For businesses wishing to transact in the global marketplace – and the financial organisations that support those businesses – it is increasingly becoming important to have access to alternatives to correspondent banking.
This isn’t only because a number of banks are pulling back from offering correspondent banking in response to risk and compliance concerns. It also reflects the fact that setting up the necessary relationships in separate countries adds considerable administrative and regulatory burdens for a business.
The digital space is shifting the payments landscape. We now live in a world of intermediaries; businesses that tend not to have assets of their own, but instead provide the marketplace that brings together sellers and buyers. These businesses are providing the conduit for trillions of dollars of trade, but the changes to the correspondent banking infrastructure is making it difficult for them to be truly global.
Companies looking to trade abroad generally need to open accounts in the geographical region where they wish to do business. However, the appetite of the incumbent players to offer this service is waning and that’s not the only challenge. Even when the incumbents are able to help financial technology companies (fintechs) with their cross border requirements, the latter can find that the sheer size and restrictions imposed by legacy infrastructures often restrict them in being as flexible and responsive as they wish.
By nature, fintechs are smaller, nimbler and quicker to adapt to changing market conditions, so can find the incumbent infrastructure to be restrictive when it comes to trading internationally. The number of intermediaries required for a traditional international bank transfer adds significantly to the cost and time involved with the process.
Worryingly, many companies – of all sizes, ranging from start-ups to huge corporations – are putting up with these high costs and slow transfer times, apparently because they lack the time to invest in researching alternatives.
A recent study conducted by Saxo Payments into the payment processes of issuers, acquirers, payment service providers (PSPs), foreign exchange (FX) businesses and merchants found that only 38.2% of respondents believe they get a competitive FX rate when handling cross border transfers. Almost half (48%) expressed dissatisfaction with the rates they pay to handle cross border transfers for customers, yet 32% said they do not have time to look elsewhere and 28% are put off because the change is so unlikely to be implemented due to the resources required to make the switch.
The emergence of the utility
So what are the fintechs to do? They need a bank account in order to send and receive payments, as well as the ability to trade in different currencies. In response, a whole new ecosystem is rapidly emerging, which provides an alternative for business-to-business (B2B) cross border payments. At the heart of this ecosystem is the emergence of ‘utilities’, which enable fintechs – and even banks – to concentrate on their core proposition while leaving the back office processes to specialists.
Just like the utilities used in a domestic environment for gas, electricity and water supplies, utilities for the banking and payments sector provide the unseen but necessary power and energy to give the customer a great experience. Working in partnership with specialist utilities also means that a business can move much faster, as well as reduce costs – all of which can be passed onto the customer. As the utility isn’t in competition with a business, but rather acts as a supporter, both organisations should share similar goals instead of pitching themselves against each other.
The Saxo Payments Banking Circle is one of a number of examples of such a ‘utility’, providing the connections – such as clearing – via a credible and compliant banking network. That means clients only have to pass one clearing in one jurisdiction; ensuring settlements can be done quickly and cash flow can keep moving. It’s a marketplace that allows companies serving merchants in the digital space to open physical and/or virtual international bank account number (IBAN) accounts in 25 currencies, in their name and/or their client’s name.
The accounts, domiciled in the UK, European Union (EU) and Denmark, enable companies to send and receive cross border and local payments at a low cost and within seconds rather than days, if the other company involved in the transaction is also a Banking Circle member. Payments are sent in the underlying client’s name, in order to increase transparency and reduce rejections.
It is impossible to predict who will win in the digitalisation battle, but there is good reason to believe that using a ‘utility’ will be the route to success for those operating in the banking and fintech sectors. In particular, tier two and tier three banks are set to become more digitalised, relationship-driven and focused on the customer relationship, while outsourcing non-core functions such as lending, FX and cross border payments to ‘utilities’.
Consequently, by 2020 the banking industry will be more fragmented and delivering ‘banking services’ in a much more dynamic and broader way than we see today. Moreover, increased innovation will ultimately benefit customers, making them the real winners.
Banks will always play an important role in business, but alternative solutions can be employed alongside, to complement the traditional banks’ offering and maximise profit potential and international growth. The most important thing is that companies of all sizes take the time to investigate these alternatives, rather than sleepwalking through high fees, slow transfer times and poor FX rates which with they have long been dissatisfied. It’s time that payments worked for payments businesses, not against them.
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