Banks and Fintech: An Evolving Relationship
by Michael Bellacosa, Head of Global Payments Product Management, Treasury Services, BNY Mellon
Rapid technology developments and the corresponding flood of new fintech players into the finance market are having a huge impact on payments. What’s more, it is also having a huge impact on banks, which are having to adapt to and navigate the fast-changing landscape. Michael Bellacosa, Head of Global Payments Product Management, Treasury Services, BNY Mellon, discusses how banks’ strategies are evolving in response to fintech and digitisation, and how banks are taking the helm in order to deliver client-centric, transformative payment initiatives.
The payments space has undergone a significant shake-up in recent years, with new technology capabilities and a mass of fintech companies bursting onto the scene. These developments presented a whole new ballgame to banks; not only were they required to attune to the increasingly-digital landscape, the market had suddenly become much more competitive.
Understandably, a degree of uncertainty swept through the banking sector. Yet this initial reaction was soon replaced with intrigue and a need to take action. Certainly, with the transaction landscape evolving around them, a ‘wait and see’ approach could be viewed as a potentially risky strategy. And with fintech introducing new technology and possibilities, including the opportunity for banks to address the historic challenges of their payment legacy systems and offer new client-centric, modernised solutions, many banks were soon firmly on board with fintech innovation; seeking to explore and leverage emerging technology’s huge potential to enhance payments.
Banks have adopted a range of strategies in order to tap into the vibrant fintech scene, including venture capital-style investment and incubator/accelerator programmes, as well as establishing innovation centres with the aim of working with both fintechs and clients on new, innovative ideas and concepts that could enrich business processes and the transaction experience.
This close collaboration with the fintech community has not only enabled banks to become involved in developments and understand how fintech could impact the industry, but has also helped to affirm banks’ role in delivering the future of payments. Indeed, the value of bank-fintech partnerships is very much reciprocal, with fintechs benefiting from banks’ existing, extensive pool of clients, their established trust and security with regard to cash and transactions, as well as their ingrained knowledge of the practicalities of functioning payment systems and industry requirements regarding regulation and risk mitigation – areas in which fintechs have very limited experience.
As a result, banks’ mind-sets have very much progressed from a state of trepidation regarding their place in the future payments landscape, to not only embracing digital change, but helping to lead the evolution and deliver an optimised client experience. Certainly, BNY Mellon believes it is extremely important to be at the forefront of developments, and we are heavily involved in a significant number of payment modernisation efforts, driving and leading transformational change to the benefit of our clients.
Technology: the beginning of the transformational journey
As banks look to drive forward developments, their focus has very much shifted to looking at change in terms of the bigger picture: how business processes can be enhanced and supported using these new technologies, and how they can realistically be applied to the finance industry.
There is a great deal of activity in the fintech sector, with many exciting concepts – such as the blockchain – being explored, and it remains clear that developments unfolding through technology innovation hold the potential to completely transform the world of payments. However, what is also becoming clear, following the initial surge of activity in the fintech sector, is that while technology is providing the tools to transform payments and has been the catalyst for change, there are a lot of factors that need to be addressed if new solutions are to be launched into the mainstream market.
Indeed, widespread traction in cross-border payments will require three key building blocks. Firstly, it needs buy-in from a critical mass of payment system players, sometimes termed the ‘network effect’. Secondly, common standards and practices are needed to create opportunities for interoperability. Finally, it is crucial that regulators are comfortable with developments.
In recognition of this, banks are also increasingly understanding the importance and value of bank-bank collaboration, working together to drive forward progress through greater standardisation, interoperability and large-scale backing of industry initiatives.