Cross-Border Payments: Challenges and Opportunities as Fintechs Compete with Banks

By Senthil Kumar, Group VP, FSGBU Cloud Customer Success, Oracle [NYSE:ORCL]

Senthil Kumar, Group VP, FSGBU Cloud Customer Success, Oracle [NYSE:ORCL]

Fintechs have rewritten the rules of what’s possible in the payments space. Rather than payments taking days to process with unclear fee structures, they are nearly instantaneous with clear per-transaction pricing. These are two obvious benefits in business to consumer and customer to customer environments and they’ve similarly shifted B2B customer expectations, particularly among price sensitive small and mid-size enterprise customers.

Many SME customers are too small and don’t have the critical mass of transactions necessary to make banks’ traditional payment offerings cost effective. Increasingly, many of these customers are digital businesses, serving a hard-to-define customer base. When these factors are coupled with banks regulatory and compliance requirements, and the legacy technology supporting their payments infrastructure, it’s not surprising that banks have not actively competed with their fintech counterparts.

The past two years have seen an unprecedented rise in fintechs offering fast and cost effective payments solutions, and the pool of players continues to grow.

"Fintech offerings will continue to evolve and improve, attracting many more traditional customers in the consumer and business arenas"

While banks were busy with post-financial crisis regulations, technology enabled the smaller players to cost-effectively enter the space. These fintech players are now competing with many of the world’s largest financial institutions. Goldman Sachs’ 2015 Future of Finance report estimated that banks risk losing $90 billion in payment fees to their fintech competitors throughout the next several years. While the general public is familiar with many of the B2C and C2C fintech payments platforms, B2B payments will be affected as well. In fact, the Goldman report found that B2B payment fintechs could carve out as much as $17 billion in the incremental revenue in the years ahead.

Large, traditional businesses are taking notice. As fintech payment providers and their offerings have matured, more traditional businesses are demanding the same capabilities.

So what can banks do to compete with the speed and efficiency of these new entrants?

Banks need to think differently about payments. Incremental changes will only take them so far. The fintech proposition is a whole new way of doing business. Traditional payment processing systems include numerous intermediaries and take some time to process. Fintech and its customers have a frictionless mindset where that sort of complex, antiquated system is seen as slow-moving and burdensome—a problem to be solved.

Banks need to expand their definition of what constitutes a target customer. While often small, many of the digital entities serviced by fintechs are global companies. The nature of their business does not have a geographic limitation. The efficiencies of technology allow them to operate with minimal overhead while platform as a service and software as a service offerings give them the freedom to scale exponentially. Many of the largest, most successful tech companies in the world today started with the same blueprint.

Banks need systems that meet regulatory requirements while offering the speed, choice, options and scale of these new platforms. Technology has been the game changer for fintechs. The outcomes for any existing player will be the speed at which they adopt a modern infrastructure. Modern banking platforms enable financial institutions to meet cross-border payment regulatory requirements, as well as offering fast and cost-efficient payment solutions built from the ground up or white-labeled from a third-party.

As we look ahead in 2017, there are a number of developments we should expect.

Blockchain represents a unique opportunity for innovation across the financial services spectrum, including cross-border payments. The industry will continue to see investment in new applications. More organizations will announce proof-of-concept initiatives. Regulators will likely take a more active role, observing and potentially shaping how blockchain technology is used. But there may not be a full-scale, commercially viable product deployment in the near future. Barring a significant leap in innovation, the technology may not offer the speed or scale needed to deploy that sort of offering.

Fintech offerings will continue to evolve and improve, attracting many more traditional customers in the consumer and business arenas. At the same time, the financial market will see increased regulatory engagement and scrutiny as the size and sophistication of non-bank entities continues to grow.

Finally, banks will begin to gain some parity with their fintech rivals. Investment by banks will grow as some legacy systems struggle to meet the demands of today’s financial institutions. As a result, we will see new offerings and partnerships that allow banks to deliver cutting-edge payment solutions.

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