Aaron Carpenter, CEO, Transact Payments Malta
In the past, the provision of financial services was limited to a relatively small number of heavily regulated institutions. Banks were at the centre of everything, an essential player in just about every transaction an individual made.
But the financial services industry has been completely transformed in the last ten years or so. The growth of Open Banking – with the second iteration of the Payment Services Directive (PSD2) in Europe as its main catalyst – has opened up the market. Now, just about any business that has consent has the ability to access account information and initiate payments on behalf of the customer. This means that just about any company can become a financial services provider if they want to.
The result of this, of course, has been an increase in competition in the industry. However, offering financial products and services still relies on many different processes and providers, so there are also a great deal of new partnerships and coalitions being formed.
Yet it is critical to understand why the quality of these relationships are fundamental to the success or failure of any business that wants to expand into financial services.
We live in exciting times
The changes in the payments and financial services ecosystem in recent years have made it considerably easier for new entrants to come into the market. Everywhere around us we see new digital banks emerging, as well as many existing brands bringing payment services and e-wallets into their product offering. It’s an incredibly exciting time to be involved in payments with many innovative and consumer-friendly services coming to the fore.
But while the barriers for entry are much lower than they used to be, these new players — known as Generic Service Providers (GSPs) — are still faced with a number of tricky decisions. Decisions such as whether they should buy or build each individual component of their product offering; which service providers they should choose for things like data storage, infrastructure and KYC compliance checks; and whether they should apply for their own banking licence such as an Electronic Money Institution (EMI) licence, or whether they operate under someone else’s licence.
Getting the right licences required in order to be issued with a Bank Identification Number (BIN) isn’t a quick process. However, it is critical for the GSP that they can bring their product to market quickly. Likewise, being granted membership of payment schemes such as Visa and Mastercard doesn’t happen overnight, but it is essential that they have access to these payment schemes in order to operate. Dealing with the intricacies of the membership rules for such payment schemes also requires specialist knowledge.
Looking for a helping hand
So, while making the move into financial services is easier than it used to be, it still involves a lot of hard work. For a small company that needs to focus on building a cutting-edge product that meets and exceeds the expectations of customers — customers that have a great deal of choice, remember — it’s too much to take on alone.
A GSP that decides that they want to do everything themselves is likely to be faced with a long wait before they can even bring their product to market, as well as an acute knowledge and skills gap which will divert internal resources away from their core operations. Dealing with reporting and settlement requirements, for example, on top of all of the necessary processes required to keep the GSP’s core product running smoothly will have a detrimental effect on overall efficiency and productivity. It’s a path that will only end in failure.
Most GSPs, then, need to find a reliable and trustworthy partner in order to gain access to a BIN and the necessary expertise before they can begin to provide their services to customers. While it’s possible to hire new staff with the right skills to deal with payment scheme membership, regulatory compliance and capital control, it makes much more sense to form a partnership where all of these things can be taken care of. That way, they can free up their time to continue to develop the innovative, exciting products and services that their customers expect.
Operating successfully in the world of financial services and payments is all about relationships. While a small GSP wouldn’t have the necessary scale and resources to manage all of the relationships required, by choosing the right partner — a partner that has already developed these relationships — they can save themselves a real headache and focus instead on what it is that they’re good at. Finding the right partner that can offer all of the assets required as well as the experience and skills to operate effectively in financial services is essential to any GSP that wants to succeed.