Fintech for corporates: partnering for success
With global investment into the fintech arena growing at an astonishing rate, it is only a matter of time before the corporate sector begins to feel its true force. Fred DiCocco, head of market management, BNY Mellon Treasury Services, discusses how banks are adapting.
Fintech is triggering a monumental shift in the payments space, with the entire financial industry abuzz with anticipation of how new digital capabilities could alter the way in which present day transactions take place.
Change is being driven by a multitude of non-banks entering the payments sphere, leveraging cutting-edge technology to offer solutions that appeal to the digitally-astute customers of today. These start-ups not only face far fewer regulatory requirements than banks, they typically won’t have legacy systems; they can therefore afford to adopt a far more experimental, fast-paced approach to innovation.
Furthermore, advances in technology mean that new players have the ability, potentially, to quickly build and scale-up their business operations. Cloud-based solutions, for example, may offer far greater flexibility than traditional banking legacy systems (which are less suited to respond to changing market and industry demands) and require lower capital expenditure than locally installed software. Elsewhere, application programming interfaces, which facilitate the interaction between two or more online connected services, provide the opportunity to build solutions that integrate and combine different services and data sources.
These technologies and processes have been instrumental in accelerating the process of change and enabling fintech start-ups to disrupt established players, creating somewhat of an unbundling of financial services. Indeed, new entrants have been able to make significant advances into a number of financial services, including purchasing (e.g. PayPal and Apple Pay), fund transfers (e.g. Venmo and TransferWise), borrowing (e.g. Wonga and Zopa), investing (e.g. Nutmeg) and the tracking of spending (e.g. MoneyDashboard).
While banks could view the somewhat crowded environment as an obstacle, this step-change in the industry should be seen as positive, creating the opportunity for banks to redress their strategies and even their way of thinking. Indeed, the increased level of competition can spur banks to find creative ways to innovate and improve their systems, with a client-centric approach at the core of developments.
For now, the vast majority of fintech-led change has been in the retail industry, with enhancements to the client experience coming thick-and-fast in terms of multichannel accessibility, speed and efficiency. It is only a matter of time, however, before fintechs begin to make their mark on corporate payments. Indeed, with initiators of corporate payments regularly exposed to the developments in retail payments, it is inevitable that banks within the corporate space will be expected to deliver equally attractive digital solutions. It is therefore imperative that they remain vigilant of developments in the retail and consumer space.
A key shift in retail payment capabilities has been as a result of smartphone and mobile wallet innovation. Certainly, mobile payments have radically altered how and where payments can be made, resulting in shifts in spending habits – over 20% of online purchases in the UK now take place on a commuter journey, for example. And in the case of unbanked populations in the emerging markets (approximately 59% of adults in developing economies don’t have an account with a financial institution), mobile wallets, such as M-Pesa, provide the opportunity to access a growing array of financial services.
Due to the complexity and often cross-border nature of transactions initiated by multinational businesses, there are greater levels of concern regarding security in the corporate payments space however, meaning this sector has been less impacted by mobile payments to date. Yet banks in the corporate sphere should be mindful that expectations for mobile corporate payments is only likely to grow, for two key reasons. Firstly, fintech companies are exploring ways to significantly improve risk mitigation – such as biometric security, while simultaneously improving the overall user experience. Secondly, the number of mobile payment users, which totalled approximately 245 million at the end of 2013, is predicted to rise to up to 450 million by 2017. And with in excess of five billion active mobile phone accounts globally, the growth potential for mobile payments is enormous. Developing solutions that are less PC-centric and can be applied to a range of devices (including smartphones, tablets and even those emerging in the field of wearable devices) should therefore be a key consideration for banks that are looking to demonstrate their understanding of client needs and commitment to enhancing the client transaction experience.
Elsewhere, the development of real-time systems – which offer immediate notification/availability to the receiver, irrevocability, certainty (confirmation of acceptance or rejection is received within 15 seconds) and delayed settlement – has brought huge enhancements to retail payments in terms of speed, efficiency and convenience. Introducing real-time payments into the corporate payments space, however, would be a more complex undertaking, with a multitude of other processes – such as reconciliation, reporting databases and intraday liquidity management – needing to be factored in to any system upgrade.
Yet as more countries explore real-time payment solutions (such as the UK’s Faster Payments, Switzerland’s Swiss Interbank Clearing, Denmark’s Nets Real-time 24/7, Singapore’s Fast and Secure Transfers, and Poland’s Express Elixir) immediate payments are becoming increasingly embedded into the retail and consumer transaction experience. And with innovation in retail payments driving demand in the corporate space, the development of real-time corporate payments is a major goal for the corporate banking industry. Indeed, following the implementation of SEPA, the European Central Bank has identified real-time payments as a key next step towards achieving its aim of cross-border harmonisation.
With global interest in fintech gaining serious traction (investment skyrocketed in the last 12 months, growing from $4.1 billion in 2013 to $12.2 billion in 2014), the potential for fintech to bring not only improvements, but entirely new concepts to the world of corporate payments is becoming increasingly less of an “if” and more of a “when”.
Banks – which have always been dedicated to investing in technological development to help improve payment operations and client service, reduce risk and lower costs – recognise the huge value that fintech innovation could bring to the payments industry. They are therefore becoming increasingly immersed in the fintech space and engaging with new players. Collaborating with nimble, pioneering firms from the fintech community can enable banks to “plug in” to new ideas and concepts and be better-positioned to anticipate and implement future tools and techniques, thereby “future-proofing” their role within the unfolding payments business. Methods including venture capital investment, accelerator programmes, hosting “hackathons” and establishing innovation centres are just some of the approaches banks are adopting to position themselves firmly within the vanguard of fintech.
In turn, such partnerships have a great deal to offer fintech companies. The high standards of regulation that banks must comply with – that have absorbed a significant portion of bank resources in recent years – mean that banks can offer much greater levels of security and risk mitigation than non-bank players, an attribute that is of particular value in the complex, multi-layered world of corporate payments. Indeed, the position of trust that banks have established as safe-keeper of society’s wealth, as well as the specialist expertise and practical experience of payment processes, cannot be matched. Fintech companies are therefore very receptive to these two-way partnerships, with banks not only offering investment to help bring ideas to life, but providing invaluable guidance regarding how concepts could be developed into viable real-world applications.
Certainly, the growing relationships between banks and fintechs can help facilitate the launch of realistic innovations into the corporate payments space. An area of technology that has been identified as a possible game-changer for corporate payments (if developed to its full potential) is that which lies behind the digital currency Bitcoin: the blockchain. A distributed, cryptographically secured ledger, the blockchain records every detail of every transaction made in a format that cannot be altered or deleted.
Interest in the properties and potential capabilities of the blockchain is increasing, with a number of banks, including BNY Mellon, announcing their involvement in the exploration of applying the blockchain more broadly to the finance world. UBS has launched a Blockchain Innovation Lab, for example, while banks such as Fidor, CBW and CrossRiver have signed up to use Ripple, which operates independently from Bitcoin. Ripple is an open sourced, permissioned payments protocol that can provide a means for real-time, cross-border currency exchanges (both crypto and fiat) without the need for international settlements. Theoretically, this concept could ultimately even become a challenger to Swift’s clearing house role. Certainly, if the characteristics of the blockchain can be leveraged it could transform the payments business, providing significantly enhanced speed and efficiency, and also aiding regulatory oversight and security – to the extent that it could even help to eradicate money laundering.
A substantial amount of activity is occurring in the blockchain arena and much of it is yet to be disclosed. At this stage, exactly how these developments – and the concepts being worked upon across the wider fintech space – will unfold remains to be seen. But as fintechs and banks become increasingly engaged and marry their respective strengths, such partnerships will be key to ensuring the corporate payments space is propelled into the digital era, with banks able to offer relevant, technology-fuelled, attractive solutions that can add significant value to client transactions.