Payments to determine banks’ future

According to some fintech firms, large banks do have a future. It’s just as a low-value provider of the transaction data that they, the highly rated tech specialists, will exploit.

But banks may be ready to fight back.

Simon Gleeson, the moderator of a panel on the future of banking at this week’s Sibos conference, held in London, draws a parallel with a technology shift that occurred 150 years ago.

“The first steam-powered metal ship crossed the Atlantic in 1850, signalling the end of sail. But the most advanced sailing ship ever seen came into service thirty years later. When a new technology appears, the old one doesn’t roll over and die,” said Gleeson.

Payments are the battleground

For now, the battleground between banks and fintechs centres on payments, a market that consultant McKinsey expects to generate $2.3trn in global revenues by 2023, up from $1.3 trn a decade earlier.

Amidst a generally stagnant financial sector, there’s one key reason for the steady increase in payments income—data.

“We are very well equipped to dig into this mine”

“Banks have been sitting on a gold mine of data, having a good life and not making enough money,” said Benoît Legrand, chief innovation officer at ING, also speaking at Sibos.

“We are very well equipped to dig into this mine and get the best for the customer,” said Legrand.

But banks have also exploited a captive payments market in the past, said co-panelist Kristo Käärmann, co-founder and CEO of fintech firm TransferWise.

“When we started in 2011, we went around to all the banks in this room and asked them how much it would cost to process a payment. The best deal I got was £1.30 per payment,” said Käärmann.

“But now we pay 3 pence (£0.03) for a payment across the Bank of England’s Real Time Gross Settlement (RTGS) system,” he said. “This is the difference that gets passed on to consumers.”

TransferWise became the first non-bank to participate in the UK’s RTGS system in April last year.

National and global payments

For now, despite innovations like cryptocurrencies and initiatives like Facebook’s Libra project, both of which represent global systems for the transfer of value, central bank-operated national payments systems are likely to persist, said the Sibos panellists.

“National currencies are likely to be around for a long time,” conceded TransferWise’s Käärmann, who said his firm had initially underestimated the costs incurred by banks when moving money around the world.

But it’s also important not to overcomplicate the idea of an international transfer, said Manish Kohli, global head of payments at Citi, also a participant on the Sibos panel.

“The missing link is how you manage the FX component”

“In the simplest terms, a cross-border payment is two domestic payments, with a foreign exchange transaction in between,” he said.

“And forty countries worldwide now allow real-time domestic payments 24/7,” said Kohli.

“So the missing link and the main area of complexity is how you manage the FX component. With some liquidity and credit lines that process can also work. But this area still needs some structural changes,” said Kohli.

“To have a global real-time payments system you’d need to have the FX and the money markets operating 24/7,” he said. “Until that happens there will still be some instability and wastage in the system.”

For the time being, successes in linking national payments systems are happening on a piecemeal basis.

SWIFT, the global financial messaging network that organises the Sibos conference, announced on September 23 that it had launched a new service to integrate GPI, its cross-border payments service, into domestic instant payments systems around the world.

SWIFT said it had delivered payments between Australia and China in 18 seconds and sent a payment from Singapore to Germany in 41 seconds.

For a global real-time payments system to operate seamlessly, there also needs to be a standardisation of digital identities and of messaging standards, said Citi’s Kohli.

Some countries, like India and Estonia, have introduced digital national identity systems with near 100-percent coverage, while others, like the UK and the US, have nothing equivalent.

Infrastructure changes

Can central banks do anything to speed global payments up?

“We are starting to look at operating RTGS systems 24/7 so they can talk internationally,” said the Bank of England’s Victoria Cleland.

“We think about resilience at the same time as innovation”

“But I’m not promising anything—it’s a phenomenal piece of work,” she said.

And national authorities have to balance speed against the requirements to promote monetary and financial stability, she added.

“While we are seeing a lot of change at the consumer end, payments still rely on the core infrastructure that comes back to central banks,” Cleland said.

“That’s why we think about resilience at the same time as innovation.”

And while new technology, like that behind blockchain networks, could help manage global payments more seamlessly, for the time being the UK is focusing on an upgrade of its existing systems, said Cleland.

“At the moment we’re focused on our RTGS renewal programme, with a delivery date of 2025,” said Cleland. “We won’t be using distributed ledger technology (DLT) for that,” she said.

“But when we come round to the next renewal, whenever that may be, we’ll certainly be open-minded,” she added.

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