The past few years have seen a technology-led revolution in how we live our lives. Who would have thought, five years ago, that today we would be doing our weekly shop on our mobile phones on the bus, that we would wear wristbands to track our exercise, calories burned and sleep patterns or that we would pay to stay in the homes of strangers around the world instead of in hotels. And it’s no longer a thing of dreams that we can turn our heating and hot water on while still out in the pouring rain desperate for that hot bath and warm towel.
In the world of payments, the revolution has been just as phenomenal. And of course, many of these innovations simply wouldn’t be possible without the new payments technology now available.
According to a McKinsey report, global trade flows were worth $26 trillion in 2012 and could reach up to $85 trillion by 2025. The report also states that one in three goods are now sold across borders, and over 33% of financial investments are international transactions. The B2B international payments sector is estimated to be 10 times larger than the B2C sector in transaction volume and three to four times larger in dollar volume.
B2B innovation lagging behind
But the attention from the inventors and innovators for B2B payments – especially cross border – hasn’t accelerated at the same pace as consumer, despite the value potential.
The fintech industry has driven revolution and disruption in the last few years – but the existing B2B cross border payments infrastructure appears to be a stumbling block to the new wave of fintechs really taking off and making serious money.
However, changes are afoot. Influential organisations throughout the UK and EU are making enquiries and investments in the payment market.
Waking up to innovation
SWIFT announced in January that 45 leading banks signed up to its global payments innovation initiative, and more banks are expected to join this initiative in the coming months. Designed to help corporates grow their international business, improve supplier relationships, and achieve greater treasury efficiencies, the initiative will enable corporates to receive an enhanced payments service directly from their banks.
In another initiative to improve the flow of payments across borders, at the start of February 2016, trade association Payments UK launched a directory designed to make it simpler for anyone making cross-border payments into Britain to check routing data.
BACS recently published a white paper on widening access to its payments services. During 2016 the Bank of England is developing a blueprint for a new high value payments system, focusing on Real-time Gross Settlements and the Bank’s settlements infrastructure. The EU Commission Banking and Finance group is running a consultation into approach to the current payment services regime.
In addition PSD2 has now been introduced and began to be implemented from January 2016. The new Directive replaces the original, created in 2007. Some of the biggest changes PSD2 brings, are to transparency of payment fees and charges – payment service users now have a right to know what charges, if any, will be applied to payments before they are processed. In addition, payment service providers will be required to provide customers with “explicit information on the maximum execution time and charges payable.”
This increased transparency will give customers a more accurate picture of the service they receive, and may result in customers choosing to process transactions with fintechs or other providers who are likely to be able to offer lower charges than incumbent banks.
Collaboration, not competition
The past year or two has seen a huge step forward by the banks themselves as they have taken a leap into the fintech space. Many big banks have invested in fintech start-ups – Barclays, HSBC and Santander to name just three – and others have created dedicated fintech teams. It’s clear that the phrase ‘you can’t teach an old dog new tricks’ doesn’t necessarily apply to the banks.
The banks have recognised that anyone who doesn’t catch on to the power of technology will be left behind. A PWC report on the future of Retail Banking for 2020 clearly identified that technology is changing everything. Ultimately, it will increase convenience and reduce cost. Looking at how the industry is evolving now, it seems to me that by 2020 we will see tier two and three banks outsourcing to fintechs even some of their core functions, such as FX, wealth management and lending, in a bid to become more relationship-focused to improve the customer experience.
Deutsche Bank’s white paper, FinTech 2.0, provides insight into how the payments ecosystem has evolved over the last decade thanks to innovation from non-bank players in the market. The paper highlights the need for banks to welcome innovators, and concludes that cooperation, not competition, is the best approach – particularly in the B2B payments arena.
Looking to the future
The evolution of technology also means that geography is no longer a limiter. That’s good news for any business looking to expand, but it’s bad news for a business that thinks it hasn’t got any competition because there’s no one else operating in the same region. Ambitious foreign entrants with resources no longer need local bricks and mortar.
Innovation and rapid development in the payments sector is bound to continue, but the financial industry is beginning to accept that collaboration is key, rather than viewing new entrants as the competition. By being open to forging long-term, strategic partnerships, together, banks and payments innovators are set to revolutionise the ecosystem.
With the B2C sector significantly smaller in transaction volume and value, than the B2B sector, yet far more technologically advanced, it is time for B2B payments to catch up and even get ahead. The first step to seeing this change happen is undoubtedly increasing demand – customer demand is definitely not lacking in B2B payments, but with businesses too busy to look into other options, processes are stumbling along in the same way they have for many years. An increase in demand and higher expectations of a better, quicker and cheaper service is key to pushing providers to invest in change.
Providers, including the traditional banks, are already waking up to the possibilities and opportunities, but they need a push from customers to take that final leap to implement change. The end of paying high fees for poor FX rates and slow transactions is finally in sight, but in order to keep up with the market and keep customers happy, providers need to find the time to create better solutions with the technology already available.
By Anders la Cour, Chief Executive Officer, Saxo Payments.â