innovation.
In all areas of the financial industry, technology innovation is transforming the payments landscape, with new capabilities and developments emerging that enable transactions to occur with greater ease, efficiency and transparency. In many countries across the globe, domestic payments have gone—or are in the process of going—real-time and mobile. This is not only altering the payments process, it is fundamentally altering the behaviour of consumers in terms of how and when they choose to initiate payments. Certainly, technology is bringing retail transactions more in line with the needs of the modern-day customer.
The impact on the corporate space has been less noticeable than in the retail sector thus far. The increased complexity, and the often higher value and cross-border nature of transactions undertaken by corporates, means there are greater levels of concern regarding security and therefore more challenges to overcome when bringing new solutions to the mainstream market. Yet the enhancements to retail payments are triggering client demand for similar payment experiences in corporate transactions, particularly as the influence of Millennials continues to grow. And with payment infrastructures far from optimal when it comes to modern-day requirements, it is inevitable that new, innovative, fintech-based solutions will attempt to break into the corporate space, changing corporate payments as we know them.
Given that there have been few substantial changes to core payments systems in recent years (for example, The Clearing House’s US real-time payments initiative, which is due to launch in 2017, will be the first new payments system in the US since the 1970s) means they are ripe for refurbishment. As a result, fintech companies, with their digital expertise, are increasingly attempting to enter the corporate-payments arena, exploring ways to bring payments technology in line with the evolving needs of clients.
Compared to banks, fintechs have a number of advantages when it comes to innovation. For example, banks are required to allocate considerable resources—both in terms of time and costs—to adhering to increased compliance specifications in the wake of the financial crisis. Fintechs, however, while they are working to launch and scale their solutions, are generally free from the same regulatory constraints and can therefore dedicate their focus towards client-centric innovation. Furthermore, fintechs, as new entrants to the market, are without the burden of maintaining the legacy systems that banks have acquired over the years in order to serve their clients. They are therefore able to develop new solutions from scratch.
With an increasing number of tech-honed companies, equipped with ideas and intent on making their mark in the world of transactions, entering the market, where does that leave banks?
Banks taking action.
With it becoming increasingly likely that it’s a case of when, not if, technology will transform the corporate-client transaction experience, banks are gearing up to ensure they secure their future in the new digital age of payments. Indeed, the influx of new non-bank players to the market is spurring banks to adopt new strategies that ensure they are at the forefront when it comes to developing new solutions that cater to expanding client needs. Certainly, as we embark on a whole new era of payments, banks are not only participating in these transformative changes but helping to lead the transformation, leveraging their extensive sector knowledge and established industry position to begin to make the changes that are necessary.
There are a number of different approaches that banks are adopting. Many are choosing to engage with fintech companies in order to benefit from their technology expertise through bank-fintech partnerships. Fintechs are also keen to work with banks, recognising that while they may be the experts when it comes to technology, banks bring invaluable strengths to the table and cannot be rivalled when it comes to factors such as trust, safety and stability; established client relationships; scalability; regulatory know-how; and risk-management discipline. Of course, through such partnerships, banks can also gain direct access to the latest fintech ideas and projects. It is believed that by integrating the skillsets of banks and fintechs, new concepts are more likely to gain traction and become tangible market solutions in the corporate sector.
Certainly, collaboration is an approach that is being fuelled by fintechs, and banks are also becoming increasingly aware of the importance of bank-bank collaboration if they are to continue to maintain their stronghold in the payments ecosystem of the future. Indeed, in order to leverage the capabilities that are being made available through technology, banks need to be collectively focused on delivering an optimal client-payment experience through interoperability and standardisation.
In this globalised world, a key priority in this respect is to ultimately create global real-time payments solutions, with complete transparency of end-to-end costs, payment status and all of the parties to a transaction, as well as real-time fraud analysis—all at a reasonable cost. Technology has opened the door to these possibilities, and it is now up to banks to work together to bring about transformational change and deliver a new global payments experience to their clients.
Of course, this is no small task, requiring a substantial amount of change, and there are three key challenges that need to be addressed. Firstly, it is crucial to achieve the network effect—i.e., a critical mass of industry players must be involved. Secondly, harmonisation with regard to standards is required, in order to create interoperability. Finally, regulatory engagement is paramount if any initiative is to come to fruition.
With many banks now collaborating on industry-wide initiatives and work groups, the network effect is growing, and the industry is taking significant steps towards the vision of real-time, cross-border payments.
Collaborating for cross-border.
SWIFT’s global payments innovation initiative (GPII) is one such initiative. If successful, it could transform the way in which cross-border payments are made, improving the overall client experience by delivering enhanced transparency and speed. The aim behind the initiative is to leverage and enhance SWIFT’s existing global network, introducing new service level agreements (SLAs) and standards of performance to help improve interoperability and transparency between correspondent banks. A number of significant enhancement initiatives are to be introduced by the end of 2018, including capabilities such as:
- A payments tracker able to provide parties to transactions with real-time updates as to payment status, including confirmation of beneficiary receipt.
- Improved transparency as to end-to-end transaction fees.
- Accelerated transaction settlement based on agreed-upon standards established between GPII-enabled institutions.
- Improved fraud-screening and pattern-recognition services.
In our view, SWIFT’s GPII holds a great deal of potential. Indeed, SWIFT already has a strong foundation in place: with an established interconnectivity between banks, a real-time messaging system, an infrastructure that deals with governance and rules, and an existing regulatory structure. In recognition of this, more than 70 banks have so far elected to sign up, with 21 banks (including BNY Mellon) currently participating in the pilot phase. And with participating banks representing more than 74 percent of all SWIFT cross-border payments traffic across 227 countries, the project has a great deal of weight behind it.
With collaborative strategies gaining traction, and the belief that they will play an important role in transforming the global payments industry, it is hoped that such an approach will be increasingly encouraged by regulators. Certainly, this will help to bring the concept of cross-border, real-time payments much closer to reality.
The blockchain is like a box of chocolates….
With its potential to disrupt legacy payment practices, as well as other use cases involving value transfer, blockchain continues to be a hot topic across the finance industry, and is an area that is fuelling increasing collaboration between banks and fintechs.
Blockchain—the distributed ledger technology that underpins bitcoin—has a number of key attributes that could enhance financial transactions, including improved speed and mobility, risk mitigation, a decentralised nature that avoids the risk of a single point of failure, increased transparency and traceable transaction histories. Blockchain holds a great deal of promise, and its capabilities are being explored extensively. Indeed, a number of key initiatives, such as R3—a consortium of more than 40 banks that is focused on developing a base layer for blockchain development—are currently underway.
Despite the expectations around blockchain, its development remains at an early stage, and many questions remain, including with regard to regulation and regulatory backing; the significant effort that may be required to integrate the technology with other financial systems; timescales for successfully achieving a network effect across the industry; potential cost savings—as well as whether blockchain is even the best solution to address evolving payment needs.
Certainly, blockchain has the potential to dramatically modernise financial services, but a great deal is still to be learned and determined regarding blockchain’s future. In many respects blockchain is like a box of chocolates—while everybody wants a hand in it, we still don’t know what we are going to get.
What is clear, however, is that as the exploration of innovative concepts and ways to build relevance and scale in payments gathers momentum, banks can’t afford to adopt a “wait and see” approach; being passive puts banks at risk of being unable to keep pace and provide the solutions that the latest generation of clients demand. While the degree of change and the presence of fintechs in the payments space—traditionally, “bank territory”—can be somewhat daunting, banks must view these developments as constructive, inspiring the industry to evolve and adopt an efficient and effective means of transacting that is fit for the needs of today and the future. Certainly, payments need to be brought into the digital era, and banks—through both bank-bank and bank-fintech collaboration—can not only participate in these transformative changes that deliver client-focused enhancements but can help to lead the transformation.
The views expressed herein are those of the author only and may not reflect the views of BNY Mellon. This does not constitute treasury services advice, or any other business or legal advice, and it should not be relied upon as such.