Payments Fintechs – threat or opportunity?

A Dovetail thought-piece: David Chance SVP, Product Strategy
The current methods of moving funds across border, such as Western Union, Travelex and traditional correspondent banking relationships, are perceived to be slow and expensive. With this perception it is not surprising that cross-border transfers/payments are such a focus for some Fintech upstarts.

There have been a number of new entrants who claim to have solved these problems and provide efficient, cost effective mechanisms to move funds. Companies such as Ripple, TransferWise, Earthport, Saxo Payments, Payoneer and Trustly provide overlay services, sitting on top of the existing payment mechanisms, while providing technology solutions that try to address the cost, speed and visibility of the funds transfer. The common feature of most of these solutions is the focus on the clearing/authorization element. The actual settlement of funds (between the payer and payee’s bank) is typically left to either a traditional correspondent bank relationship or an organization that holds funds in each bank (and is willing to trade against their accounts without physically moving any funds).

Although, at a first glance, these solutions address many of the perceived problems of cross border payments, the problems are not usually the result of deficiencies in the underlying payment infrastructure, but the regulatory requirements in the countries through which the payment has to flow. These include FATF sanctions screening, foreign exchange controls, KYC and anti-money laundering – introduced to support anti-crime, terrorism and tax evasion regulations that have to be followed, whatever technology is used. All have the potential to add cost and time to a payment.

Increasing numbers of the more innovative banks have now also introduced more flexible and efficient payment processing capabilities which, combined with initiatives such as SWIFT gpii, address many of the perceived problems of the current correspondent banking networks – enabling them to provide customers with significantly improved levels of service.

Both the volume of cross border payments and the demand for them to become quicker, cheaper and easier to trace will continue to increase. However, the needs of the users of cross border services are very different across the retail and corporate sectors. By providing new and innovative overlay services on top of the existing (but improved) settlement systems, new market entrants are offering a much enhanced experience – particularly for consumers/SMEs. This is forcing existing players to improve the services provided to both consumer/SME and corporate customers.

Fintechs are catalyzing change by seeking out inefficiencies to exploit in the market – whether it be PayPal in the small merchant acquiring sector or multiple providers addressing the FX spread inefficiencies which exist for all but the larger corporates …

So, for banks payments, Fintech start-ups represent both a threat and an opportunity – those banks whose operations have grown accustomed to market inefficiencies are at risk as efficiencies are removed. Those that can take advantage of these changing dynamics have much to gain.

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