By Peter Hazou, Senior Market Manager – EMEA, Treasury Services, BNY Mellon
Innovation is key to growth. And it has become all the more important during this period of evolution in the payments industry in which banks are expected to provide the required tools to meet the developing needs of clients(such as the growing demand for real-time visibility and the facilitation of cross-border payments).
Yet the introduction of a multitude of new regulations in the wake of the financial crisis has resulted in extensive compliance requirements that are stretching bank resources and demanding significant industry focus. And this increased absorption of costs and talent has left many questioning whether compliance demands are compromising banks’ ability to innovate.
While it’s true that regulatory requirements have “stepped up” as policy makers make it their priority to restore confidence in the security of the banking industry, it is important to remember that banks are no strangers to regulation and have always dedicated a great deal of focus and energy adhering to applicable regulations.
Of course, an initial period of adjustment during which business models must adapt to the new requirements and implement the right building blocks is necessary. Yet this should only affect innovation in the short-term. After all, achieving the right balance between compliance and innovation is something in which banks should be well-versed.
Technology: the real influencer of innovation
Parallel to the belief that regulation could be restricting banks’ ability to innovate is the contradicting notion that regulation could in fact be driving innovation. Ultimately, however, regulation is primarily concerned with prudence and is not a real stimulator of innovation, despite there being some policy objectives that have encouraged particular behaviours – for example, Basel III’s intra day liquidity requirements (introduced as a method of reducing systemic risk)are helping to fuel demand for real time data visibility.
Innovation, instead, is borne of ingenuity and the desire to address client needs. And there is another trend at play that is having a far greater impact on innovation than regulation: technology.
Indeed, the march of disruptive technology and the subsequent influx of new, nimble alternative payments providers into the banking sector – from online payments providers and virtual marketplaces, to large technology and social media companies – is fundamentally reshaping our industry, making innovation a necessity. These new payments market entrants are vying to offer solutions centred upon client needs and expectations; with convenience, speed, visibility and a greater choice of access channels the order of the day.
Not only is this altering the payments space as we know it, the impact is set to be long-lasting, with the belief that in the not too distant future the payments landscape will have undergone a complete transformation.
Indeed, the speed and extent to which non-banks have asserted their presence and driven changes in the payments space has been astonishing, and they have gained a reputation for being the quickest to explore and implement new channels, such as mobile and electronic payments.
This level of innovation is largely due to two key factors. Firstly (unlike banks), non-banks don’t have existing legacy banking platforms in place. Secondly, they currently aren’t subject to the same standards of regulations as banks. Subsequently, non-banks can afford to “try and try again” until they succeed, whereas the ability for banks to “experiment” in pursuit of innovation with such a trial and error approach is belied by their long-established fiduciary position in the management of other people’s money. There is therefore a disparity between the way in which banks and non-banks innovate.
Yet if banks are to thrive in the new payments space, they must meet the challenge of competing with these new technology-hungry, entrepreneurial market entrants.
Now, as much as ever, banks are focused on serving clients with innovation– an area in which they have a very good track-record. A consequence of the rapid ascent of new technology capabilities, however, has been the broadening of options available to clients – with respect to the choice of products and solutions, as well as the number of service providers, available, which has led to a degree of fragmentation.
As a result of this altered landscape, banks in turn have altered the way in which they approach innovation. Certainly, it is impractical and unrealistic to attempt to be all things to all clients, and therefore, banks must prioritise. This requires banks to determine the most effective ways in which they can serve their clients within their value chain, identify strategically-appropriate opportunities, and invest in that area accordingly. So contrary to some opinions, banks are innovating, but they are being more targeted in their approach.
Enhancing clients’ banking experience through innovation remains a priority – indeed, regulation and innovation are not mutually exclusive. And in this evolving landscape, fuelled by technology and non-bank newcomers, banks are very clear about where innovation investment is needed to best serve clients and where the most valuable opportunities lie. The dedicated focus of banks should be to serve its clients, and the disruptive factors of regulation and technology-driven non-banks should not alter this philosophy.
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.