The payments industry has faced a great deal of disruption in 2016, and 2017 is looking to be just as exciting. New regulations, improved support for non-bank players, and increased collaboration are all set to further shake up the status quo.
Non-banks will be the key to FinTechs global growth
For a long time, banks have held the monopoly on business banking, particularly when it comes to opening settlement accounts. Having access to banking is a critical factor for businesses, but it often becomes complicated when companies want to trade abroad as they generally need to open accounts in each of the geographical regions in which they wish to do business.
In the last few years, with margins on basic bank accounts being impacted by regulations, and increased risk and competition, major banks are becoming reluctant to offer non domestic business banking services. Incumbents see it as a less attractive aspect of their offering. It seems, therefore, that both established payments businesses and up-and-coming new entrants are struggling to find a bank that allows them to open the necessary bank accounts. This, in turn, hinders them in reaching their international trading potential.
So what options are there? Thankfully, there are now alternative solutions available to businesses of any size, and they are typically able to offer faster cross border payments, at a much lower cost, than banks.
Businesses looking for an alternative solution should begin the new year by looking for a provider that allows companies who are serving merchants in the digital space to open IBAN accounts in a wide choice of currencies.
Banks are retrenching
Banks around the world are facing regulatory reforms and capital and profitability pressures in their home markets. As a result, they have reversed their expansionist policies, focusing their attention on geographies and products that remain profitable. This has been demonstrated by some of the world’s largest financial institutions pulling out of certain markets and products, the correspondent banking model being one of these.
In terms of cross border payments, banks currently control nearly 90% of this sector, and it is well worth them holding onto it in their core markets, as it has an average CAGR of 4% for the period 2015-20, with B2B payments driving approximately 80% of cross border payments revenues.
Cross border payments must become cheaper, more transparent, and more efficient. But this is not possible with the existing correspondent banking model. Making changes to legacy infrastructure will not be easy, but it must evolve – and quickly – to be able to keep up with non-bank players.
The emergence of the ‘utility’
Open banking is an emerging term in financial services, driven by regulations that promote consumer choice and competition. With the advent of XS2A under PSD2 and Open Banking Standard, there are plenty of new opportunities for FinTechs to win relationships with innovative offerings. However, while FinTechs have recognised the benefits of unbundling banking services, and the access that new legislation will grant them, they should still look to appoint a specialist who acts as a utility able to provide the crucial nuts and bolts to underpin their offering. Both the tier two and three banks and established payment providers are aware that it makes no sense to build the utilities that underpin their service when they can focus their resources on owning and maintaining the client relationship, as well as leaving them free to concentrate on developing their proposition.
Using a ‘utility’ will be the route to success for those operating in banking and FinTech in the next few years. Tier two and three banks could become more digitalised, relationship-driven and focused on the customer relationship by outsourcing non-core functions to third parties. Looking further ahead, the banking industry is likely to be even more fragmented, but capable of delivering ‘banking services’ in a much more dynamic way than we see today.