New alliances for a digital future
The world of payments is being fundamentally reshaped by new financial technology, or “fintech”, with technology-led developments already radically transforming retail and consumer payments. Innovation on the corporate side is a more complex proposition, but come it must, as pressure mounts from corporate clients who wish to enjoy the same levels of speed, ease and flexible access in their business transactions, as they already experience in the consumer arena. With investment in fintech soaring to unprecedented heights, and increasing numbers of new non-bank players jostling to take a share of the payments market, Dominic Broom, Head of Treasury Services EMEA, BNY Mellon, explores how banks can engage with fintech to ensure not just that they remain at the hub of the payments business, but that they are able to reap the rich rewards offered by digitalisation.
There can be no doubt that the era of “fintech” is upon us; technology-driven developments have transformed the way customers interact with banks, and particularly where and how they make payments. It is arguably the single greatest driver for change in financial services, reshaping customer expectations and behaviour. Much of this has been pioneered by new non-bank payment providers such as PayPal and AliPay, which have been propelled to prominence by the immense growth in e-commerce, and are helping to bring fast, secure, convenient and near-ubiquitous access to payments in consumer transactions, to billions of customers. Banks have to ride this wave of innovation, or risk being swept away by it.
Fintech poised for its second wave
Yet the era of innovation is only just beginning. Developments continue to multiply, from biometric security to digital currencies, and it’s not just about new currencies and safer payment methods – some projects currently underway require a fundamental re-think of the entire notion of “value” and how this may be transferred.
The fintech revolution is being fuelled by rising levels of investment. Global investment into fintech innovation soared in 2014, jumping up to US$12.04 billion, from just US$4.02 billion in 2013, with the level of spending in Q4 of 2014 alone eclipsing the level of investment seen in the whole of 2012. A new generation of non-bank payment providers have made traditional banks sit up and take notice, and they fall roughly into two groups. The first are fintech start-ups, quite a few of which have now grown into major players. Of the over 4000 start-ups currently active, more than a dozen are valued at over US$1 billion. The second are major non-payment industry operators – for example, in technology (Apple) or social media (Facebook) – whose primary concern is to improve the payments experience of their customers, in order to support their own core (non-payments) businesses. All are working to take payments to new levels of speed, convenience, efficiency and multichannel accessibility.
This is a challenging arena for banks. Many have ploughed significant investment and organisational energies into regulatory and compliance-based projects in the wake of the financial crisis, and may now need to allocate resources to speed up their technology innovation cycles. Indeed, they cannot rest on their laurels, but must work full-throttle to provide the new, digital-based solutions their clients require.
With the potential of fintech undeniable, many banks are now embracing this revolution and are using a number of approaches to meet the challenge head-on, in order to future-proof their businesses. One route that is appealing to an increasing numbers of banks, is to team up with a suitable technology partner; all the more important as the fintech era enters its second major phase: focusing on innovation for corporate customers.
Compared with some of the early projects in the consumer sphere, delivering new capabilities to corporate customers requires a far higher level of investment and customer trust, as well as technical sophistication. This is why these types of partnership may be advantageous to all involved. Banks gain from access to a higher level of technological expertise, and can contribute their traditional network and KYC strengths, which fintech companies lack. For example, for centuries, banks have been custodians of corporate and individual wealth. They are also experts in managing payment risk and satisfying regulators; areas where fintech players will need support. Finally, there are plenty of ways to structure such relationships, from venture capital investment to accelerator/incubator or sponsorship models.
London, San Francisco/Silicon Valley and New York are key hubs for innovation, and are fast being followed by new innovation centres around the world. Indeed, the number of such specialist fintech accelerators in Europe and the Middle East is growing. Tel Aviv, for example, has become a hotbed for fintech activity, home to a growing number of initiatives. Citbank’s Citi Accelerator Programme, for instance, provides a four-month incubation process with mentoring, product development support and access to senior executives at Citibank. And the partnership between Bank Leumi and the local Elevator Fund provides a Tel Aviv-based incubator programme for fintech start-ups, while a 36-hour “hackathon” launched by Bank Leumi, LeumiTech and Salesforce, also in Tel Aviv, was aimed at developing fintech applications.
Corporates in consumers’ footsteps
So far, change – in terms of developing greater multichannel accessibility, speed and efficiency – has been considerably greater in the retail than in the corporate sector. However, this gap will have to be bridged in order to meet the expectations of a generation of corporate executives accustomed to the ease, speed and near-ubiquitous access they experience on a daily basis, as consumers.
On the retail side, innovation is resulting in an unbundling of a range of retail financial services, with non-banks gaining ground in areas such as purchasing (e.g. Apple Pay, PayPal), fund transfers (e.g. TransferWise), the tracking of spending (e.g. MoneyDashboard), borrowing (e.g. Wonga and Zopa), and investment (e.g. Nutmeg). There are also new entrants into the foreign exchange arena (e.g. WeSwap), where the significant reduction in risk of exchange rate fluctuations bought about by real-time payments, can be passed on to consumers.
Mobile is clearly a key area in retail payments, with mobile penetration reaching unprecedented levels; the number of mobile phones in use actually surpassed the number of humans on the planet in 2014. Mobile payments have radically changed how and where users make payments, and increased access to digital services. They have enabled previously unbanked populations in emerging markets to access basic financial services for the first time, famously pioneered by M-Pesa, which started offering mobile-based money transfers and micro-financing to consumers in Kenya and Tanzania, and has since expanded into Afghanistan, South Africa, India and Eastern Europe.
Mobile payments have not yet broken into the corporate arena in any major way, a key reason being security considerations. However, these risks are being addressed by current research (biometric data and tokenisation, for example). So in the face of pressure from an increasingly “digitally-native” workforce, banks need to be working full-tilt to develop corporate solutions for multi-device use, including smartphones, tablets and eventually wearable devices. Payments in (near) real-time are another area in which the retail sector has stolen a march on corporate banking, allowing consumers to engage in near-instantaneous digital commerce around the clock. The establishment of faster or near real-time payment infrastructures – be that Denmark’s Nets Real-time 24/7, Poland’s Express Elixir, Turkey’s TIC-RTGS, Singapore’s Fast and Secure Transfers, Switzerland’s Swiss Interbank Clearing or the UK’s Faster Payments System – all bear witness to central banks’ and the industry’s awareness of the overriding importance of extending real-time payments’ reach.
On the technology side, migrating corporate payments onto a real-time platform requires solutions for all manner of other banking functions, including reporting databases, anti-money laundering and customer accounts payable/receivable. It will also require high levels of national and regional standardisation, and cross-border collaboration. The implementation of ISO 20022, allowing banking systems to communicate more effectively with each other, and the SEPA and TARGET2-Securities (T2S) initiatives, facilitating greater levels of standardisation and harmonisation for transaction settlements within Europe, all show what can be achieved; the next step for the European Central Bank being real-time payments across the EU, as a key mile-stone on the journey towards cross-border harmonisation.
The mighty pull of the blockchain
One technology – which was devised for transacting Bitcoin; the best-known digital currency – has the potential to affect the future of corporate payments and transactions more than most. The “blockchain” on which it is built, is a distributed ledger in which every transaction or exchange is recorded in a cryptographically-secure way, and is time-stamped, transparent to all network users, and cannot be altered or deleted. Growing numbers of banks – including BNY Mellon – are exploring ways to exploit the blockchain’s capabilities for corporate payments and beyond. The technology cuts out the need for intermediaries and could therefore potentially be used to improve speed, efficiency and security (even to help eradicate money laundering), as well as to lower transaction costs and facilitate regulatory control.
One use currently being investigated, is the incorporation of “smart contracts” (computer programmes that can automatically execute the terms of a contract) into or on top of digital currencies, with a variety of information including, for example, the ownership of goods stored on the blockchain. This would allow independent agents to carry out contracts without the need for intermediaries – and without the requirement for a central clearing house.
The efficiency and risk management of securities trading can also be enhanced, which is the aim of Smart Securities: a platform enabling digital securities to be managed using blockchain technologies and improving automation and disintermediation. A number of banks have also signed up to use Ripple: a permissioned, open-source payments protocol which can provide a means for real-time, cross-border transfers to take place without the need for international settlements. In theory, this challenges the role of SWIFT, by acting directly as a clearing house for any bank that adopts it.
Step to a regional beat
In the Middle East, the speed and level of technological innovation uptake varies from country to country, with factors such as culture and security concerns impacting the appetite for investment. Indeed, with many Middle East corporates being family-run companies, each having ingrained methods and approaches to carrying out business, there can be a reluctance towards embracing innovation.
The region’s youthful population (consider Yemen, where a massive 74% of the population is under 30) is likely to play a role in boosting demand for more technology-based solutions, however, meaning there may be growing scope for fintech innovation. Mobile payments are increasing in popularity (with initiatives such as T-Pay available in countries including Bahrain, Saudi Arabia, Lebanon and the UAE), radically altering how and where payments can be made, and also granting access to financial services for those in the region without bank accounts. As is the case across the globe, the relentless advance of new technologies in consumer banking will eventually influence change in the corporate domain.
Increasingly, technology-driven supply chain financing (SCF) could also become a feature in the region. Though the trade arena has historically been renowned for its resistance to change and more traditional approach and values, it is an area that could significantly benefit from digitisation. While such innovations can be slow to catch on, with technological advancement occurring at such a rapid pace, the industry is increasingly becoming used to change and is subsequently far more responsive and ready to adopt new solutions.
While every bank and every region will find its own way to exploit the rich potential of fintech innovation, there is no doubt that we are all heading towards the bright horizon of a technology-fuelled digital banking and payments future, where customers will benefit from faster, more convenient, secure and efficient transactions, and thereby be better-placed to fuel real economic growth.
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.