Banks step up to the fintech threat

Anders la Cour, co-founder and Chief Executive Officer of Banking Circle reveals unique insights from large and mid-sized banks around the world

16 September 2018

Winning, or even succeeding, in today’s global market requires a new set of tactics. Manoeuvring through the rapidly changing landscape demands a wider and yet more detailed map. Gone are the days when providing a faster, better, cheaper solution is all it takes to stay ahead of the competition. Indeed, the only way for banks and financial tech companies to successfully navigate the global market, is by creating new solutions which put the customer first.

Banks must move up the value chain, focusing their resources on delivering the best possible service to their customers by allowing core banking functions to be delivered by financial utilities. These emerging financial utilities have the technological capability to deliver these services more cost-effectively and more efficiently, improving the service provided to the end-customer and increasing the added value of the bank.

Insights from the banks

At Banking Circle, we recently carried out an exclusive study into the changing landscape of the banking and payments industry. The study sought to understand the true impact of fintech and the disintermediation of the cross border transactions and payments businesses on mid-size European banks. We commissioned MagnaCarta to carry out a series of interviews with heads of correspondent banking, cash management and transaction banking at large and mid-sized institutions to gain a unique and invaluable perspective.

The insight paper produced from these interviews, ‘Re-drawing the Map: The changing landscape of cross border banking and payments’, revealed that the rising digital tide is already incentivising many banks to move further into digitisation. Banks are stepping up to take on the FinTechs.

Global Head of Institutional Market Management, Cash Management, at Deutsche Bank, Marc Recker, commented: “Deutsche Bank is the number one euro clearer and top Dollar clearer in Europe, and plays a strategic role in correspondent banking, yet even we cannot sit back and turn a blind eye to competitors in the market.”

Tatra Banka is a Slovakian bank with a brand promise to be the leader in innovations, and a mission to shift the boundaries of banking. Rastislav Vallo, Head of Payment Cards at Tatra Banka, added: “It’s really about a different approach, fintech is teaching us this rule: take it or leave it. And make it quick. In the end the customer should be the winner.”


Growth of cross border

In recent years, global commerce has grown exponentially. It is no longer possible to separate a business’ local banking requirements from its international needs. In 2016 86% of technology start-up businesses reported having some form of cross border activity (i). Therefore, established firms and microbusinesses launching tomorrow must each have access to affordable, efficient global banking solutions from the outset. Without this, they are unable to compete effectively.

SR Bank is a small regional player, but the largest savings bank in Norway. SR Bank’s Vice President, Payments, Geir Gundersen confirmed that the bank is seeing an increase in the number of customers in need of cross border payments. “Our customers are increasingly seeking international payment solutions, and we are regularly acquiring new corporate business from companies with international trading ambitions. As such, much of our income today is connected to our foreign exchange transactions.”

ATB Financial, a local bank based in Canada, is also seeing growing numbers of corporate clients sending and receiving cross border payments. Mariia Khriachtcheva, Director Payments, ATB Financial, commented: “Demand is currently very high from new and existing business clients looking to minimise the cost of wires and reduce cheques. Cross border is therefore of strategic interest to us. The market is changing rapidly, and ATB Financial is stepping up to the challenge.”

Ireti Samuel-Ogbu, Managing Director, EMEA Payments and Receivables Head with Citibank’s Treasury and Trade solutions division, believes it is time for an overhaul of cross border payments: “Cross border in terms of SWIFT payments is around 40 years old, and it’s clear that this market is ripe for change. Recently there have been significant steps forward with the launch of SWIFTnet, initiatives like gpi and the exploration of incorporation of new technology and fintech partnerships into the existing SWIFT model.”

Marc Recker of Deutsche Bank added: “We’re not complacent but to date we’ve not seen major impact from fintechs in the cross border payments space. That said, we expect banks to collaborate with fintechs in areas where this results in additional value for clients. In terms of scale, Deutsche Bank is in the ideal position to serve as an enabler to smaller institutions and take away the burden of cross border payments.”

Collaboration of banks and financial tech businesses

Andrea Dunlop, Chief Executive of Acquiring and Card Solutions at Paysafe Group explains how the current system is no longer fit for purpose: “Current correspondent banking payments are slow and not transparent. In one case a payment was refused for one of our merchants without explanation – it then took thirty days to have the funds returned. This ends up becoming a reputational issue for us, to the point that we sometimes have to refuse to work with some customers because of the banks they use.”

McKinsey estimates that existing banks wanting to take full advantage of the digital globalisation opportunity will need to reduce the costs of their transactions businesses by up to 95% (ii). This is impossible without banks working with third parties to deliver certain aspects of their service. Alone, they simply cannot provide an affordable solution.

Wim Grosemans, Head of Product Management, Payments and Receivables at BNP Paribas added: “We have to make sure that we think about the client experience, and not in silos, with the capacity to make use of best-of-breed solutions by providing connectivity to our platforms to third parties.”

Banks and fintechs must work together to meet today’s challenges. Costs are one of the biggest stumbling blocks for cross border payments, and tackling this begins with instant payments, 24/7. SWIFT net and gpi are beginning to address some of the challenges, and the Bank of England RTGS renewal programme will deliver the next generation of real-time gross settlement.

Despite these banks working in different regions, they are all taking the fintech competition seriously and gearing up to take on their biggest challenge in generations. As the international banking and payments map is redrawn, the winners will be those institutions – large and small – which can fully embrace a digital mindset and partner with financial utilities to deliver the best solutions for their customers.

Download the Banking Circle white paper here: ‘Re-drawing the Map: The changing landscape of cross border banking and payments’

(i) Digital Globalization: the new era of global flows, McKinsey & Company, February 2016

(ii) Global Payments 2016: Strong Fundamentals despite uncertain times, McKinsey & Company, September 2016

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