Financial technology, or “fintech”, has become a huge mobiliser of change in the transaction space. While fintech companies have been a key catalyst for the recent innovation surge, the onus is now on banks to ensure new capabilities are leveraged to the full to meet ever-increasing corporate client demands. Christopher Mager, Head of Treasury Services Market Segments, BNY Mellon, discusses how banks are not only embracing technological change, but leading the charge to transform global payments and deliver a significantly enhanced client experience.
Digital developments are spurring a payments ecosystem shake-up, resulting in the emergence of new user-friendly solutions. This, combined with the growing millennial influence, is leading clients to expect ever-more effective solutions at their fingertips – anywhere, and at any time.
While innovation for corporate banking has been slower to progress than in the retail sector – primarily due to greater transaction complexity, regulatory requirements and security concerns – demand for a radical overhaul of corporate transactions to bring them in line with modern day needs is certainly gaining momentum. Indeed, with fintech innovation gaining traction in retail payments – consider ApplePay, PayPal and Alibaba, for instance – users are beginning to expect similar breakthroughs in a corporate context. This presents banks with a significant challenge – namely, how best to deliver an enhanced client experience fit for today’s digitally-driven clients.
In an endeavour to address evolving client needs, fintech companies have attempted to enter the payments space in droves. These nimble non-bank providers have been able to enjoy somewhat of a head-start over traditional banking providers in terms of digital innovation, for two main reasons: firstly, fintechs have somewhat been flying under the regulatory radar, meaning they have been able to focus energies on customer-centric developments. Yet, as certain fintechs begin to scale up and become more important to the financial system, it will be interesting to observe how the regulatory landscape will evolve for fintechs. As it stands, the stance that regulators will take remains to be seen. Secondly, unlike banks, fintechs are unrestrained by existing legacy systems, giving them the freedom to push innovation to its limits.
Furthermore, fintech companies – of course – have exceptional know-how when it comes to digitisation, and a great affinity with the needs of millennials, which makes them well-positioned to create new, experience-changing concepts. That said, while technological talent is vital to exploring and understanding the extent of what’s possible for banking innovation, it is merely the tip of the iceberg when it comes to its delivery.
It is here that banks’ role in driving the future of payments really comes to the fore. Indeed, banks possess invaluable qualities in this respect – notably an unrivalled grasp of the regulatory system, capital, market trust, and a far-reaching client base that fintechs, for all their technological nous, cannot match. That is why banks are gearing up to lead the charge to transform the global payments ecosystem; leveraging core bank strengths and building upon the possibilities created by fintech to drive forward new industry developments and make them a reality.
Banks and fintechs unite
Given core payment systems have seen little in the way of significant technology advancements in many years, modernisation of legacy infrastructure is long-overdue. The advent of fintechs has changed the perceptions of what could be possible for global payments, and banks are now adopting a number of approaches in the quest to deliver an enhanced, real-time global transaction experience to clients.
Banks and fintechs – in increasing numbers – are now recognising the incomparable benefits that fusing their strengths through bank-fintech partnerships can provide. In this respect, banks are structuring such alliances via various methods, from venture capital investment to accelerator/incubators and sponsorship models, as well as by engaging the fintech community by hosting “hackathons” and establishing innovation centres to promote interaction and the exploration of new ideas.
Such a collaborative approach is not exclusive to bank-fintech alliances. Banks, spurred by new technology capabilities, are starting to work more closely together to promote a more harmonised and interoperable global payments infrastructure. Certainly, cooperation and standardisation are crucial if the ultimate goal of implementing a real-time, cross-border payments ecosystem is to be achieved. And key to this is establishing the network effect – having a critical mass of industry players involved. Importantly, as a growing number of banks collaborate on industry-wide initiatives and work groups to modernise payments, the network effect is gaining traction in this area.
Here, we consider three important collaboration initiatives currently being pursued by the traditional banking community that – if stitched together successfully – could ultimately mark the genesis of a real-time global payments infrastructure: the SWIFT global payments innovation (gpi) initiative; domestic real-time payments systems and ISO 20022 – the global standardised messaging system; and collaborative efforts to harness the possibilities of the distributed-ledger technology, or “blockchain”.
The potential of SWIFT gpi
With SWIFT’s global network and expertise of local banking processes, the SWIFT gpi initiative has the potential to overhaul cross-border transactions – and significantly enhance both payment transparency and efficiency. Its objective is to establish new service level agreements (SLAs) and global standards that will enhance the correspondent banking sector’s ability to provide interoperable and transparent services. Currently in its pilot phase, with some services expected to be available as early as 2017, the project hopes to provide transaction parties with real-time updates of any transaction’s payment status, a clear indicator of transaction fees, and improved fraud screening capabilities and pattern recognition services.
The project exemplifies a turning point for inter-bank collaboration. With more than 70 banks already signed up (including BNY Mellon), the consortium constitutes almost three-quarters of SWIFT’s cross-border payment traffic. Certainly, it is hoped that with such industry backing, the project will have a significant impact in the global payments space, and will act as a blueprint for what can be achieved if the network effect gains considerable traction among the industry’s leaders.
Importantly, the gpi project becomes increasingly attractive when we consider that domestic real-time systems that are being developed – such as the US real-time payments system (to be introduced in 2017) – are incorporating ISO 20022 standards, the common messaging framework for cross-border payments. Should this occur as planned, the framework would be in place to enable various countries’ individual payment systems to eventually become inter-connected to establish a truly global cross-border real-time capability in the future. With this in mind, discussions between a number of payment system operators, including from the UK, the US, Canada, Australia, and Singapore, have already taken place – a promising signal of intent that real-time cross-border payments are a matter of when, not if.
Blockchain’s potential to empower
While its chances of success are less clear-cut than the SWIFT gpi initiative, the possibilities of blockchain – the distributed-ledger technology – are swirling around the finance industry with tremendous anticipation.
Blockchain – the foundation technology for bitcoin – can be deployed in various other applications (not necessarily involving the bitcoin digital currency) to enhance transaction efficiency and transparency, as well as mitigate risks, owing to its cryptographically-secure nature. A great deal of investment is going into exploring blockchain’s possibilities, with banks and fintechs working collaboratively on proof of concept projects. Elsewhere, the R3 consortium has brought together over 50 banks to focus on pushing blockchain’s capabilities and testing its compatibility for corporate transaction usage in the future.
Of course, while blockchain can address many questions, it leaves just as many unanswered, especially with regard to regulatory and legal scrutiny, and whether its advantages could be leveraged through other means entirely at a lesser expense. Despite its inherent complications, however, blockchain remains a key priority for exploration.
While banks may initially have reacted with uncertainty at the prospect of fintechs on “their patch”, they have not lost sight of their role as the vanguards of the payments sphere, and are crucial to the myriad of inter-bank and bank-fintech partnerships that hold the optimal chance of making substantial progress. Investment into fintech innovation has grown significantly in recent years, and as the charge to introduce an enriched payments experience gathers pace, banks are positioning themselves at the forefront of new, key initiatives; taking action to drive forward valuable advances that can truly transform transactions in order to ultimately create an optimised global payment ecosystem for the future.
The views expressed herein are those of the author only and may not reflect the views of BNY Mellon. This does not constitute treasury services advice, or any other business or legal advice, and it should not be relied upon as such.