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. [[[PAGE]]]

Operation payment transformation

With current core payment systems in need of modernisation, and with client expectations changing significantly in terms of their payments experience, it is clear that one of the main areas that needs to be addressed is cross-border payments. Certainly, clients expect global payments to be just as seamless as domestic payments – real-time, transparent and cost-effective. That is why this area in particular is a key focus for bank collaboration – initiatives impacting global payments need global connectivity and cooperation. And it is very encouraging to see the trend of banks working together on key initiatives begin to gain real traction. SWIFT’s Global Payments Innovation Initiative (GPII) is a ground-breaking project in this respect, with over 70 banks from around the world already signed up [1] – a significant critical mass with the potential to really drive enhancements to cross-border payment processes. And, because it involves leveraging and enhancing SWIFT’s existing global infrastructure, it marks the difference between experimentation and actually changing how payment systems – and correspondent banking – work. Certainly, that is the aim of the initiative: changing the fundamental business process to make it much more efficient in terms of clearing and settlement, and transparency of transactions from a global cross-border perspective. Elsewhere, as the provision of domestic instant payments gathers real momentum (approximately 30 countries are currently in various stages of real-time infrastructure development [2], with predictions that this number could soon rise to 140 [3]), there are also industry discussions under way between different countries’ payment system operators to help ensure a strong degree of standardisation between these individual systems is established. By putting in place such measures now, it will help facilitate the long-term vision of connecting domestic real-time payments systems together to enable global real-time payments. There are also consortiums that have emerged to explore the potential of the blockchain. R3, for example, is an initiative involving over 40 banks that is focused on developing a base layer for blockchain development and use cases for exploration [4]. The distributed ledger concept holds a great deal of promise for payments, with valuable functionality and features – particularly with regard to proof of ownership and transfer. Of course, the blockchain concept within specific business parameters is still at a very early stage, and it remains to be seen exactly how it will unfold. A great deal of effort is being dedicated to leveraging technology innovation to enrich the client experience, and this has been a key focus for BNY Mellon. In fact, we are in the midst of a digitisation journey to transform our services and the way in which we interact with our clients. The keystone of this is our NEXEN digital ecosystem – the biggest technological project in BNY Mellon history. NEXEN uses the latest advances in technology – cloud computing, open-source software and Application Programming Interfaces (APIs) – to seamlessly consolidate solutions from BNY Mellon, select third-parties (including fintechs) and clients onto a single cloud-based platform. Through NEXEN, clients will not only have an enhanced experience, with real-time data and transaction updates, they will also be able to utilise and leverage the data it holds with respect to the entire payments life cycle. Indeed, everything related to payments, including processing, exceptions, beneficiary details, transaction notifications and updates, will all be managed through services available on the platform. And by pulling together end-to-end transaction information, clients can manage their cash and payments more effectively and efficiently, therefore benefiting from considerable added-value. With technology presenting such a vast array of possibilities, it is important for banks to effectively prioritise innovation investment and deliver value to clients. Certainly, while there is a great deal of anticipation regarding the potential to ultimately be able to deliver a new era of global payments, banks must remember not to overlook enhancements that can be implemented today. There has never been a more exciting time for payments, and banks are embracing the opportunities that are emerging as a result of significant advancements in technology. Through these developments, the foundations are being put in place for monumental change, and it is now up to the industry to capitalise on this, ensuring new capabilities are leveraged to the full to provide a user-friendly, enriched transaction experience for our clients. It is being increasingly realised that collaboration – both bank-bank and bank-fintech – lies at the heart of this, and as parties come together to combine skillsets and create a network effect, we can work as one to ensure a new global payments ecosystem can ultimately be delivered to our clients.