FinTech: Gearing up for the future of payments

The era of FinTech is upon us. In a short period of just a few years, there has been a sea-change in the way in which transactions are initiated and processed, with technological innovation enabling fast, convenient and multi-channel payment experiences. So far, change has been far greater on the consumer and retail side than in the corporate sector, yet this imbalance is not expected to endure for much longer. Those who initiate corporate payments are becoming accustomed to making consumer payments at the touch of their smartphone screen – practically whenever and wherever they choose – and expectations for equally-optimised payments standards in the corporate sphere are growing.

Consumer present: Corporate future

That said, bringing innovation to payments on the corporate side can be far more complex and risky than some of the early projects rolled out to consumers. Take mobile payments, for example: a key tool by which consumer and retail payments have been transformed. Not only has this technology placed sophisticated digital services quite literally at our fingertips, it has also allowed unbanked populations in developing countries to gain access to financial services for the very first time. Yet using mobile devices to effect payments in a corporate context throws up a host of security considerations, due to the complexity of transactions and although solutions can and will be found (those currently being explored include the use of biometric information and tokenisation, for instance), banks are understandably cautious about large-scale roll-outs. Although with client demand (and security capabilities) expected to increase, banks will ultimately need to factor multi-device solutions into their future offerings.

The other great transformation in consumer payments has been the move to (near) real-time. This has seriously improved the consumer payments experience, and the pressure is really on for banks to try to extend this capability into the corporate market. Indeed, the growing number of countries implementing real-time payment infrastructures bears witness to the need and expectation for near-instantaneous transactions. As further technological advances streamline inter-related processes, adoption of real-time payments – and demand for such capabilities in the corporate sector – will continue to gain traction. Estimations suggest that up to 100 countries will have implemented domestic real-time payment capabilities within the next twenty years.

However, when it comes to delivering real-time corporate payments, a host of other banking systems, such as reporting databases, customer accounts payable/receivable and reconciliation, will require adaptation, alongside the payments infrastructure itself. High levels of standardisation among institutions will be required as well as – for international payments – cross-border collaboration and harmonisation.

The blockchain: Leading the way?

A host of technologies that are currently – and soon to be – in development have the potential to influence the future of corporate payments. At present, a great deal of interest and activity is occurring around the “blockchain”, which was originally developed to record transactions in the best-known of the digital currencies, Bitcoin.

The blockchain is a distributed ledger in which every transaction or exchange is recorded cryptographically; time-stamped and transparent to all network users. No entry can be altered or deleted, and no intermediary is required to effect a transfer. It is therefore an excellent mechanism to defeat fraud; enhance automation, speed and efficiency; cut costs and aid regulatory control wherever it can be applied. Many banks – including BNY Mellon – are exploring ways in which the properties of the blockchain can be leveraged. The blockchain concept can be applied to any digital asset, such as security, bonds, loans and collateral, and could therefore be used in a number of different areas that are already being investigated by FinTech companies.

Joining forces

While the speed and extent to which technology is shaping the payments space can appear daunting to commercial banks – particularly when they have been required in recent years to focus a great deal of resources on compliance rather than client-centric technological innovation – they should see the potential for change in the payments industry as positive; a chance to reassess their strategies and business models and grasp the opportunities of the new digital payments age. Indeed, banks must embrace these new trends in order to thrive in the future of payments. These trends are driving banks to cooperate further in areas such as global payments innovation to improve the customer experience in correspondent banking for corporates by increasing the speed, transparency and predictability of cross-border payments.

Apart from these industry-led innovation initiatives it is important for banks to consider partnering with new FinTech entrants and see how all parties can benefit. The banking partner gains direct access to pioneering technology, and can engage with some of the key thinkers in this dynamic space. In turn, the FinTech partner is able to tap into the bank’s core strengths as a trusted custodian of wealth, together with its vast practical knowledge of working payment systems and expertise in managing payment risk and negotiating regulatory frameworks. Such partnerships are perhaps particularly important now, as FinTech gears up for its second great wave: to bring innovation to corporate payments.

Yet the sheer number of start-ups looking to gain a foot-hold in the payments space makes it imperative that a bank clearly understands its objectives and establishes a “FinTech profile” before embarking on a specific partnership. This is vital in order for a bank to identify the best, most appropriate opportunities to leverage FinTech innovation for its particular market and customers.

A number of different approaches to FinTech are now emerging, including industry initiatives, venture capital investment, accelerator/incubator programmes and the establishment of innovation centres to drive creative thinking. While many of these approaches are still in their relative infancy, through reciprocal engagement and support, banks and FinTechs together can lead corporate payments into the digital era and add real value to the transaction experience.