Don’t Blink. Payments and Trade Disruption is Happening Faster Than You Think

A year ago, I published an article prognosticating that disruption to the B2B payments and trade space presented pressing challenges to financial institutions. Over the ensuing months, this dynamic has continued to accelerate as innovation and new players push major changes forward at breathtaking speed.  

In Avoiding Marginalization: How Banks Can Remain Relevant In a Rapidly Changing Commerce World, I wrote: “For banks, the sea changes taking place today threaten to marginalize important relationships with clients as attractive alternative options have proliferated. Over the past decade or so, banks have gradually become disintermediated in the marketplace, as corporates turn to other sources for cash management services, such as payment, trade services and dynamic discounting. As a result, banks have increasingly been used primarily for their balance sheets to execute transactions."

The current situation stands as an inflexion point for banks who have an opportunity to embrace greater innovation in payments and trade. A Finextra research paper from October 2018, Payments Transformation: Jostling for Position in the New Digital Landscape highlighted the current state of affairs succinctly.“Core banking systems and infrastructure govern every major bank process and while they are robust, built for scale and central to how they handle day-to-day operations, respondents agree outdated core systems are a barrier to responding to competition and customer expectations.”

Looming Challenges from Non-Traditional Players

One of the looming challenges banks face is the very real potential that third-party, non-traditional players may begin to process payments themselves. Case in point, WeChat, a Chinese multi-purpose messaging, social media and mobile payment app has begun handling payment processing within its own ecosystem. According to a recent Bloomberg article, this suggests that billions of dollars in annual revenue from transaction processing could be siphoned away from banks and other firms in the near future. 

Another example of the changing tide can be found in American Express’s recent partnership with Amazon. This came in the wake of the end of Amex’s relationship with Costco, which many at first saw as a huge loss of transaction business for the card processor. But the emergence of this new deal with Amazon has created an incredibly promising opportunity for Amex to reaffirm their leadership in the small business space. 

Major technology companies are rapidly encroaching on banking territory. According to the Bain & Company report, Evolving the Customer Experience in Banking, large tech firms are already making significant inroads into banking in Asia. “In China, ecommerce giant Alibaba has amassed the world’s largest money-market fund, issued $96 billion of loans in five years and grown Ant Financial to a market capitalization roughly equivalent to the ninth-largest bank in the US.” The report goes on to say that Japan’s main e-commerce giant, Rakuten, is currently operating the country’s largest Internet bank and third-largest credit card company by transaction value. 

The point here is - in this digital age, more and more large organizations are blurring the lines by offering financial services. These companies are focusing on the treasurer’s experience around settling payments, conducting global trade, and managing the supply chain, with the goal of providing a more frictionless system, while also reducing costs. 

Collaboration with Fintechs Offer Banks a Way to Compete with Techfins

Part of the problem is that banks are playing catch-up in the quest to develop innovations around instant payments, blockchain and distributed ledger – all of which promise to transform how payments are processed, cleared and settled. According to the previously mentioned Finextra research paper, 88% of respondents cite that “existing bank systems, processes and infrastructure hinder the competitive response of banks.”

To compete with technology companies who are entering the financial services space – aka techfins - banks are exploring innovative business services based on new payment initiation methods that improve the customer experience while at the same time take advantage of myriad back-end clearing and settlement choices. Collaborating with fintechs offer banks an effective means of taking on the techfin challenge. 

A recent Forbes article, The Future Of Banking: Fintech Or Techfin?, cited the World Fintech Report 2018, outlining the strengths and weaknesses of fintechs and banks, and why collaboration makes sense. “Most successful fintech firms have focused on narrow functions or segments with high friction levels or those underserved by traditional financial institutions, but have struggled to profitably scale on their own. Traditional financial institutions have a vast customer base and deep pockets, but with legacy systems holding them back.”

Banks have an opportunity to work with technology-savvy fintechs to tap into a wealth of data related to their customers that can then be effectively analyzed to render better credit decisions and risk analysis, as well as drive greater automation. This in turn can reduce costs and strengthen the client relationship. Because most banks have their own large networks of clients, they are well positioned to meet the needs of treasurers and CFOs, who are traditionally risk averse, and more likely to rely on a trusted banking relationship.

Finextra’s Payments Transformation: Jostling for Position in the New Digital Landscape report concludes: “By working with fintechs through open APIs, banks can achieve step changes in their products and services in areas such as mobile banking, as well as assistance with resolving areas of concern internally, such as KYC, real-time fraud prevention and new capabilities based on data analytics.”

Innovation centered around banks is already in the works. For example, a major payments network is introducing distributed ledger technology that will allow processing of transactions over their network from the bank of origin directly to the recipient bank. By reducing friction in the payments process, such innovation holds real promise for banks looking to demonstrate greater value to clients. 

The changes taking place in the payments marketplace actually present a tremendous opportunity for banks to adopt a more agile, customer-centric approach that relies on innovation to meet shifting client needs. At the 2018 Money 20/20 conference, a repeated theme was the unbundling of banks. My question is – who will rebundle them if that happens? In my experience, corporate treasurers are risk averse by nature and they will not be anxious to work with a cast of vendors to manage their business. 

This being true, the prospect for banks to innovate has never been greater. Banks provide relationship and understanding of their client’s business in a way no other provider can. That relationship and understanding needs to fuel new ways of delivering service for the good of their client’s business as well as their own.