The new payments landscape: we need a new mind-set

Paula Roels is head of market management EMEA, Institutional Cash at Deutsche Bank

Popmoney, Dwolla, Square Cash, Funding Circle, Venmo, Nutmeg, Transferwise, Stellar, Kabbage … this is not a list of the latest box office hits or some weird shopping list, but a handful of the emergent FinTech companies that are sprouting up everywhere like wild mushrooms.

These companies are, to a certain extent, beginning to reshape and become part of a new financial landscape, offering financial technology services that not only covers payments, but also personal finance, lending and asset management, writes Paula Roels.

It doesn’t take a genius to see why they are appearing: they see a gap in the market claiming they can offer cheaper, faster and ultimately better services than those provided by traditional banks. Their characteristics are strikingly similar. They are extremely focused, transparent, have identified an unmet demand, and utilise technology to establish unique customer experience. More often or not, their employees are made up entirely of Millennials who having grown up in the age of personal computers and the internet, are entrepreneurial, goal-oriented and extremely technology savvy.

These FinTech companies have taken advantage of an ideal set of circumstances. The first of these concerns customer satisfaction. Since the financial crisis banks have been trying to regain the trust of the consumer. At the same time, banks have fallen behind the times in the sense that they have not been providing customers with sufficiently convenient products and services.

The second aspect is regulation. Regulators have historically maintained a risk-averse stance which has hindered the entrance of new players into the market. However, more recently, in response to criticism that they are restricting competition regulators themselves are seeking to break down the barriers on access to payment systems.

The final point concerns technology, which over the past 10 years has progressed at a blistering pace. Indeed, in that past decade, we have witnessed the emergence of new technologies such as cloud-based systems, high speed wireless networks, biometric recognition and blockchain which are leading to a new wave of payment product and service possibilities. At the same time, the increasing use of smartphone and tablet devices is acting as a catalyst for mobile-based payment service expectations.

You scratch my back, I’ll scratch yours

So are the emerging FinTech providers any different from the current FinTech providers that are mainly geared towards providing payment services through widely used channels such as card, online and P2P payments?

The answer to that is yes, in the sense that they have the potential to be more disruptive and transform the industry. It is clear that some of the new entrants view themselves as being in direct competition with banks with the aim of taking away business. However, many of them actually see better chances of success by partnering with traditional banks and likewise banks can benefit from their innovation as they journey towards becoming digital.

By the sheer number of FinTechs that have emerged it is unlikely that they will all survive. Some would argue that we are going to experience another bubble similar to the dotcom era. At the other extreme, you have some arguing banks could be displaced entirely. That is speculative. The truth is, banks must adapt to the new environment and with regards to FinTechs there will be a natural attrition and rationalisation process.

One aspect that needs to be kept in mind when we consider their disruption effect is regulation. It’s unrealistic to think that regulation will not at some point in the future apply to them – that will come. The stringent measures that have been imposed on banks have quite rightly been brought in to combat financial crime and ultimately protect the end-consumer. That security cannot be compromised. One of the potential outcomes of regulation may well be that many FinTechs will either be acquired or integrated into banking ecosystems.

The other set of providers in our newly emerging financial landscape will be the huge tech players, such as Apple, Google or Alibaba. Banks have been somewhat sceptical of their intentions to move into the financial services. However, as  the objective of these tech players is to create a seamless experience for consumers whereby they don’t even think about payments, as of now, they have essentially not done anything more than add an experience and security layer on top of the existing payments systems. The likely scenario therefore will be interplay between traditional banks, some FinTechs and technology players. Each of these sets of players can add value to their corresponding relationships.

Fintech/Traditional Bank Relationship

There is no doubt that FinTechs bring new ideas to the table. At the very least, even if banks decide not to work with them, they have been valuable in the sense that they have given them a wake-up call as most banks are now embracing and investing in digital innovation. As banks confront the challenges of digital structure change, FinTechs could play an important role. Banks are realising that they need more entrepreneurial skill sets and are starting to seed-fund and finance start-up incubators to harvest those innovative ideas. In this respect Deutsche Bank is no different, recently announcing the opening of three innovation labs in Europe and the US. These labs will act as a bridge between start-ups and different parts of the bank, enabling it to apply innovative technology to enhance service to clients and internal processes.

Perhaps the biggest challenge for banks will be quickly adapting to the change that they know they have to undertake. They will have to determine which providers they want to collaborate with, which ones could potentially be acquired and which ones they choose to compete against. Having established who to work with there will be other challenges to overcome, not only on the technology front but also regarding the workforce. Banks are not exactly known for their entrepreneurial or innovative culture. This will require them to start attracting top talent to help build ecosystems that offer best in class service and user experience to their customers. Banks need to move beyond the traditional mind-set of simply initiating and executing payments to one in which they support their customers across the entire value chain.

The digitalisation undertaking by banks will be a monumental task, yet if carried out correctly has the potential to transform banking from a utility into a great consumer experience. In the past few years, the choice of channels may have widened, but banking could still be easier, more intuitive and more enabling as clients and merchants go global. In this respect, we could learn from the established retailers of this world. The way they anticipate and meet your needs intuitively from the minute you step into a shop or click onto their home page. The way they lay out their shops and display their products to mimic, even prompt, your thinking. To realise the full potential of digitisation, banks have to do what these retailers do; structure their business around the client, and away from disaggregated product and channel transactions. In other words speak the language of the client.

Traditional Banks/Tech-Giant Relationship

A lot has been written in the past couple of years about tech giants such as Apple, Google or even PayPal encroaching into the banks’ traditional business. But here too, there are opportunities for collaboration and examples of this have already emerged, for instance around the m-wallet. Many people would have you believe that this is a first step to them effectively stepping in to doing what banks have traditionally done for centuries. Yet tech companies themselves are not pushing that message and payments are not their core business.

So what is the standpoint of some of these technology giants?  Knowing that individuals are not overly willing to share their personal financial information with them, some have openly said they want to work with banks to facilitate payments between consumer, retailer and the bank. PayPal is a good example, and more recently, of course, Apple has stepped onto the scene with Apple Pay. In the US, banks have shown their willingness to work with Apple, in the UK it will soon be the same. What’s in it for the banks, one may ask. At the end of the day it boils down to driving transaction volume in credit and displacing debit and cash. Banks will stand also to gain on volumes if it proves to be successful.

The Wholesale Payments Landscape

The retail side of payments gets more publicity by virtue of the fact that it affects nearly every individual. That is not to say that the payments landscape on the institutional side is not evolving and even being targeted by new entrants utilising new technologies. These have yet to prove their concept of profitability. Perhaps the best example is the emergence of distributed ledger technology which allows a digital currency to be used in a decentralised payment system. A lot has been written around promoters of these technologies such as Ripple labsor Stellar, but it is difficult to envisage this technology becoming anything more than a complementary channel for certain types of clients. However, similar to the retail side, such disruptors are pushing banks to think beyond the status quo.

Indeed banks must continue to invest in enhanced cash management capabilities and platforms, implementing more straight through processing and simplifying bank to corporate connectivity. So far, good progress has been made on a regional level with the introduction of the Single Euro Payments Area, but we need to think end-to-end globally. The use of data will play crucial role not only to ensure best-in-class execution of payments, but also to enable corporates and merchants to instantly manage their liquidity positions.

Banks will have to continue to engage with market infrastructure providers, corporates and financial institutions in promoting ways to move the industry forward. One prominent example is XML messaging and ISO 20022 which have emerged as the standards for international payment transactions. Indeed ISO 20022’s deployment has been welcomed by companies seeking more transparency into their payment providers’ processes. It will also play an instrumental role in our continued move to real-time. What banks must avoid is that they themselves become a “disruptor of progress” by imposing different standards.

Collaboration on Multiple Fronts

As banks continue to move in the direction of becoming digital, they will do so with a far more open mind set and openness to combining skill sets with strategic partners. FinTechs will, as mentioned, play a role with their entrepreneurial culture, nimbleness and strength in applying a new way of thinking to today’s challenges. By engaging with them rather than against them, banks will be better placed to anticipate and then implement the corresponding tools.

However, that is only one form of collaboration. It will take more than just forming a few partnerships with a couple of innovative thinkers who may only be concentrating on one part of the value chain. Banks also need to look to improve efficiencies across the entire value chain across multiple channels and importantly they have to react by offering clients a more complete payment covering convenience, economic value and advisory services. Ultimately banks need to speak the clients’ language and anticipate their needs providing products at the right time, at the right place and in the right way.