Disruption was a frequently used word in the payments industry throughout 2016; and 2017 is looking to be just as exciting. New regulation, improved support for non-bank players and increased collaboration are all set to further shake-up the established status quo.
The digital space is shifting the payments landscape. We now live in a world of intermediaries – businesses that tend not to have assets of their own, but provide the marketplace that brings together sellers and buyers. These businesses are providing the conduit for trillions of dollars of trade, and they need to be able to find the channels to handle those transactions across multiple geographies and currencies.
Banks are retrenching
However, 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.
What does this mean for 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. However, cross border payments must become cheaper, more transparent, and more efficient.
Making changes to legacy infrastructure is therefore essential – albeit not easy – for the established banks. They must evolve, and quickly, to be able to keep up with non-bank players.
Non-banks hold the key to the global growth of fintech
Companies looking to trade abroad generally need to open accounts in the geographical region in which they wish to do business. But the appetite of the incumbent players to offer this service is waning, and that’s not the only challenge. Even when incumbents are able to help fintechs with their cross border requirements, fintechs can find that the sheer size and restrictions due to legacy infrastructure mean they are not able to be as flexible and responsive as the fintech might require. By nature, fintechs are smaller, more nimble and quick to adapt to changing market conditions, and can find the incumbent infrastructure to be restrictive when it comes to trading internationally. The number of intermediaries required for a traditional international bank transfer adds significantly to the cost and time involved with the process.
Doing the research
Businesses looking for an alternative solution should, therefore, 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. But will they?
Last year we carried out an exclusive study into the payment processes of issuers, acquirers, payment service providers (PSPs), FX businesses and merchants. Less than 40% (38.2%) believe they get a competitive foreign exchange rate when handling cross border transfers. And almost half (48%) do not feel satisfied with the rates they pay to handle cross border transfers for customers. Yet nearly a third (32%) said they do not have time to look elsewhere and 28% are put off because the change is so unlikely to be implemented due to the resources required to make the switch.
Thankfully, there are now alternative solutions available to businesses of any size, which typically offer faster cross border payments, at a much lower cost. And I believe 2017 will be the year where we see these entities come into their own.
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, empowered by the freedoms of new legislation.
However, doing everything ‘in-house’ won’t necessarily be the key to success. 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. And this, I believe, will result in the emergence of the stand-alone ‘utility’.
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.
And 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.
Anders la Cour, Chief Executive, Saxo Payments