A new payments landscape: banks step up commitment to digitalization

What factors have been driving change in the payments and banking landscape in recent years?

In the last decade, a fundamental shift has taken place, especially in Europe. In the aftermath of the financial crisis in 2008, the Payment Services Directives have been adopted, with many new incumbents developing and delivering digital solutions, which were highly focused on user experience and customer service. Consumers began to realise their value to businesses, and to demand and expect a better service – from new players and existing incumbents. Better solutions were built to meet demand, with innovation in technology accelerated to allow for rapid evolution.

With higher expectations and customer-centric service becoming the norm for consumers, it was inevitable that businesses would recognise the benefits and place similar demands on business-to-business services. However, new technology and new solutions also brought new risks. Managing the new risk protecting consumers and businesses needed new regulation.

Changes to regulation, new technology and the growth of international ecommerce have allowed an influx of new providers to enter the market, thus increasing competition. In turn, this has been further improved the level of service and range of solutions available to all customers.

One of the most significant changes in the banking and payments industry is the retrenching of banks from foreign markets. Indeed, this is leading us towards an end of the traditional correspondent banking network as it has operated for generations.

Today we can see how the coming-together of so many elements has a dramatic impact on the market. The changes, which are improving customer service for consumers and businesses, are long overdue.

Are banks adapting to meet the new expectations of the industry, while competing with their FinTech counterparts?

According to our latest research, many banks are preparing to take on the biggest challenge they have faced in many years.

Our study into the changing payments and banking landscape was compiled from a series of interviews with mid-tier and large banks. The insight paper, ‘Re-drawing the Map: The changing landscape of cross border banking and payments’, reveals that incumbents of all sizes are in a good place to seize the opportunity of the industry overhaul, but they must be fully committed to the challenge.

Only banks ready for a fundamental shift in the institutional mindset will be able to stand firm in the shifting landscape and remain competitive alongside emerging providers.

What do smaller banks need to do to stay ahead in this digital landscape, while complying with regulatory and compliance standards?

With the industry in the midst of such significant change, it is vital that banks move up the value chain and focus on relationships with their customers, both consumer and corporate. This will engender loyalty and ensure they are able to remain competitive and generate profit.

Due to regulatory changes, new providers have been able to position themselves well in the part of the value chain that focuses specifically on the client relationship. They have done so by offering financial services in an agile and modern way and using modern technology to enhance the customer experience.

Most of these new FinTechs have been very good at focusing on the client relationship and working with traditional banks that provide the less profitable pipes and plumbing needed to deliver the solutions. However, for banks to avoid ending up as utilities and handling only the less profitable back office functions, they also need to move up the value chain. Moreover, this can be done by engaging with other entities able to provide the pipes and plumbing for those services offered outside the banks’ core geographies.

Innovation, done alone, requires a huge investment in terms of cash, time and resources. It can also take the focus away from building and maintaining the all-important customer relationship. Traditional banks and incumbents should be focusing all their available resources on the client relationship and growing their client base, which will offer them little scope for innovation. Moreover, if they try to build the pipes and plumbing to service business outside of their geographical core, the costs are likely to be prohibitively high.

This is where Financial Utilities are stepping up to the plate. Third-party organisations that do not compete with the financial service provider, the new breed of Financial Utilities can underpin a financial institution’s offering, enabling them to add value to their customer service proposition and remain competitive. Financial Utilities can provide the necessary infrastructure for Tier 2 and 3 banks and Financial Tech businesses to create and offer new propositions - without having to devote resources and funds. For instance, cross-border payments can be faster, cheaper and more integrated. In addition, these benefits are vital to business success, particularly, as 39% of businesses said they are being put off expanding internationally due to concerns over cross-border payments.

Most importantly, working with a third-party provider not only removes the burden of investment from the bank or FinTech, but also ensures compliance with the latest regulation (without having to change internal processes).

There have been suggestions that traditional banking, and correspondent banking, will die out. Will that remain true?

Correspondent banks are already reinventing and responding to new demands and challenges. Traditional banks are pulling back from international markets due to changing regulation as well as increased costs and risk.

However, traditional banks have not lost their purpose - customers (business and consumer alike) still need banking services, which only banks can provide. Nevertheless, while banks remain vital to the global economy, their position is changing. Long gone are the days when banks owned the entire value chain, while business and consumer banking customers had to make do with limited options.

FinTechs are stepping in to provide cost-effective, highly efficient, tailored alternatives, which meet the changing needs of today’s markets. As a result, banks have to consider and address where to position themselves in the value chain. If they decide to move up the value chain - and leave the pipes and plumbing to a utility - they will certainly be in a better position to deliver new and exciting customer-centric solutions.

With banks retreating from their correspondent banking relationships, how should banks and payment providers be managing services such as cross-border B2B payments?

Many FinTechs have been excellent at filling gaps in the market and growing rapidly while using a third party for the pipes and plumbing. Therefore, FinTechs could threaten banks’ ongoing profitability and success.

However, smaller, adaptable, flexible and forward-thinking banks also have a real opportunity. The key to the success of these banks is a partnership ecosystem, in which third-parties handle the non-core pipes and plumbing. They can do so more efficiently and at a lower cost. Working with a third-party Financial Utility allows banks of all sizes to focus resources and bring fresh solutions to market quickly, while enabling them to compete with the bigger players.

The best way for incumbents to remain competitive and unlock value for these customers is through partnerships, particularly when it comes to delivering services such as cross border payments. Banks must focus on their customer relationships and core services; and, by collaborating with third parties, new services can be offered without the usual investment required from the bank.

Working with Financial Utilities in a pick-and-mix of banking and payment services will ensure that business and consumer customers have affordable access to the best financial solutions in the market. No doubt, that has to be good for the global economy as a whole.

To download your free copy of the latest research from Saxo Payments Banking Circle ‘Re-drawing the Map: The changing landscape of cross border banking and payments’, click here.

About Anders la Cour

Anders la Cour is Chief Executive Officer at Saxo Payments Banking Circle. He used his experience in legal M&A as well as in venture capital, coupled with a strong commercial acumen and entrepreneurial mind-set, to co-found Saxo Payments in 2013, with backing from Saxo Bank. He is also a board member of YouLend and an adviser to other financial technology businesses. Anders was named Entrepreneur of the Year in the 2016 Emerging Payments Awards, in recognition of his leadership in bringing to market the innovative Banking Circle solution to tackle the cost and time challenges of cross-border payments. He was appointed to the Emerging Payments Association Advisory Board at the end of 2016.

About Saxo Payments Banking Circle

Innovative global scale Financial Utility, Saxo Payments Banking Circle, is underpinning the service proposition of FinTechs, PSPs, FX businesses and banks. By leading the rise of a super-correspondent banking network, Banking Circle is helping financial institutions to provide their customers with faster and cheaper cross-border banking solutions, without the need to build their own infrastructure and correspondent banking partner network.