The Future is Fintech
by Dominic Broom, Head of Treasury Services EMEA, BNY Mellon
“Fintech will radically redefine the payments landscape, and has the potential to leave banks behind if they fail to react.”
So concludes BNY Mellon’s pioneering new report, Innovation in Payments: The Future is Fintech, which is launched at Sibos 2015. A confluence of technology innovation, increasing interest and investment in financial technology (‘fintech’), new consumer trends and industry-wide developments has sparked a period of momentous change for the payments business, affecting not only the mechanisms, but even the concept of what constitutes a payment. As new payment capabilities come to the fore, innovative technology is transforming how we initiate and process transactions. This is no longer just a case of new currencies or faster payment methods, but an entire rethinking of transfers of ‘value’ (monetary or otherwise) and how these are undertaken.
The emergence of new players
Over the past few years, we have seen a surge of interest from non-bank players in global transaction banking, particularly payments. The foreign exchange (FX) market is already rife with non-bank participants, particularly at a retail level, with a similar trend in trade finance. Historically, however, payments have been purely the domain of banks, not least due to their complexity, and the need for both a network and clearing system access. This is changing, however, with a host of new entrants vying to win a share of the payments market with attractive, user-friendly solutions. Fintech start-ups, for example, are looking to leverage technology to bring advancements to the payments space.
Meanwhile, established non-payments industry operators, such as Facebook and Apple, are seeking to improve the payments experience of their customer base in order to support their core (non-payments) business. These new competitors are playing a leading role in exploring opportunities that have the potential to transform payments processing in terms of speed, convenience, efficiency and multichannel accessibility.
Constraints and opportunities
An obvious question is why non-bank participants are playing such an important role given banks’ supremacy in this area in the past.
Firstly, it is important to emphasise that banks have been instrumental in driving radical change in the payments space over the past few years, with a marked change in culture from competition to collaboration. For example, in the wholesale and corporate payments sector, industry-wide initiatives such as SEPA and TARGET2 have served to increase payment harmonisation and establish market standards. However, despite such progress, some banks are currently underprepared in embracing and harnessing a new generation of payments technology, creating a greater opportunity for non-banks to enter the market.
A major reason for banks being less equipped with state-of-the-art technology-driven solutions is that they have a range of competing priorities, of which compliance with new regulations that have materialised since the global financial crisis is perhaps the most onerous and complex. Banks consequently operate in a more constrained environment than their non-bank participants, such as the need to perform rigorous know your customer (KYC) approvals and meet anti-money laundering and sanctions screening requirements. With a range of pressures on resources and investment dollars, banks are therefore in less of a position to focus on innovation than aspiring market participants that are not subject to the same constraints. However, high standards of regulation mean that banks are able to provide much greater levels of security and risk mitigation than non-bank players, which is likely to become a more compelling issue in the future as non-bank solutions become more mainstream.
Conversely, fintech companies that are more nimble and less constrained by regulation, are keen to tap into the potential profitability of the payments market. Increasingly, payments are not a physical exchange, such as cash or cheque, but a transfer of value driven by data on the originator, beneficiary and transaction details. The data-led nature of a payment is highly attractive to both fintech companies and larger non-bank operators that are looking to add payments to their wider offering, as this is typically the area in which they excel.