Banks: the engine room driving digital change
The rise of financial technology or “fintech” companies has sparked unprecedented levels of digital innovation, resulting in huge change, especially in the retail transaction space. While developments have been less prominent in the corporate sector – and particularly elusive in the trade finance sphere – that is set to change. BNY Mellon’s Anthony Brady, Global Head of Business Strategy and Market Solutions, Treasury Services, and Christopher Mager, Head of Global Innovation, discuss how, as the value of collaborative innovation strategies takes hold, banks are leveraging their industry-leading position to drive transformation and deliver an enriched transaction experience to clients.
Technological transformation is occurring across the finance world, with digitally-driven enhancements making transactions and processes increasingly efficient, transparent and accessible. This sea change was initially set in motion by fintech companies using their technology proficiency to modernise existing systems and approaches. In this respect, the retail banking sector has seen the majority of innovation to date – including PayPal and AliPay’s rise in e-commerce transactions, which has brought convenient, near-instant payments to the mainstream.
But expectations for cutting-edge payment systems similar to those in the retail space are heightening in the corporate sector, particularly as the proportion of leaders of the business world increasingly shifts from the baby boomer generation to tech-savvy millennials. Indeed, such demographic changes, coupled with the fintech progress in the retail space, is propelling client demand for attractive, user-friendly payment solutions. And corporate payment modernisation is certainly long-overdue – with core systems seeing little in the way of upgrades for decades.
Unbound by complex legacy systems and the regulatory requirements of banks, and equipped with exceptional digital creativity, fintechs have remained on the pulse in efforts to deliver smart solutions aimed at millennial users.
For all their technological prowess, however, developing new concepts – and even actual products – alone is not necessarily enough to succeed in the complex corporate finance arena. Indeed, successful fintech transformation requires a deep understanding of financial regulations and security requirements, working capital to operate at scale, and a substantial client reach. In this respect, it is only banks that tick all the boxes. Indeed, the traditional banking community has unrivalled regulatory and payments experience, as well as long and trusted client relationships.
Banks are therefore ideally placed to lead the industry’s digital agenda and bring new capabilities and experiences to benefit clients, working with fintechs to fuse their respective skills and experience.
Banks at the helm of payment innovation
Traditional providers are more open than ever to collaboration as the answer to driving forward digital change, and a great deal of effort is currently being dedicated to enhancing the future corporate payments space – with a key aim being to ultimately provide a global, real or near real-time payment experience.
Notably, SWIFT’s global payments (gpi) initiative aims to create an internationally-harmonised payments infrastructure by leveraging its existing global network to offer same-day payment clearing and full transparency of transaction costs and remittances. The initiative, currently in its pilot phase, already has the backing of over 70 banks from across the globe (including the Middle East), representing 75% of global payment traffic.
Similar partnerships that employ “wisdom of the crowd” logic to banking regeneration are exploring the benefits of distributed ledger technology, or the blockchain. The cryptographically-secure blockchain – the underlying technology for Bitcoin – holds the potential to answer many questions that are being raised regarding existing payment rails, including concerns around transparency, cost, efficiency and risk mitigation.
Given the distributed ledger technology’s broad applicability, banks and fintechs are joining forces to explore how blockchain may regenerate the payment ecosystem. For instance, the R3 consortium, comprising over 50 financial institutions – as at August 2016 – marks a joint approach to developing common standards for blockchain, as well as defining and building a base layer and communication protocols.
Collaboration: the formula for transforming trade
While it is the payments space that has largely captured the attention of digital innovators, it is increasingly being realised that such technology capabilities hold a great deal of promise with regard to trade. Certainly, this sector is heavily dominated by labour- and paper-intensive processes, which could be overhauled through fintech innovation.
Regulators, for example, are focusing on how technology can be leveraged more effectively in anti-money laundering (AML) applications in the trade sector, examining how it can enhance risk mitigation methods and help to verify the authenticity of transactions. And proof of concept (POC) projects exploring solutions that utilise the blockchain and how it could be used to enrich transactions and mitigate risks are also gaining traction. Indeed, a number of bank consortiums, including R3, are looking to create solutions via POC by working with various technology companies.
That said, the trade industry is somewhat renowned for being slower to adopt modernising solutions than other finance industry segments – notably due its inherent complexity. Indeed, even a straightforward transaction can include a multitude of participants (such as the buyer’s bank, seller’s bank, logistics, carriers, inspection agencies and insurers). With so many parties to consider, achieving standardisation via the full buy-in of new end-to-end practices remains problematic.
For this reason, collaborative approaches are particularly important, leveraging skillsets and expertise, and working together to address problems with solutions that can add the most value for clients.
Herein lies the advantages of APIs or “application programme interfaces” – tools with interoperable and customisable capabilities that can be used not only to build software applications, but link them together. An inherent strength of API development is the flexibility and ease of their integration, meaning that banks and clients can work more collaboratively to develop new solutions – giving clients a voice to ensure that end-products are specifically tailored to their requirements. It is hoped that this approach will be particularly effective in inciting digital progress in the trade space, as clients will not only have a clearer understanding of the changes, they can help to determine how developments unfold.
Recognising the value of APIs, BNY Mellon has developed an industry-leading, cloud-based ecosystem – NEXEN – which integrates solutions and data from BNY Mellon, clients and select third-parties (including fintechs), which clients can access through NEXEN’s digital portal or electronically via APIs. Currently, more than 50 APIs of various BNY Mellon functions are available in the API store, which will update and grow according to evolving client needs. And with around 500 additional APIs currently undergoing development by BNY Mellon, there is scope for this approach to drive innovations that will streamline the corporate’s everyday operations in previously undeveloped corners of the finance industry – namely trade finance.
Fintech collaboration: a regional perspective
Undoubtedly, fintech collaboration has the power to transform the very nature of payments and trade. Looking specifically at the Middle East, receptiveness to fintech adoption varies between countries across the region, and many have been slower to embrace digital innovation than, say, Europe or North America. With the Middle Eastern business culture comprising of large numbers of family-run conglomerates with minimal appetite for continuous renewal, it can sometimes be challenging to demonstrate the value of new technological endeavours.
This is particularly true for fintechs. Indeed, the region’s conservative approach to banking means that corporates tend to widely support traditional FIs rather than entrusting their wealth to new, unfamiliar market entrants. In many respects, there is therefore only so far that fintech entrants alone may be able to penetrate certain markets.
However, appetite for digitisation is certainly present, and growing in correlation with the region’s millennial population. Roughly 30% of the Middle East’s financial services directors are looking to increase investments into disruptive technologies, and a raft of new players are entering various markets in the region, including Beehive (crowdfunding), Betterment and Wealthfront (wealth management), and PayFort (payment solutions) – demonstrating the potential influence that new technology capabilities holds for the Gulf’s future.
With an increasing critical mass of banks – including BNY Mellon – committing to collaborative change to deliver enhanced, digitally-driven client experiences, as well as the buy-in from the fintech space, the financial industry is transforming into a network dedicated to taking payments into a new digital era. Technology is providing the tools, and it is now up to banks to ultimately build effective global capabilities that best serve the needs of our clients. Certainly, the industry is abuzz with change, and there has never been a more exciting time for payments and trade. Watch this space.
The views expressed herein are those of the authors 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.