Why FinTechs Need Banks and Banks Need FinTechs in the Mobile Payments Sector
Oftentimes the banking sector is spoken of in quite a skeptical way. It’s true that some of the technologies that they are using are outdated and that traditional global transfers can be horrendously expensive and slow. But the reasons behind those problems need to be acknowledged and understood, so that proper solutions may be implemented.
As public interest entities, banks were always under direct regulatory pressure. Every economical and financial crisis revealed their shortcomings and so supervision over their activities has been getting stricter time and time again. Regulations like EU’s 4th Anti Money Laundering Directive, MiFID II and Title III of the USA PATRIOT Act in the US take away much of the capability to rapidly innovate, especially in the progressing mobile payments field. This is where the immense potential of cooperating with FinTech companies comes in.
According to the latest World Payments Report by BNP Paribas and Capgemini, the pace at which the entirety of payments market changes is continuously accelerating. This change is brought by rising customer expectations, which is being met by FinTechs. Services like Alipay, WeChat Pay and Paytm have already acquired significant market share in the Asian countries, where it traditionally belonged to banks.
It is being achieved by customized, contextual value driven offerings, seamless user experience as well as new payment technologies, among other factors. Some of those technologies, like the introduction of RTP infrastructure, while being ‘just’ an evolution of the current banking system, are already a huge improvement since they are enabling near-instant domestic bank transfers.
However, the revolution may come in the form of implementing Distributed Ledger Technology, which already allows for instant global transfers at low cost, with ensured business continuity and immutable audit trail. Obstacles will be discussed later but at this point it’s worth mentioning, that some FinTechs, e.g. Crypterium, PumaPay and Pacific, are already tapping into the possibilities arising from the use of DLT in consumer payments.
On top of those technologies, innovations like basing services on agile platforms, IoT and AI amplify the benefits of value-added services. All of those elements are broadening the payments landscape, both for the consumers and for corporate entities.
On the one hand there is the consumer side of this landscape. It is being shaped largely by a significant generational shift of the last decade. Aside from all the debatable opinions and studies on the personality traits of generation Y and Z, their fluency in technology is visible to the naked eye and proven. In emerging markets FinTechs are working on promoting online and contactless payments, and as for developed regions, such methods are often already a natural part of daily life. To suit the shifting approach to using technology, alternate payment methods are being introduced there. They can include somewhat recognizable solutions like external wallets and payments via familiar social media.
But the innovation goes even further — soon consumers might be able to pay via a payment module installed in any of their wearable items or biometric payment forms, with the last one expected to have over 2.6 billion users by 2023.
On the other hand, there is different demand coming from corporate entities. As Global Head of Transaction Banking at ING, Mark Buitenhek, puts it:
“Corporate demand is changing from ‘payments only’ to end-to-end services across the entire value chain. Banks are traditionally not well organized to address these demands’’.
Cooperation with corporate treasurers is required, as they may further clarify those demands — possible advances in cash forecasting, liquidity management and automated treasury deserve a separate discussion.
However, the report states that the biggest potential benefit for banks could come from orchestration of value-added capabilities. Simply speaking — most banks may be better off not trying to do everything by themselves.
Since FinTechs are better suited for spearheading payments innovation, cooperation in handing over this aspect to FinTechs would allow banks to focus on the highly demanded value-added services. Other banks can choose a different approach.
By developing and making their API publically available it’s startups who could take over the part of creating value-added services. Those banks could then funnel more resources into modernizing their payment rails, which would improve their operational efficiency, both retail and corporate related. Of course, FinTechs would also benefit from either cooperation. Banks already extensive infrastructure in place, and customer trust earned — by leveraging those strengths when implementing FinTech innovations, both sides have a lot to gain.
Numerous challenges arise when trying to bring those innovations to life. In case of Distributed Ledger technologies problems lie mostly in their interoperability with current systems, as well as their scalability and cost-effectiveness. RTP infrastructure is mostly hindered by synchronization and interoperability difficulties, and when it comes to APIs they still lack standardization needed to connect them in a global network .
In all those cases, when trying to open up banking system, cybersecurity threats will emerge. Banks’ experience in securing their systems might prove crucial for FinTechs, who will need to bring their solutions up to the same level, especially in the wake of attacks on some FinTech platforms, like cryptocurrency exchanges. And those are only the strictly technical challenges.
Banks also need to collaborate with FinTechs to relay the latter ones’ expertise on financial technology to the legislators. Since the progress is so dynamic, authorities may simply need help in keeping up and making sure that regulations are on the right track. Such consultations are already taking place, for example Malta Financial Services Authority conducted them to ensure that their new regulatory framework answers the needs of FinTechs, public market investors and consumers.
Overall, it may be concluded that both vast possibilities and significant obstacles are ahead of the payments market. The key to materializing those possibilities and overcoming obstacles lies in proper cooperation between FinTechs, banks and financial authorities. But if suitable joint effort is put into the development of innovations, their interoperability and regulations, then in the coming years a considerable transformation may await the whole of payments market as we know it.
