Lost in Transformation…

by François Masquelier, Head of Corporate Finance and Treasury, RTL Group, and Honorary Chairman of the European Association of Corporate Treasurers

Does the future belong to fintech? We are seeing a true technological revolution that will radically rearrange the landscape of banking in the short term. A transformation is in progress, but some of the people affected seem to be doing remarkably little about it. If they wait too long, some financial institutions could miss the digital train and be left standing on the platform. We must not stick our heads in the sand and pretend that nothing is happening. Even less must we think that, come what may, banks and other financial institutions will always be needed? The end can come through doing nothing, too.

“Tomorrow belongs to those who can hear it coming” (David Bowie)

The future belongs to fintech, a grotesque word but one in keeping with our times, a contraction of financial and technology. In the ‘fin’, we see or should see the banks and other financial institutions. However, it is not certain that all of them have taken on board this necessary and vital transformation in their business model. The technology is here and continues to beam out its enormous potential at lightning speed. Will the ‘financials’ be able to turn it to their advantage and adapt to this technological revolution? The question is vital, but difficult to answer. To paraphrase Alvin Toffler, we are facing a sort of fourth wave, although some people dispute it vigorously. It is no longer an opportunity to be grasped but a precondition of long-term survival.

We think that the initial claim (“The future belongs to fintech”) is indeed true. The future of finance lies with digital technology, and nothing will be as it was before. Technology will be to finance what the steam engine was to the Industrial Revolution. The way in which financial companies react will reshape the landscape, particularly for payments in Europe, but also for finance in general – trade finance, funding, disintermediation, online platforms and others. Where treasurers see an opportunity, banks see a threat. There lies the rub.

Spectators in a play performed without treasurers

Treasurers, key players in this digital play that is unfolding without them, have decided to make themselves heard and to mount the stage. As with the new financial regulations, they forgot to include treasurers, even though they are in the front line of those affected. Taking action, rather than being on the receiving end of these changes, is the aim of EACT (the European Association of Corporate Treasurers). They also want to be consulted on electronic payments, instantaneous payments and the possible use of blockchain to replace clearing houses, for instance. In the final analysis, who would reject a payment system that is more secure, more transparent, cheaper and that has greater traceability? That, however, is what blockchain technology offers in the short term. Banks and other financial institution should see the new entrants to the market, the financial start-ups, as being worthy of copying rather than as being disruptive. But nevertheless…

In any change lies opportunity

As with the foreign exchange market with online platforms and peer-to-peer solutions, or as for trade finance with dynamic discounting solutions, for example, fintech has already created a disruption or even a break. Moreover, the PSD2 Directive requires existing operators to open up to outsiders and thereby to increase competition. Unfortunately, the banks and other financial institutions are ill-prepared to harness these new technologies and take them on board. The latter are a sign of disintermediation. They must try to avoid losing everything in the free-for-all through not doing enough.
 

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Banks operate in a hyper-regulated and burdensome environment. Fintech companies, by contrast, operate without complexities or constraints: an undoubted advantage. Partnership with fintech companies will perhaps be the saviour of the financial institutions. That is the way to go.

We have to ask whether fintech companies will be this virtual El Dorado or not. A good question, but to answer it we need to be proactive. Eat or be eaten, those are the alternatives.

Innovating doesn’t mean just doing things quicker

Innovation isn’t just about doing things quicker, but doing them more efficiently. Yes, the digital paradigm will take a certain amount of time. Yes, there will be obstacles and difficulties, but change can no longer be halted. There will be many constraints: the inertia of existing information systems and the system legacy, the numerous legal constraints, the natural resistance to change, the high cost of capital expenditure on IT, the advent of PSD2, and eventually the erosion of margins with the emergence of shadow banking. The difficulty lies in being able to separate the wheat from the chaff when faced with the multitude of solutions on offer. There is a plethora of ideas, but not all of them will succeed. The financial technology train is on the move, and it would be dangerous not to take it. Staying on the platform would be suicidal, even if you don’t know where the train is going.

The biggest risk is arrogance and the refusal to see the danger. It would be naive and delusional to believe that barriers to entry are so high that nobody can overcome them. Underestimating the competition has wiped out business after business. Did the mail service foresee the rise of email? Did fax expect the advent of email? Coaches, the rise of the automobile? Or libraries the appearance of Amazon or the Kindle? And so it goes on. However, having a competitive advantage over your peers could be your salvation.

Fintech companies are a little like the game of Jeopardy!

These start-ups have the answer – and perhaps the banks and other financial institutions have the question. They have the ideas and the solutions, and the financial institutions know the problem. That is why collaboration should work well. The banks are as much in danger of dying out as taxi drivers are. Perhaps they don’t realise it yet. Customer loyalty is never guaranteed, and it must not be relied on too much. For instance, by offering several payment and collection solutions, banks could satisfy their customers and be the point of contact between multiple solutions and customers. Customers know that they can do without banks, as in foreign exchange and trade finance. Nor should the changing behaviour of young customers (millennials) be overlooked. They have other expectations, and do not need banks or no longer need them. We should remember the record industry, which turned up its nose at Napster. Questioning ourselves is a duty.

Of course, some people have launched initiatives such as the recent SWIFT GPII (Global Payment Innovation Initiative) with 51 participants from the world of banking. The aim of the work group set up in December 2015 is to focus on B2B using the SWIFT platform. We can only applaud this: same-day re-use of funds, transparency and predictability of charges, end-to-end payment tracking and fuller payment information are only the obvious things that treasurers would expect. Will anything come of it? Something needs to be proposed rapidly instead of just making do with periodic meetings. Looking for a solution between ‘friends’ might seem promising, but it is not enough and it is certainly too slow. Why use a system involving four banks as correspondents? Surely that system is obsolete? Take care not to plod on doggedly or to think you are irreplaceable.

What do treasurers want?

The choice of partner, becoming agnostic in the choice of bank, changing from one to the other with no technical problems or restrictions, having access to many APIs (Application Programming Interface), lower cost and less risk, end-to-end payment tracking, like Amazon or UPS parcels, and faster processing in a world in which everything is speeding up. The best is yet to come, don’t doubt it. To fight fintech companies, you need to be nimble and sharp. You need to get rid of intrinsic inertia. It is predicted that one bank job out of two will be lost within ten years. The effects of disintermediation will not be beneficial only. We need to prepare ourselves for all that. Peter Drucker said that there was no point in defending yesterday’s world when we could build tomorrow’s world instead. Wise words, surely? A certain hesitancy may be expected from the banks and other financial institutions.

What does the future of payments hold in store for us?

“The future is already here, it’s just not evenly distributed yet” said William Gibson. We don’t know what tomorrow will bring in the way of payments. But it will be different. With business models evolving more towards B2C, we will have to move to more diversified payment and collection methods. Even in the 21st century, the payment process is still local, regional and specific. A global solution does not yet exist. In China, you receive funds by Alipay, whereas in the USA, PayPal, which is just about the world’s most expensive solution, prevails. That’s market habits and practices for you.

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In some niches, we have begun to see disintermediation at work. Who had ever heard of Prime Revenue, C2FO, Kantox or Ripple just a few years ago? No one would claim that the foreign exchange platforms, such as 360T or FXall, have not changed the lives of treasurers. GAFA (Google, Amazon, Facebook and Apple) will not be slow in picking the cherries out of the banking industry cake (finance for private individuals, payment systems, etc.), leaving only a few meagre crumbs for the banks. The fintech train has pulled out, leaving some finance industry passengers still strolling on the platform.

The question is not if, what, who or how – but when. Let us dare to be disruptive and force companies in the market to bestir themselves to offer solutions. We have wonderful technology, and it will soon go into action. The (central) intermediaries of trust are perhaps not destined to remain that way forever. According to Darwinian theory, you have to adapt or disappear. It looked as if the dinosaurs would last forever – and yet...