Flying the Fintech Kite

Technology innovation has always been intrinsic to the changing role of treasury, and been instrumental in creating opportunities for enhanced efficiency, control and capacity building. In some cases, such as electronic banking, technology has been delivered by banks while others, such as treasury management, payment, collection systems and some trading portals, have been developed by third party technology companies. As Bruno Mellado, Head of International Payments & Collections, BNP Paribas comments,

“Fintech is not new for treasurers, although the name has been coined relatively recently: treasurers have benefitted from innovations by banks and technology vendors and the partnerships between them, over many years."

If you were to believe much of the rhetoric that has circulated over the past three years or so, however, you would think that financial technology was invented in around 2014, discarding two or more decades of treasury technology evolution to gaze starry-eyed at new ‘fintech’ companies with their ‘disruptive’ technologies, edgy branding and designer casual dress code. Today, however, the rhetoric is starting to wane, with more sensible conversations now taking place about the role and potential of new technologies. In reality, these conversations are far more exciting than the somewhat vacuous claims of a brave new technology world in which the ‘little guys’ break down the ‘establishment’ (a direct quote from a fintech CEO).

Rejection of disruption?  

Bruno Mellado Head of International Payments & Collections, BNP Paribas

‘Disruptive’ is the term most frequently applied not necessarily to new technology, but new deployments of technology, of which Uber is often given as an example. In payments technology too, PSD2 (the second payment services directive) seems to promise a new generation of competitive payment offerings to challenge existing players and practices. However, as Uber’s experience illustrates, with the recent (and possibly temporary) decision not to renew Uber’s license to operate in London, the window during which a company can play outside the status quo is short, and soon enough, it becomes clear that everyone, emerging or incumbent, needs to play by the same rules. Similarly, there are undoubtedly new payment technologies and models emerging which are creating significant new opportunities, particularly in regions such as Asia and Africa where mobile solutions in particular are proliferating and the pace of innovation is fastest. However, these solutions are typically not destroying an existing model, but creating a new paradigm without the hindrance of legacy technologies. Corporate treasurers and finance managers’ objectives are not looking to be ‘disrupted’, with its implications of uncertainty and fundamental change, but instead to fulfil their roles more efficiently, cost-effectively and securely. Paul Camp, Global Head of GLCM-FIG & GTRF-FIG, and Global Head of GLCM Business Transformation, HSBC outlines,

“Two of the key drivers of innovation are: evolving customer demand coupled with the arrival of significant new technologies. Corporate treasurers and finance managers are always looking for ways to improve efficiency, increase revenues, enhance information flows and optimise risk management. These demands have become particularly acute over the past decade, particularly given the promise of new technologies.”

Luc Belpaire, Director of Product – Payments, FIS suggests,

“The continuing era of cyber-crime, the growth in demand for simpler, easier to use technology, and the desire for real-time information have been a few of the primary factors driving the introduction of new solutions.  Organisations are placing a higher value than ever on secure and powerful, yet easy to implement technology – that combination, while conceptually straight-forward, hasn’t always been easy for solution providers to deliver.”

So how should we perceive ‘disruption’ in a corporate treasury and finance context, and what could it mean in practice? Bruno Mellado, BNP Paribas says,

“There is a great deal of talk about the disruptive potential of new technology, but it can be quite difficult to define what this means in practice. In my mind, disruption in this industry is really in the combination of a new culture, new technologies, new money and evolving regulation, which is accelerating innovation and change at a far faster rate than we have seen in the past.”

He continues,

“Triggered by the global financial crisis and to some degree an element of complacency in the industry, we have seen a far more rapid pace of change, new financing for fintech ventures, and a growing culture of entrepreneurship which has been less apparent in transaction banking in the past.”

Leveraging technologies to meet corporate demand

Paul Camp Global Head of GLCM-FIG & GTRF-FIG, and Global Head of GLCM Business Transformation, HSBC

While the innovation stars are aligning in cash and treasury management, treasurers rarely have the time or appetite to buy new toys that look good but add little value. Bruno Mellado, BNP Paribas emphasises,

“Innovation in technology is only of value when it addresses specific customer challenges or creates new value-added opportunities, so banks and new and established technology companies need to work together to identify the most meaningful areas of focus.”

Open API (application programming interfaces) are a useful example of practical innovation. Open APIs allow an organisation to provide access to data held in its systems to its customers, or to third parties, creating new opportunities in the way that organisations and technologies are connected. Open APIs are already being proactively deployed in locations such as the UK and Singapore, while the PSD2 obliges banks to allow third parties to access customer data when authorised by the customer to do so, therefore allowing them to build additional services beyond those of the bank. From a corporate perspective, open APIs offer the opportunity to embed banking services far more closely into their solutions and services, and to integrate information and processes across banking partners more cohesively. Luc Belpaire, FIS continues,

“API technology is a solid, recent example of a solution which has resulted from bank & technology partnerships.  API technology can facilitate much simpler integration, as well as real-time transaction processing between banks and corporates.  The use of API technology will change the way the treasury community process transactions (batch processing v. real-time processing), and receive information reporting (prior day reporting to real-time reporting).  We expect adoption rates of API offerings to grow swiftly in a few short years.”

There are already a number of concrete examples emerging. For example, DBS recently announced a partnership with GrabTaxi in Singapore which allows taxi payments to be done via a new, secure app, replacing cash and card payments to provide greater convenience to customers, and more rapid payment to drivers, and there are many other examples emerging.

Open APIs are often an enabler to other technologies. Bruno Mellado, BNP Paribas emphasises some of the other technologies that are delivering value,

“Some of the areas in which we see the greatest progress are:

These points are particularly interesting as they include both new and existing technologies that are being used in new ways. For example, SWIFT gpi (global payment innovation) offers a standard service level across banks for cross-border payments to allow same-day payment, with a payments tracker to provide visibility and predictability over the timing, status and cost of payment. API technology is part of the way that SWIFT gpi is delivered, such as the tracker, but critical to the value and rapid adoption of gpi is that it leverages the existing, trusted SWIFT network rather than creating a new network and set of processes and controls that would increase risk and uncertainty. Paul Camp, HSBC summarises some of the areas of potential, including AI,

“When it comes to technology, I would identify four key themes:

The focus on AI is an important one. The potential for artificial intelligence (AI) tools and machine learning, is not to create a department staffed by automata, but to improve insights and processes. According to McKinsey Global Institute’s recent report, “Artificial intelligence: the next digital frontier”,

“Early evidence suggests that AI can deliver real value to serious adopters and can be a powerful force for disruption. In our survey, early AI adopters that combine strong digital capability with proactive strategies have higher profit margins and expect the performance gap with other firms to widen in the future.”

In particular, industries such as retail, utilities, manufacturing, health care, and education are already leveraging the potential “to improve forecasting and sourcing, optimise and automate operations, develop targeted marketing and pricing, and enhance the user experience.” These aims resonate strongly with treasury, as they seek to leverage data in new ways to enhance operations, develop better insights into future risks and liquidity requirements, and increase predictability of information and transaction flows.

Has blockchain hit a block?

Luc Belpaire Director of Product – Payments, FIS

Luc Belpaire, FIS highlights the potential both for AI and blockchain (distributed ledger technology (‘DLT’)).

“Blockchain and the emergence of artificial intelligence (AI) are two areas which have received quite a bit of media coverage, and for good reason. A recent study conducted by EuroFinance and J.P. Morgan indicated that over half of treasurers believe blockchain will fundamentally change the payments ecosystem. Many treasurers believe the distributed database technology and peer-to-peer network underlying blockchain may allow for organisations to more easily exchange data, with reduced reliance on intermediaries. Because secure and efficient payments processing is commonly a pain point for treasurers, many organisations would be eager to adopt a new technology that can simplify transaction processing. With AI, key functions such as cash forecasting and transaction processing fraud mitigation can be vastly improved through improved technology.  New AI and blockchain style solutions may be closer than the treasury community thinks.”

New solutions based on DLT or blockchain are emerging particularly in the trade finance space, with the potential to transform paper-based processes, and the R3 blockchain consortium continues to build momentum. However, the success of new solutions, as with every other new technology, is not in the way that they exploit temporary loopholes to ‘disrupt’ the market, but to address genuine problems or create opportunities that add quantifiable value to users. Bruno Mellado, BNP Paribas advises restraint and a level head when weighing up the value of different technologies, including blockchain,

“Even a year ago, blockchain (distributed ledger technology) was being feted as a transformational technology in transaction banking, but this promise has faded a little, even though we are likely to see genuine opportunities emerging in conjunction with established technologies. Whenever looking at new technologies, it is important to weigh up the risk, cost and time to market compared with existing, proven technologies, to determine what is likely to become a trend, and what is simply trendy.”

Fulfilling potential through partnerships

Although a great deal of proof of concept work around blockchain and other technologies is being done by individual organisations, the initiatives that are coming to fruition, such as in trade finance, have been designed or developed on a collaborative basis. Does this mean that the era of the young, emerging ‘fintech’ is now over, and these technologies are becoming part of the mainstream? Well, yes and no. Paul Camp, HSBC comments,

“Emerging fintechs in particular typically excel at coming up with innovative solutions, and are often agile, creative and entrepreneurial. Scalability is often the biggest challenge for these companies, but this challenge can apply equally to larger, established companies too. In some cases, collaboration between complementary partners can help to overcome this, but this is easier said than done, and success depends largely on defining and retaining the value that both parties offer.”

While scalability is one issue with small, unproven new technology companies, the other issue is long term financial and strategic viability, particularly given the business-critical, sensitive nature of treasurers’ responsibilities. Luc Belpaire, FIS highlights,

“Corporate treasurers and CTOs are placing a much greater value than ever before on technology vendor counterparty risk, in order to protect company assets. For that reason, corporate treasurers are extremely sensitive when dealing with emerging fintechs, and aren’t always keen on becoming early adopters of new technology from these firms.  Those emerging fintechs who can partner with large, trusted banks to offer their solutions, will have greater adoption rates and success in the corporate community.”

Partnerships between new and established technology companies and banks are not new. Paul Camp, HSBC notes,

“Many banks, including HSBC, have worked with financial technology companies for a long time. In some cases, they provide software to the bank for its own purposes, while in others, solutions or components are embedded into the solutions delivered to customers under the HSBC branding.”

Bruno Mellado, BNP Paribas drills down further into the potential for partnerships,

“The value of bank or technology company partnerships for an emerging fintech – and vice versa - depends largely on the type of solution that it offers and the problem it addresses. If the solution needs to be deeply embedded in the industrial chain between banks, technology companies and corporate treasury and finance functions, it is very difficult for treasurers and finance managers to bring in an additional tool, with high integration costs and the potential for additional operational risk. Therefore, it makes sense for the fintech company to work with banks and larger technology companies to embed their offering into solutions that customers already have in place. 

For solutions that sit apart from the transaction workflow, that may extract data from other systems for analysis or transformation, the potential to work directly with end users is greater, although partnerships are still likely to offer mutual value. From a BNP Paribas perspective, we have found that fintechs are very willing to work with banks and established technology vendors, having in some cases tried to approach customers directly and finding that partnerships are a more effective route to market. Even so, if a fintech is participating in the transaction workflow, they need to be able to invest in security at the appropriate level.”

The press announcements at this year’s EuroFinance, AFP and Sibos conferences demonstrate this balance of partnerships and direct customer engagement. The other key element of collaborative innovation, however, is the ultimate user. Bruno Mellado, BNP Paribas observes,

“New technology solutions will offer the greatest value when treasurers can invest time in collaborating banks and vendors to work through challenges and identify how best to deliver value. No longer can new developments take place behind closed doors without verifiable and concrete benefit to clients in meeting business objectives and addressing obstacles.”

Looking ahead

Is the treasury landscape likely to be fundamentally different in five years’ time? Fundamentally different, no, but different, yes. Luc Belpaire, FIS summarises that we are likely to see

“accelerated adoption of cloud-based technologies, more high profile data breaches and hacks as a result of inadequate (or late adoption of) fraud mitigation tools at both banks and corporates, real-time, reduced-cost global transaction processing through the introduction of new blockchain-style technology, and a strengthening of core treasury technology tools through machine learning / AI innovation.”

Paul Camp, HSBC delves into some of these themes in more detail,

“When contemplating the future, it is important to look through different lenses: products; technologies, and benefits to clients. From a product perspective, we are seeing considerable investment in global trade services, cash management, payment, liquidity and risk management solutions and channels across banks, technology companies and clearing houses. This in turn could lead to end-to-end visibility of payment and liquidity flows for customers, and greater empowerment to control these flows more effectively, both within the business and across the wider ecosystem. New technologies such as AI and machine learning are already enabling the industry to take big steps forward in data and analysis, while nascent technologies such as blockchain also have the potential to deliver transformational solutions, albeit a little later.”

The success of these initiatives will be based not on the disruptive qualities or excitement level, but on the ability to solve problems and shape new opportunities. Cash flow forecasting, financial risk management, tackling fraud and cybercrime, compliance and regulation, and streamlining processes are all areas that are ripe for transformation, but by remaining tethered to reality, solutions in these areas could really fly.