Payments: Embracing the future of FinTech
Written by Leda Glyptis
A host of new players are entering the payments space, vying to develop new solutions to enhance the transaction experience. With FinTech activity gaining momentum, Leda Glyptis, head, EMEA Innovation Centre, BNY Mellon, examines how banks are adapting to this digitally-focused transaction arena; aligning with FinTechs to explore ideas that could truly transform the world of payments
The digital payments space is in full swing. A growing collection of new entrants are exploring ways to enhance payments and helping to kick-start a whole new way of thinking throughout the finance industry. Financial technology is the catalyst driving these enhancements, and traditional banks and new entrants alike are aware of the potential FinTech holds, with banks now very much a part of the FinTech business. Investment into the area has soared in the last 12 months, almost tripling in the US from $3.4 billion in 2013 to nearly $10 billion in 2014. With support for FinTech gaining traction, there is no doubt that the enhancements seen so far are just the tip of the iceberg.
This is certainly true for the corporate payments sector which, as yet, has felt relatively little impact from this surge in FinTech compared with retail payments. For the latter market, improvements in speed, access and convenience have already been rolled out, with growth in global e-commerce playing a huge role in driving the adoption of new payment experiences and propelling the success of non-bank payment providers such as PayPal and AliPay. That said, changes in wholesale and corporate payments are beginning to accelerate, and the sector is poised for FinTech to truly make its mark.
There is no doubt that it is playing a prominent role in shaping the evolution of payments, and banks in the corporate industry are aware of the disruption the new entrants could present. The unbundling of financial services portfolios is widespread in the consumer sector, with non-banks making significant inroads in areas such as fund transfers (e.g. TransferWise), purchasing (e.g. Apple Pay, PayPal) and the tracking of spending (e.g. MoneyDashboard). A number of new entrants (e.g. WeSwap) are also entering the foreign exchange arena, leveraging the introduction of real-time payments (which significantly reduce the risk of exchange rate fluctuations) to offer lower-cost services.
Leveraging FinTech: combining skillsets
Without doubt, FinTech developments are enabling new players to enter the payments space. Yet as long-standing gatekeepers of society’s wealth – the beating heart that works to move payments, the lifeblood of the economy, around the globe – banks are not prepared to rest on their laurels while these non-banks dictate the way the new era of payments unfolds.
Banks are therefore gearing up to ensure they are positioned at the forefront of the digital age by establishing valuable alliances with new entrants. There are many advantages to be gleaned by both parties from such arrangements. The specialist expertise, practical experience of payment processes, thorough regulatory oversight and open dialogue with regulators, and client access and trust that banks can offer can be hugely valuable in helping FinTech ideas to progress, and be developed into viable real-world applications. In turn, banks gain access to the creative insights and unrivalled digital know-how of technology innovators, enabling them to be directly involved and immersed in the dynamic sector that is heavily influencing the direction of payments. Banks are exploring these allegiances through a number of approaches, including venture capital-style investment and accelerator programmes, where the relationship ranges from partner-sponsor to more active ownership structures.
As banks and new entrants collaborate, it is becoming increasingly realised that the digital currency Bitcoin or, more precisely, the technology behind it known as the blockchain, could hold a great deal of potential for corporate payments. The blockchain is a cryptographically secured, distributed ledger wherein each transaction or exchange is time-stamped and transparently logged in a mutual record that cannot be changed or deleted. The public blockchain is designed for absolute transparency to all participants but the technology allows for the creation of permissioned networks and “eponymous” participation.
A growing number of banks – including BNY Mellon – are exploring ways to leverage the capabilities of the blockchain for corporate payments and beyond. The properties of the blockchain could, for example, be used to improve speed, efficiency and security (if developed to its full potential it could potentially help to eradicate money laundering), lower transaction costs and facilitate regulatory oversight. Certainly, there is a lot of activity occurring around blockchain technology. Some banks have signed up to use Ripple, a permissioned, open-source payments protocol which can provide a means for real-time, cross-border transfers to take place without the need for international settlements. Such a concept could, theoretically, challenge the role of SWIFT by acting directly as a clearing house for any bank that adopts it.
Elsewhere, the exploration of smart contracts could radically change the way debt is issued. Securities bought and sold as a new investment cycle is being visualised, while others are exploring incorporating ownership of physical goods onto the blockchain – from “the internet of things” smart car insurance, to immutable diamond ledgers. In its full expression, this technology could make intermediaries a thing of the past across many industries.
Certainly, banks and new entrants are looking at ways to leverage the blockchain to enhance the efficiency and risk management of the trade business, and Smart Securities, for example (a recently-launched platform enabling the management of digital securities using the distributed ledger technologies of the blockchain), can provide improved automation and disintermediation.
The practicalities of how the blockchain can be applied to corporate payments is still being worked out. Indeed, a multitude of new entrants are currently examining verticals that would fit into a future payments landscape. But to bring these creative concepts to fruition, it is increasingly being understood that the infrastructural and conceptual knowledge and experience of banks is crucial to the FinTech formula.
There remains a great deal of exploring to do of the FinTech space, but two things are clear: firstly, new entrants, particularly in the digital currency space have the power to radically alter payments as we know them, and secondly, FinTech has far more chance of successfully and sustainably advancing payments if such developments are conducted with the support of banks. Two heads are better than one, as they say, and without doubt, established player-new entrant partnerships hold the key to unlocking the true potential of digital payments.