The Payment Crossroad –?Regulation, innovation, and the need for strong bank and fintech collaboration
The last few months have been packed with industry events gathering fintechs, banks, and software vendors servicing these verticals. They’ve also seen the adoption of the Instant Payments Regulations (IPR) in Europe and the increasing incertainty about the industry's ability to be ready on time.
Our reading of the industry reactions to the IPR, the most discussed topics at these events, and banks' latest moves towards fintechs – including our recently announced partnership with BNP Paribas – tells an interesting story about the dynamics between banks and fintechs.
Also in this newsletter: upcoming regulations on virtual IBANs, the transformation of the CFO stack and our latest product updates.
What the Instant Payments Regulation tells about our industry
In 2022, our first newsletter was about the then-announced legislative proposal on instant payments. Almost two years later, here we are, still discussing this regulation. What does it tell about our industry? That we ramble? Yes. It also has an interesting story about the regulatory load put on banks, the different space-times in which they operate, and the benefits for both fintechs and banks in deepening their partnerships.
Payment regulations, banks’ Sisyphus boulder
I’ll start with a small disclaimer. The purpose of this newsletter is neither to pity banks nor to blame them, but rather to attempt to understand why things are the way they are. As always, your feedback is very welcome.
In June, we attended EBAday, the annual payment conference for the European banking industry. The most discussed topic, whether on stage or in informal discussions, was the Instant Payments Regulation (IPR), officially adopted in March 2024. This was, to say the least, surprising: yes, the final text has just been adopted, but the idea that instant payments would become mandatory has been in the pipe since 2021 and the first dispositions of the text will start being enforced in January 2025 – tonight in banks’ space-time.
Nobody believes that all banks will be ready on time. We’ll cover the intricacies of the IPR in more details through articles during the summer.
The IPR discussions triggered broader discussions on payment regulations. PSD2 was enforced in 2021, the IPR, including its Verification of Payee dispositions, will be enforced in 2025, and PSD3 and the updated Payment Services Regulation are on the horizon for 2026-2027.
Add to that major SEPA rulebook updates every two to three years and it represents a packed regulatory agenda for banks, each requiring significant changes to their infrastructure.
Indeed, even the most minor changes, like the switch from an unstructured to a structured address field in payment messages in the latest SEPA rulebooks, can represent year-long projects for banks.
Most of them have been around for decades and rely on extremely robust but inflexible legacy IT systems. Monolithic architectures mean that the smallest changes can impact extensive scopes. The large data volumes these systems process impose extensive load and edge case tests for the slightest updates. And sometimes, these systems are just too old to handle new requirements.
Some banks are also not exempt from exotic implementation choices. We’ve heard about a bank using the last characters of the payment message address field to pass internal data before erasing these characters when the message is about to leave the bank’s systems. Now, the latest SEPA rulebook updates take another dimension.
More generally, most banks aren’t tech companies. The broader organisation isn’t built around tech. Tech is a support function that keeps the lights on and ensures compliance.
The consequence is that, as bankers highlighted at EBAday, regulatory changes are monopolising most bank tech and product resources, leaving no time to think about how to innovate and build value on top of the introduced changes.
Fintechs’ unfair(?) advantage
Of course, fintechs have their own regulatory burden to carry, from KYC to AML-CFT to payments.
But on payments specifically and complying with payment regulations such as the IPR, they’re in a much better place than banks.
They don’t drag along 30+ years old monolithic systems. They are tech companies at heart. Microservices and continuous delivery are the norm, enabling easier payment updates.
Also, in order to compete with banks and capture market shares, they have no choice but to propose better services than banks, be it through user experience, supported payment methods, or ease of integration. Fintechs are built and funded around that.
The result is that while they can still be intimidating, regulation-driven developments are, at most, month-long projects, not years.
It leaves plenty of time for innovation, whether in UX, payment methods, or new financial services such as buy now, pay later.
领英推荐
The era of partnerships has just begun
So — cliché alert— banks are slow and can’t innovate and fintechs are fast and can launch new products every week.
Great news for fintechs, right? Yes, but not so fast.
Today, all fintechs, more precisely all payment and electronic money institutions, need banks. There wouldn’t be fintechs without banks. They hold customer deposits with their partner banks. They send and receive payments through their partner banks.
They also benefit from (and depend on) banks’ investments in regulatory projects to themselves be able to comply, and in new payment methods like instant payments to offer instant payments to their customers themselves.
This state of affairs is an issue it itself. It makes fintechs dependent on banks’ commercial policies, risk appetence, and stability. Their margins result from a tight balance between what partner banks bill them and aggressive market competition. Banks can decide to de-risk their portfolios and off-board their fintech customers when the share of banks that currently work with fintechs is already small – not even mentioning fintechs in the crypto or money remittance spaces. In this context, the friendliest banks are concentrating on fintech customers and concentrating their portfolio on this industry. One of these banks encountering difficulties could strike a huge blow for the whole fintech industry – remember SVB or have a look at the unfolding Evolve Bank and Trust data breach.
In Europe, PSD3 and the PSR might change it by allowing direct access to schemes and the possibility of opening accounts at central banks for fintechs. But looking at how few fintechs went direct in the UK market, where PIs and EMIs can theoretically already operate without a partner bank by connecting directly to the scheme and opening their own accounts at the Bank of England, we don’t see fintechs do without banks tomorrow.
Where does that leave us? Until fintechs become banks and banks become tech companies, strengthening and multiplying partnerships is in everyone’s best interest.
Fintechs can rely on banks' proven payment infrastructures, liquidity coverage for payment settlements, and diversified balance sheets to secure customer deposits, allowing them to focus on innovation, address new markets, and create new uses.
Banks can rely on fintechs to create additional value on top of their infrastructures and capture the flows and deposits from these new usages and addressed markets.
And we saw this trend happening at Money20/20. Banks are embracing the rise of PSPs.
Challenger banks specialising in PSPs increased their presence on the floor. More established banks are ramping up their organisations with specialised PSP teams and products by making more of their offers accessible via APIs and partnerships to better address fintechs.
Core to Numeral is the belief that banks are and will remain critical to the success of fintechs and that fintechs represent a unique growth lever for banks. Our recent partnership with BNP Paribas, making Numeral the API of choice for PSPs to use BNP Paribas’ cash management services, is a testament to this belief.
The Crossroad
Look up for virtual IBAN regulation
This May, the European Banking Authority (EBA) published a report on virtual IBANs. You will find a quick recap on virtual IBANs here.
In this report, the EBA identified several risks linked to virtual IBANs and their usage across Europe, including:
In recent workshops held by the European Commission on the Instant Payments Regulation, they confirmed that they were looking at virtual IBANs from a policy perspective.
Read the full report here.
CFO stack: the irresistible combination of software and financial services
From the one and only Simon Taylor, the CFO stack “refers to a category that solves a problem typically seen in a finance team, such as accounting, making payments, analytics, or buying (procurement).”
Yesterday, the scopes were clearly defined: software vendors provided the software on one side, and banks provided the financial services on the other side (payments, accounts, lending, liquidity management, …).
Today, the frontier is getting blurry, starting with the freelancers and SMB markets. Financial tools provider Ageras acquired freelancer neo-bank Shine. SMB neo-bank Qonto acquired financial tools for accounting provider Regate. Accounting solution provider Pennylane integrated BaaS provider Swan’s services into its platform starting in 2021. Challenger bank Memo Bank keeps adding value-added tools on top of its financial services.
The reason? Freelancers and “modern” SMBs don’t have established, long-lasting relationships with their bankers. They will have a hard time getting more than off-the-shelf financial services. So why bother with the sometimes complex customer journey of classic banks? With these integrations and consolidations, they can manage their accounts, make payments, close their books and more from all-in-one user-friendly platforms, saving precious time to actually run their business.
Learn more about the US side of this trend in Simon Taylor's Fintech Brainfood newsletter.
Latest news from Numeral