Harnessing the Fintech Opportunity – An HSBC Industry View

  

by Mark Evans, Head of Payments Advisory, Global Liquidity & Cash Management, HSBC

 

One of the most frequent debates in the financial media that has arisen over the past year or two is the potential impact that financial technology (‘fintech’) providers will have on the traditionally unassailable banking domain. With regulations such as the Payment Services Directive (PSD) that break apart the competitive landscape to allow non-bank payment services providers (PSPs), marketplaces that blur the distinction between users and providers of ecommerce, and new players emerging to fulfil demands for commercial credit, the transaction banking landscape is more colourful than we have seen for many years.

Phases in fintech evolution

There is a great deal of speculation about the potential relationship, and competition between providers of innovative financial technology and banks in the future. According to a recent McKinsey study (Cutting through the noise around financial technology, February 2016) fintech companies have the potential to carve out a significant share of banking revenues, particularly in payments, supported by significant venture capital investment, nimble business models for acquisition and servicing of customers, and innovative use of data. With the number of start-ups in the fintech space exploding over the past year, from 800 in April 2015 to 2,000 in February 2016, many of these companies are still in the first phase of the fintech lifecycle, namely the honeymoon stage of ‘selling a dream’, enjoying the luxury of identifying and exploiting a market need at a speed that banks are largely unable to fulfil. The rapid expansion in fintech caught banks largely unawares, which gave rise to the second phase in the fintech evolution. Many banks responded to the growth of fintech by investing in these firms, often without understanding their capabilities, potential or ability to be integrated into the bank’s wider infrastructure and service offering. In some cases, these investments have proved successful, but not universally: however, whatever the financial success of these initiatives, they often fulfil banks’ aim to demonstrate their commitment to innovation and exploring new opportunities.

Although the number of fintech start-ups continues to grow, we are now entering a third, more measured phase. No-one wants to repeat the experiences of either the hype that preceded the ‘dotcom bubble’ or the over-extension of the global financial crisis. As a result, both fintechs and banks are taking a more sober and mature view of the potential that innovative technology has to challenge and transform existing business models in the financial services industry: 

Firstly, it would be wrong to assume that fintech companies exist and operate independently of banks: in reality, these companies already use banks as credit suppliers, merchant acquirers and infrastructure providers of solutions such as mobile wallets.

Secondly, by increasing, rather than reducing this co-operation, the potential to turn great ideas into great solutions that have the scale, resilience, and regulatory support to make a real difference to business models is greatly enhanced. This benefits both partners, with fintech companies gaining market access and infrastructure, while banks can leverage innovation opportunities for efficiency in the way that they structure and deliver customer solutions.

 

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A familiar concept

There are already a number of examples of large, established industries that have embraced new technology and delivery models, transforming the customer experience. Telecom companies, for example have introduced portals that enable customers to access invoices and statements, monitor usage etc. Utility companies use similar portals, supported by remote monitoring and smartphone operation, often provided by or acquired from third party technology companies. Telecom and utility companies have not been decimated by technology innovators, but their value proposition has been enhanced by them, while at the same time, customer expectations and quality of experience has increased enormously.

Making connections, breaking down silos

The same mutually beneficial transformation can be achieved in the financial services industry too, leveraging the skills and attributes of a variety of players. At the heart of any successful transformation initiatives, however, are the needs of customers. In the retail space, this involves areas such as efficient payments and lending or credit solutions. Amongst the corporate community, where efficient payment technology is more prevalent, the focus is more on integrating the procurement process, in particular to cement links between procurement and treasury. One of the themes discussed by banks over recent years is the integration of their cash and trade business lines, and while this intention may often now be reflected in organisational structures and reporting lines, there are few examples of genuine integration from product strategy through to delivery and customer support.

This is an area of particular focus for HSBC, and an area in which fintech collaboration offers considerable value in cutting across silos both at the bank and customer level. Many of our larger technology customers, for example, are approaching us to address how to manage large cash balances in a low interest rate environment. At the same time, these companies are tasked to boost their working capital ratios and improve process efficiency, both from a risk-related perspective, such as accelerating collections, or paying suppliers cost-effectively and at the optimum time.

To address these requirements, not only do we provide innovative, secure payment and collection solutions, but we are extending our expertise in cash and trade into areas such as eInvoicing, with a variety of exciting opportunities emerging for both in-house development and external partnerships. We have seen a variety of invoicing portals emerge in recent years, allowing suppliers to upload invoices to a processing platform rather than submitting on paper. These portals allow more timely, accurate and complete integration of invoice information into internal systems, more rapid approvals, and analytics tools to enable accounts payable managers to determine the best timing for supplier payments in order to take advantage of early payment discounts, which can be more favourable than the return available on surplus cash. 

A growing business case

By gaining visibility and a degree of oversight over procurement processes and invoices, treasurers can forecast future cash flow more effectively and improve decision-making. For companies with large debt levels, this is essential as a way of structuring debt and minimising new borrowing to reduce borrowing costs. For companies with surplus cash, low interest rates mean that treasurers are looking upstream to seek investment opportunities earlier, and leverage techniques such as dynamic discounting. 

While cash visibility has always been key to successful liquidity and risk management, newer technology is proving a ‘game changer’ in that treasurers have very different expectations on the completeness, accessibility and usability of data than even five years ago: while many treasurers have been satisfied with 

80-85% visibility of cash, the business drivers are becoming more compelling. At HSBC, therefore, we are supporting customers to reach that elusive 100%, leveraging our skills, international network, technology and partnerships. 

 

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Partnerships in practice

One of the ways we are doing this is through our recent investment in leading cloud-based treasury and risk management system (TRM) vendor Kyriba. Treasurers do not want to worry about technology or to deploy resources on lengthy implementation and upgrade projects: instead, they want to be able to access functionality and services that allow them to fulfil their roles more effectively.

New deployment models such as cloud-based software-as-a-service (Saas) solutions are instrumental in achieving this. Saas solutions, for example, enable treasurers and finance managers to subscribe to a shared (‘multi-tenant’) solution to access functionality and services as their needs evolve, and to benefit from automatic incremental updates. These services may be provided by one vendor, or the vendor may also integrate third party solutions, such as market information feeds, electronic dealing, bank connectivity etc. into the offering to provide customers with a rich experience without the need to acquire and integrate these services separately. For example, at HSBC, we are rolling out a fully integrated payments library with Kyriba so that users can ‘flick a switch’ and take advantage of seamless connectivity with the bank almost immediately.

A commitment to collaboration

HSBC’s relationship with Kyriba is just one step in our journey towards embracing Saas and cloud-based technology. In particular, we recognise the valuable contribution that fintech companies across a wide spectrum of activities can make to our clients, with this contribution amplified further when delivered in collaboration with treasurers’ key providers, particularly banks. We are already seeing that onboarding can be quicker, easier and rely on far fewer resources, enabling treasurers to focus on optimising processes and information flows.

As banks and fintech providers collaborate more effectively, the pace of innovation and therefore opportunities for visibility and control over cash will accelerate. For example, leading multinational corporations in the TMT space are now centralising global payments and collections in single locations with a single point of bank connectivity, standardised XML-based formats and exceptional levels of automation and analytics in areas such as reconciliation, payment order routing and exception management. Increasingly, the achievements of some will be the expectation of the majority, a role in which HSBC, together with our fintech partners, have a vital role to play.  

 

Mark Evans Head of Payments Advisory, Global Liquidity & Cash Management, HSBC Mark Evans is the Head of Payments Advisory for Global Liquidity & Cash Management at HSBC. Based in London, he leads a team specialising in industry leading and next generation payments services for corporate and commercial clients, using modern technologies to rapidly develop propositions that meet the needs of HSBC customers. Leveraging expertise across the organisation, Mark's team provides client consultancy and advisory to some of the bank’s largest clients. With over 20 years’ experience with the HSBC Group, Mark has held senior positions in Consumer, Commercial and Corporate Banking at HSBC, specialising in the research, development and deployment of digitally orientated services since the late 90s.  A founder member of HSBC's digital team, he was instrumental in the early development of innovative banking services across multiple platforms, providing new services for HSBC's clients in multiple sectors and geographies.  Prior to his current role, Mark was based in Mexico City and oversaw the build-out of HSBC's Payments & Cash Management business across Latin America, leading the deployment of digital services for corporate treasury, shared service centres and payment factories.