There’s no denying that 2016 has been a turbulent and worrying year for the financial markets, geopolitics and the macro economic environment, and this looks set to continue. It’s clear that we will enter 2017 with more uncertainty surrounding us than ever before – but no shortage of opportunity.
For the payments industry, we are without doubt facing another 12-24 month period that will see many new developments; in fact we are in the midst of a perfect storm that will be accompanied by disruptions that will fundamentally transform – mostly for the better – the way we interact with our clients on a daily basis.
All the signs are that 2017 is poised to be the year that the move away from traditional correspondent banking starts to accelerate. This momentum has been building for some time but in 2016, it became clear that the old ways are starting to become redundant, that the practicalities of the model we have used for decades no longer fulfil the brief for clients; many of whom are unhappy.
Moving away from correspondent banking
Why is this? There are numerous reasons why many elements of correspondent banking, in its old form, will be consigned to the history books and most of them concern economics and efficiency.
Regulation – for example the European Union’s revised Directive on Payment Services (PSD2), Basel III or Dodd-Frank – is having a major impact on the financial markets, and quite acutely, the banking sector – including cross-border payments. In fact, the tightening regulation around capital adequacy brought about by the Basel III capital adequacy regime will focus banks on the problems in the traditional correspondent banking system, namely capacity around liquidity positions, uncertainties around settlement time and a lack of predictability with regards to fees and charges.
At the same time, banks continue to de-risk across their businesses, resulting in a reduced presence or complete withdrawal from certain markets and geographies, pared-down client bases and hard-hitting cost efficiency programmes. Many banks are reducing their global footprint, while they aggressively strive to reduce costs. Although this is causing some pain, it is also going to create opportunities for other institutions and perhaps drive some industry consolidation.
As these pressures become more intense, the pursuit of better, faster and more dynamic technology – be it distributed ledger-driven or wallet innovations – shows no sign of abating. Everybody wants more speed, greater efficiency and enhanced visibility to capitalise on the exponential growth of cross-border payments.
Now that the industry recognises and accepts that change is afoot, the question is: who will provide the services that end-customers are now demanding?
Pace of change and client engagement
In 2016, we have seen a market shift in the quality and type of conversation we are having with banks, which demonstrates the pace of change and client inquisitiveness. Today, they want to engage in strategic dialogue from the outset. They acknowledge that a new breed of payment provider is capable of delivering a higher level of satisfaction. As the banks continue to deal with their own problems and transition towards digitalisation, against a backdrop of heightened regulation, more stringent risk and balance sheet management, companies providing cross-border payment services can come increasingly to the fore. This is good news, as increased competition invariably means higher levels of motivation and innovation among providers.
In 2017, banks will continue to assess what they really want to do, and what they can do, in the future. They will undoubtedly seek to concentrate their efforts on recurring transactional business, which bodes well for the global transaction banking industry. Transaction banking, with more concentration on fee-based business, will become even more important and essential to the global banks. As a result, and for many reasons, banks will be less reliant on risk-based business.
Ongoing cost analysis
Where will that leave them? Banks are already going through very draconian cost-examination exercises, looking at what type of business still makes sense. That won’t necessarily include low value cross-border payments and other low margin corners of the payments sector. They may decide to partner with other firms or become part of consortiums for those areas of payments that are no longer viable as standalone operations. After the first and second waves of the financial technology (fintech) revolution, banks have the chance to play a pivotal role in the third wave – where everyone works together for a better tomorrow.
This will be a big positive for third-party providers and will also allow banks to hone in on the business that accrues the right level of revenues with the most profitable clients. Of course, this all comes with change and rationalisation, but it will be a consequence of a rapidly evolving marketplace that will eventually create a set of utilities that customers can tap into.
Blockchain gains momentum
So what will we be talking about in 12 months’ time? I feel confident that we won’t be deep in discussion about distributed ledger technology and blockchain as something that is faraway into the future. The technology may still be in its infancy but is gaining momentum and is being used in real-world situations – including cross-border payments (and the first distributed ledger-enabled person-to-person (P2P) wallet). This is a perfect example of bank-fintech collaboration in order to solve a problem for the benefit of the customer.
However, it’s important to keep things in perspective. Blockchain isn’t a panacea for all our technology challenges. But it will be a useful addition to our toolkit and will complement more established technologies.
One thing is certain: the dramatic rate of progress we have witnessed over the past few years will continue, which means predicting how the landscape will look at the end of 2017 is nigh on impossible. All we can do is be prepared for a constantly shifting world.
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Europe’s opening banking regulation is finally here. After months of preparation across the continent, the Revised Payment Services Directive comes into effect on January 13.
The revised Payment Services Directive regulation, regarded as one of the most disruptive in Europe’s financial services sector, will begin to make an impact on January 13, 2018.