Anders la Cour, Chief Executive, Saxo Payments
The global transaction banking industry is experiencing one of the biggest shake-ups it has seen in decades. Non-bank tech disruptors such as Bitcoin and the blockchain, the eastward shift in global economic power, low-interest earnings in developed markets, the emergence of challenger banks, and regulatory pressure to reduce risk and inefficiency in payment-clearing infrastructure are all contributing to what is a seismic shift in how the sector operates and what customers expect.
Undoubtedly the continuing development of the fintech sector – providing alternatives to traditional service providers – is contributing to the shake-up. But there are other factors that are having a strong influence on how global banking will be facilitated in the next few years. The impact of increased regulation and capitalisation requirements has intensified competition, making it more difficult for traditional banks to do business, especially with regard to “know your customer” (KYC) requirements. Legacy infrastructure is also adding to the financial and operational burden for the incumbents.
The great unbanked
Shortcomings in banking services, along with the wish of some corporations to be ‘bank agnostic’, have therefore opened the revenue doors to fintechs and digital giants. But how easy is it for businesses to switch, and what can they expect from both incumbents and new service providers?
As fintech start-ups continue to emerge on an almost daily basis, it seems that the supposedly ‘simple’ process of opening a bank account is becoming increasingly difficult for start-ups and even established payments businesses – especially outside of first world markets. Companies looking to trade abroad generally need to open accounts in the geographical region in which they wish to do business. As a result, start-ups including the burgeoning world of fintechs, and established payments businesses are left searching for a bank that is willing and able to help them reach their international trading potential, by allowing them to open the necessary bank accounts.
The shrinking global banking landscape
According to Boston Consulting Group (BCG), global transaction banking generated almost $1.1 trillion in revenues in 2015, representing nearly 27% of total global-banking revenues. This is set to increase markedly over the coming decade, hitting nearly $2 trillion in 2025. However, whilst these growth projections for revenue are positive, it is becoming increasingly challenging for incumbents to deliver the service their clients need.
The last few years have seen a shift in the availability and accessibility of banking services for global trade. Increased focus on regulation as well as the higher capitalisation required for multi-national banking has resulted in a number of the Tier 1 global players pulling back from providing services to businesses outside their own geography. HSBC pulled out of 10 countries in 2015, and there has been a decrease in the number of countries that banks such as Barclays, Lloyds Banking Group and Standard Chartered are operating in between 2008 and 2015.
According to an East and Partners Report (Jan 11 2017) across 2,000 SMEs and large U.K. companies, the volume of foreign exchange services business conducted with U.K. banks has declined — as has the number of companies using a U.K. bank as their primary provider of FX services, with non-bank providers taking market share. But whilst the emerging fintech sector is providing some solutions with, currently, about one-third of payments-related fintech investment going to B2B providers (according to BCG), these players are not likely to displace the traditional players completely.
Five key trends
Against this backdrop, I believe there are five key trends that are going influence the world of international trade in the next few years.
1. New market opportunities driven by globalisation
While Europe is still the largest ‘inbound’ transaction banking market, rapidly developing economies will grow significantly faster during the next decade. This strong growth will be driven by a significant increase of international trade flows, especially with and within Asia, with rapidly developing economies contributing around 55% of expected transaction growth.
2. Digitisation and the focus on the customer
The digital wave is dramatically changing how businesses engage with their customers, as well as how they run their organisations. As businesses improve their own customer engagement and service levels, expectations of the digital capabilities of their banking providers steadily rise. However, incumbents are not as operationally efficient as newer market entrants, with their STP rates as low as 60%.
3. New regulation – driving banks to retrench
A new set of regulations issued mainly in Europe and the US in the last five years (e.g. Basel III and the Payment Services Directive and tighter requirements around KYC and Anti-Money Laundering) will continue to severely impact the global transaction banking landscape. Stricter KYC and AML legislation have led to increasing compliance costs and litigation risk for banks. These in turn can have adverse consequences for bank-corporate relationships: e.g., protracted account opening processes, payment value limits, difficulties for banks in supporting corporate international business in less secure jurisdictions. Banks are, as a result, retrenching due to the burden of compliance.
4. Entry of third party payment providers
Taking full advantage of the trends in the global payments space, new entrants are striving to fulfil the demands of businesses, with some threatening to disintermediate banks. New entrants aim to address existing pain points by providing, for example, real-time, rich remittance information, lower fees and launching innovative offerings to enable seamless integration of payments.
5. The Evolution of the Utility
This is the newest trend in international transactions. A whole new ecosystem is providing the infrastructure for business to business cross border payments. And this ecosystem is underpinned by ‘utilities’ which, just like the utilities used in a domestic environment – gas, electricity, water etc – provide the unseen but necessary power and energy to provide the best possible foundation for delivering a great customer experience worldwide for the end clients. Working in partnership with specialist utilities also means that a business can move much faster, as well as reduce costs – all of which can be passed onto the customer. And because the utility isn’t in competition with a business – it’s a supporter – both organisations should have like-minded goals, rather than pitch themselves against each other.
The current situation
Recognising the changing shape of the international payments marketplace, Saxo Payments commissioned exclusive research to identify how the diminishing availability of services is impacting, not only on fintechs but on the business of their clients’ operating in international markets. This research has been published in our new white paper: Missing the Opportunity.
Ranking their top three biggest concerns when it comes to cross border transfers, respondents placed cost as their biggest concern, unsurprisingly, with 50% ranking it top. Speed of transaction ranked highest as the second biggest concern, taking 32% of the votes. International regulatory requirements ranked third recording 30% of the votes followed closely by limited payment channels.
Clearly the flow of cash, to and from different businesses, is vital to keep a business alive. Yet in the world of FX payments it appears that there are some severe barriers that are stifling cash flow, with nearly half (44%) saying that payment settlement times cause the longest delays. In second place, reconciliation (17%) also caused delays, followed by screening (12%). It’s not all bad, though, as nearly a quarter (24%) said they aren’t aware of any delays. However, this could simply be that they have come to accept and live with long lead times without being aware of other options.
High overheads are compounded by the fact that nearly a third believe they are not offered competitive rates by their current FX provider (29%). Interestingly, however, nearly 1 in 10 simply hasn’t compared rates. And, significantly, going to the heart of the challenges faced by fast-moving businesses, it seems that current providers are not responsive to the FX and Payments businesses needs with 1 in 5 (21%) saying it took between two and three months to set up currency account, payment and FX facilities for their business.
Cross border payments key for growth
Given the concerns already identified by respondents, it’s probably not surprising that the top three payments related factors hindering the growth of FX and Payments businesses are the cost of FX, access to bank accounts and the speed of settlement.
With many of the big banks pulling out of overseas markets and preferring to operate in their domestic market, access to these services looks set to get worse, not better for businesses still relying on the traditional providers. 40% said their current provider cannot help them reach new international markets, and 45% say their provider does not offer access to FX tools or analytics to help manage FX risk, despite the cost of FX being identified as a barrier to growth.
What our white paper identifies is that in what has become a global digital world with very few barriers, the banking process still appears to be fenced in. Rising compliance, risk and operational costs are driving the banking sector to focus on digitising their business and operate domestically. Businesses that want to trade internationally, therefore, have to open separate accounts with multiple banks in multiple countries. With lengthy application processes taking as much as six to 12 months, the administrative burden can be huge.
Whether it is the lack of competitive rates or long delays in payment settlement, it seems that accessing global transaction banking is at the heart of the challenges facing businesses trading internationally.
Access to fast, low cost FX rates is no longer the preserve of big, multi-nationals, as online trading opens the door to smaller businesses that need to be able to make and receive international payments. However, the research shows that too many businesses are unable to grow into new markets and reach their potential due to slow, expensive services that put too high a burden on smaller firms and start-ups.
To access a full copy of the Saxo Payments FX white paper clicke here.