Cross-border payments are receiving more attention, as businesses and their supply chains become increasingly borderless.
With corporate treasurers striving to improve efficiency – through reducing operational costs, enhancing transparency and continuing to meet a multitude of regulatory demands – in an increasingly challenging economic environment, recent technological developments and trends could help simplify the complexity of commercial cross-border payments.
How strong and in which direction the winds of change are blowing really depends on which perspective you consider: that of financial professionals, technology providers or traditional financial services providers.
Technology is disrupting the payments landscape
The pace of technology convergence and innovation in the commercial payments space has accelerated. As regards cross-border payments, two developments in particular are high on the watch list:
1. Blockchain – the jury is out as to if this is a fresh breeze or a catastrophic storm brewing off the financial services coastline
Blockchain is synonymous with Bitcoin. While Bitcoin and other virtual currencies are exciting innovations that could disrupt the way funds are transferred between businesses, the underlying technology that sits behind Bitcoin is even more interesting.
A Blockchain, or shared ledger, is a digital and publically open record that details all the transactions that have been made between parties. This technology is receiving so much attention as it could be the tornado that disrupts existing business-to-business (B2B) payment models. Its open nature allows corporates to trade directly with one another regardless of their location, removing the need for intermediaries.
Removing intermediaries from the process offers clear cost and time saving benefits such as removing settlement delays, which would ultimately improve the efficiency of cross-border payments. From a control and reporting perspective, this technology also holds advantages. Records are uneditable, so act as a permanent copy of all the transactions ever executed.
For traditional service providers, the technology presents a set of challenging cross-winds that threaten to blow some out of the payments ecosystem as they are no longer relevant in their role as intermediaries. Likewise, wider adoption of this technology will change corporates’ expectations – corporates will come to expect faster and cheaper transactions. If the technology gains traction, providers will ultimately have to re-evaluate their current business models. An immediate action for service providers’ to-do lists is to evaluate Blockchain’s commercial viability as a payments solution, corporate interest and how to remain relevant in the future.
Encouragingly, many providers are doing this through exploratory trials that have been supportive of the technology; for example, payments being completed at a low cost and in seconds instead of days.
As regards commercial rollouts, critical mass is probably still some way off. This is due to the varying regulatory headwinds that the technology will need to battle through; the complexity involved in creating agreed industry standards – which will be needed to support the technology becoming mainstream versus a niche solution – alongside the sheer costs involved for providers and corporates in replacing or updating their legacy systems.
2. The Cloud – this cloud does have a silver lining
We are more mobile in both our personal and professional lives. This has led to many of our expectations being reshaped, especially with regard to technology. We increasingly expect technology to work around us and support our mobile lifestyles.
Providers have been forced to re-think how they deliver solutions to satisfy our ever-changing and increasingly demanding expectations. In terms of payments, we expect a fast, on-the-go, frictionless payment experience – expectations that are no longer confined to our personal lives.
The concept of mobility has been supported by the development of cloud computing technology that sees externally hosted services delivered over the Internet. This, in itself, has also been supported by recent developments in mobile technology.
A variety of cloud-based finance solutions have been rolled out; a trend that is only going to gather pace as businesses realise the benefits this technology offers.
For corporates, it provides a flexible low-cost option as the need for expensive IT infrastructures and support functions is reduced, while it also gives instant access to services and data. Having instant access and full visibility of any transaction, from anywhere and at any time, has clear benefits.
Another benefit claimed by providers is the centrally hosted nature of these services; meaning that cloud-based solutions offer the latest security levels, which are updated regularly.
These developments have created some challenging winds for traditional service providers to operate in. Many existing bank systems are seen as cumbersome and unable to effectively compete against the new breed of cloud-based solutions. The challenge for banks is to redesign the current model, to provide a cost-effective solution that gives financial professionals enhanced visibility to real-time information across all stages of a payment. The complexity of cross-border payments must also be reduced through clearer pricing, superior control and reconciliation capabilities.
Alternatively, the challenge will be partnering with the right external provider to be able to offer best-in-class solutions. Fintechs are high on many businesses’ radars.
New generation of providers: Fintechs are a force to be reckoned with
A number of fintechs have successfully entered the cross-border payments space to compete with and disrupt the traditional bank model. Regardless of how you view them, fintechs are here to stay and are helping to innovate and disrupt the industry.
Traditional service providers can no longer ignore the double-edged sword that fintechs represent – although they can be a competitor, they can also be a positive change agent and partner. Many traditional providers look towards fintechs as an alternative source of innovation to their own new product development (NPD) and service delivery operations.
Fintechs are creative and nimble. They are not shackled to archaic legacy systems, or the compliance web that most incumbents have to deal with on a daily basis. For traditional service providers, they provide the opportunity to build and launch disruptive technologies faster and more cheaply. The challenge for traditional providers is identifying which fintechs to partner with, or potentially buy. Scalability is a key consideration – any acquisition target or partner must be able to help deliver scalable solutions.
For financial professionals, the fintech trend has meant that a new breed of payment solutions have become available that are more aligned to the changing needs of today’s corporates, both large and small.
For fintechs, the challenge will be remaining relevant and disruptive in the cross-border payments space as user and corporates’ needs and expectations change, or finding the right suitor to partner with or be acquired by.
Regulatory and political winds of change – a mixed weather front is on the horizon for fintechs
The regulatory landscape has changed to become more accommodating to fintechs as regulators move to open up the financial services industry and reduce barriers to entry.
The Payments Services Directive, aka PSD2, has become a key talking point in Europe. What is interesting about PSD2 is that part of this regulation stipulates that banks and other financial services companies must give fintechs access to their systems in order to access customer data and to initiate payments.
This is a massive win, not only for European fintechs but also end users of cross-border payment solutions. It should create a more competitive environment whereby cheaper, faster and more innovative solutions enter the market more quickly. The challenge may well become keeping up with the developments and ensuring that the right solution is selected.
Despite this, the UK’s recent decision to leave the European Union (EU) could knock the wind out of the European fintech armada’s sails. A potential consequence of Brexit is the end to passporting rights allowing a European fintech with a licence in any European country to sell its services and products into the rest of the region.
The end of passporting may mean that UK-based fintechs are no longer licenced in the EU and will need to secure an additional licence in each EU country (likewise for any European fintech looking to sell its services in the UK). Whether this proves the case and the potential impact on the pace of innovation in the cross-border payments space is yet to be seen.
Technological developments will continue to provide strong tailwinds for commercial cross-border payments. Future developments will provide end users with an opportunity to streamline and improve the efficiency of these payments. This will be supported by the fast-paced fintech industry and supportive regulation.
Brexit and any ill-conceived regulation could however act as a headwind and blow innovation in this space off course.
There is also a clear call to action for traditional service providers. It is now, more than ever, imperative that they monitor the direction and speed of the winds of change. Failure to do so will mean that these businesses risk trailing the rest of the pack, as they are unable to successfully anticipate and navigate technological developments, changing customer needs, business models and expectations.
First published on GTNews