Winds of change in cross border banking

Having remained relatively unchanged for many generations, the cross border payments map is being transformed. The forces driving change are coming from all angles, entirely reshaping the landscape, and drawing a new map.

New entrants are changing expectations and demand. Large global banks are retreating from their traditional correspondent banking partnerships, leaving many businesses without access to affordable cross border payment options through their usual bank. Yet digital-first business is growing rapidly. And as these firms are often global from the start, it is essential to their success that they have access to fast, affordable and easy to manage cross border payment solutions.

The new breed of FinTechs, which are exceptionally good at focusing on the client relationship, are addressing this need.  And they are tackling the challenge of having the right back-office infrastructure by working with traditional banks, who provide the necessary pipes and plumbing.  But, for banks to avoid ending up as utilities, handling only the less profitable back office functions, they also need to move up the value chain and focus on delivering the best solutions for their customers.

This whirlwind of market changes, alongside new regulatory requirements, is creating a dramatic storm in the industry. As the market has been unchallenged since international trade first began, many traditional banks have found it difficult to adapt and compete effectively. However, incumbent providers have not lost the battle yet.

Change brings opportunity

Banking Circle recently commissioned research into the changing payments and banking landscape. Featuring a series of interviews with mid-tier and large banks, ‘Re-drawing the Map: The changing landscape of cross border banking and payments’, reveals that incumbents of all sizes do in fact remain best-placed to seize the opportunity of the industry overhaul, as long as they are ready for the challenge.

Only those banks that are fully-committed and ready for a fundamental shift in the institutional mindset will be up to the challenge. Smaller banks, many of which are already seeing rapid growth in their corporate customer base, also have new prospects in the new landscape. FinTechs have yet to make a significant dent in the dominance of the banks, but this will only remain true if banks adapt to remain competitive.

In these early stages of the digital economy, large institutions will continue to dominate the payments space. FinTechs however, could threaten banks’ ongoing profitability and success.  Smaller, adaptable, flexible and forward-thinking banks also have a real opportunity.

For them, a partnership ecosystem, in which third-parties handle their non-core banking functions, could be crucial. Working with a third-party Financial Utility, which can do the pipes and plumbing more efficiently and at lower cost, allows banks of all sizes to focus resources on the client relationship and growing their client base, bringing fresh solutions to market quickly, enabling them to compete with the bigger players.

Following in FinTech footsteps

FinTechs are thriving in the consumer market, and are likely to prosper in the corporate payments space in the coming years. The consumer proposition is simple but highly effective: deliver a service that is transparent, fast, cheap, and packaged in a consumer-friendly way. There’s no reason that this model can’t be replicated in the B2B space so now’s the time for banks to act.

Cross border B2B FinTech payment volumes are still low in comparison with that of the banks, but the influence of new FinTech entrants is powerful. And with B2B payments beginning to evolve, there is now an exciting opportunity for banks to build solutions which can better serve their corporate customers. To make this happen, they need to engage with other entities that can provide the pipes and plumbing, for services offered outside their core geographies.

And that is not an easy thing for a traditional bank to enact.

Financial Utilities who do not compete with the banks or the FinTechs, can underpin a financial institution’s offering, enabling them to focus on their customers and add value to their customer service proposition, and importantly, remain competitive.

‘Re-drawing the Map’ includes insights from the heads of correspondent banking, cash management and transaction banking at large and mid-tier institutions across Europe, and in Canada.  And the overwhelming message is that banks of all sizes are recognising the challenges ahead and stepping up to meet new expectations. In particular, it is encouraging to see that banks are already embracing the need to work with external partners across the banking ecosystem, to provide the best possible solutions and service levels. This is the only way banks will survive in the digital economy.

Taking on the competition

Whilst alternative payment providers are well able to offer faster, cheaper solutions to meet specific payment needs, the market is wide open for institutions of all sizes to offer integrated corporate solutions. An alternative to alternative payments.

Increasing competition in the global market has led to digital businesses having tight margins. They are therefore more focused on transaction costs and speed than their predecessors may have been. Cashflow is under more pressure in the digital age.

With their long-standing business customer relationships, banks truly understand the specific needs of their corporate customers. As such, they can create solutions tailored to work with the complexities of the modern treasury, while matching high service expectations.

The banks interviewed for our whitepaper are taking the FinTech competition seriously. They are gearing up to take on their biggest challenge in generations. And, as the international banking and payments map is redrawn, the winners will be those institutions – large and small – that can fully embrace a digital mindset.

To compete with the rising tide of FinTech insurgents, forward-thinking banks are beginning to put in place plans to move away from their traditional and complex web of fees and internal cross-selling subsidies. They will need to deliver transparent, cost effective, fast solutions for both local and cross border transactions.

To access a free copy of the full research report ‘Re-drawing the Map: The changing landscape of cross border banking and payments’, click here.

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