Reported by: banking|Updated: March 24, 2017
The cross-border payments space is undergoing a rapid transformation, as it adapts to accommodate greater regulatory complexity, diminishing margins, increasing competition, expanding business and trade flows and the ever-changing geopolitical landscape. The current reality is forcing the so-called ‘incumbents’ – the traditional, long-established providers – to scrutinize and adapt their business models in order to satisfy new regulatory requirements and the demand for faster, more transparent and more efficient international payment solutions.
It is in this environment that the industry has developed a growing awareness of the need for a new model that can facilitate the flow of global payments more effectively, efficiently and at lower cost than the decades-old, traditional correspondent banking model, which, in the sphere of low-value cross-border payments, no longer ticks the right boxes for clients.
Current payment infrastructures were not designed or built to handle the increasing volume of global payments in a transparent and efficient way. The way money has traditionally been sent across borders, using the many-to-many model, is a patchwork of interdependent bank-to-bank, currency-to-currency relationships. Typically, one bank sends to another, which sends to another, which sends to another; a labyrinthine route that is slow, difficult to track and carries unpredictable fees for the end beneficiary. This results in a highly unsatisfactory experience for customers, who may eventually be lost to providers who can overcome the challenges of the old system.
EMBRACE CHANGE, COLLABORATE
The fact remains, however, that transactions are owned by the banks – a consequence of their long history, scale and degree of governmental protection that helps preserve their status as ‘keepers’ of transaction flows. Nevertheless, with cumbersome legacy systems and regulation curbing the pace of change, plus increasing cost pressures, there is an obvious role for financial technology – ‘fintech’ – firms to take the lead in innovation and drive forward much needed progress.
For some time, there has been resistance from established banks to engage with these new providers, as they seek to maintain control of their systems in a misguided belief of self-preservation. However, the reality is that we are in the midst of a new digital revolution which is impacting everyone and everything, so they must embrace change and collaborate with more nimble service providers.
While the fintech sector is often said to be disrupting some of the business areas which, for many years, banks considered their territory, collaboration does not mean snatching business share or increased costs. Banks are not set up in a way that lends itself to fast or cost-effective innovation but collaboration can, in fact, be a route that enables them to evolve quickly and efficiently.
It is no longer accurate to talk about the so-called (and over-hyped) ‘battle’ between banks and fintechs. If fintechs are disruptors they should be disrupting outdated processes, not the banks themselves. Rather, they should be enablers. Collaboration is a mutually beneficial, two-way street. Banks have the transactions but agile service providers but when it comes to innovation, the agile service providers have a clear edge. The small but perfectly formed fintech firm can react quickly to market demands, without being hindered by regulation, bureaucracy or slow, monolithic manoeuvring, and are able to deliver at much lower cost than the banks can.
The industry now recognizes that change is irreversible and it is widely acknowledged that a new breed of payment provider can deliver a higher level of client satisfaction. While banks are concerned with their own challenges and the transition towards digitalization, fintech firms can come to the fore. This is a win-win situation for customers, as more competition invariably results in higher levels of motivation and innovation among providers.
Ecommerce and the sharing economy are driving change in the payments industry. In a truly interconnected world, there is great potential for the many different types of online businesses, consumer services and digital marketplaces to grow across borders. To succeed – and maintain their impressive pace of growth – these new platforms need specialist services, such as efficient, low-value payment solutions and one-stop connectivity to the global marketplace.
However, there are still too many people at the periphery of, or unable to access, financial services. With the world so dependent on online commerce today, digital access to banking services is becoming an imperative. We are starting to move away from physical cash and in many ways, the real-time and very rapid movement of money, with high levels of security, transparency and costs has to be the way ahead.
Recent events in India, where more than 80% of physical cash was removed from circulation, could provide some clear pointers to the future of money. This tentative first step towards a cashless society has been called ‘a cultural economic revolution in the making’.
In India’s case, 96% of transactions are currently carried out in cash. Many people still do not have bank accounts, meaning there is tremendous upside in driving the financial inclusion agenda. There is widespread realization across the globe that, in a digital world, everything does not have to be about cash.
Could this bold and far-reaching move be contagious? At the moment, it would seem unlikely, as people still like having actual cash in their pocket. It will be very difficult – at least, initially – to replace the trust factor of possessing physical cash, so it is unlikely that there broad adoption of a cashless economy will happen quickly.
Events in India are merely signaling the start of a new mindset that will take some years to formulate and we shall all watch closely to see how the story unfolds.
Earthport provides cross-border payment services to banks and businesses. Through a single relationship with Earthport, clients can seamlessly manage payments to almost any bank account in the world, reducing complexity to meet their customers’ evolving expectations of cost, speed and transparency. Earthport offers clients access to global payment capability in 190+ countries and territories, with local ACH options in 60+ countries, and an evolving suite of currencies and settlement options.
Hank Uberoi is Chief Executive Officer, Earthport