Takis Georgakopoulos, J.P. Morgan Chase’s managing director and global head of wholesale payments in New York, strikes a confident note about the transaction-banking industry.
“The future of payments is exciting,” he said in his keynote address last week to the annual conference of the Bankers Association for Finance and Trade (BAFT). “No other part of banking industry is undergoing such tremendous change. It is up to us to define and shape how that looks.”
What he didn’t address was the likelihood that “up to us” will require painful tradeoffs around how banks charge institutional clients for services such as foreign exchange.
Georgakopoulos did acknowledge the industry has lost ground to fintechs in consumer banking. Aggressive, large-scale tech entrants such as Adyen, PalPal, Revolut, Stripe, Square and Transferwise are eating into banks’ market share for payments. In Asia, superapps such as Ant, WeChat and Grab Finance look even more dangerous.
These platforms threaten to leave banks the dreck of pure processing while the fintechs savor the customer interaction – and the data that comes from it. Banks need to get back into the consumer game, Georgakopoulos said.
But he was more confident about banks’ position in wholesale, so long as they continue to innovate, maintain the customer relationship, and keep their legacy infrastructure nimble enough to plug in new features. Here the challenge is the zero-interest rate environment rather than fintech competitors, he says.
Open versus closed loops
Not all bankers are so sanguine about defending their relationships with corporate clients, however.
Indeed, in other conversations during the BAFT event, senior bankers in Asia acknowledged pressure on their wholesale payments businesses too.
Shirish Wadivkar, managing director and global head of correspondent banking products at Standard Chartered in Singapore, describes fintech and techfin platforms as closed loops with such a high degree of control that they can determine not only pricing but all other aspects of a payment.
While banks can offer services to fintechs as they would to other banks, they are not dealing with just another counterparty.
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Traditionally, a correspondent bank’s job is to connect and intermediate among other banks, all of which are separately owned, separately regulated, and have their own business models. Correspondent banks have to reconcile every trade individually (usually to satisfy local regulations), so their payment service is slower and more expensive.
Banks also suffer from high fixed costs from compliance and legacy systems, which is reflected in how they price services. This doesn’t change even as they digitize their touchpoints and operations.
In contrast, a technology platform that owns every point of the value chain can offer clients faster and cheaper service.
No other part of banking industry is undergoing such tremendous changeTakis Georgakopoulos, J.P. Morgan Chase
Fintechs have designed their processes to be so efficient they can provide rebates to clients: foreign exchange is a good example of how some tech platforms can outcompete the banks, at least in lower-value amounts.
Fintechs still need a bank to settle a transaction – indeed, they’re leveraging the same infrastructure built by banks – but without sharing the spoils, and they operate at much lower costs.
“The challenge is for banks, operating in an open-loop environment, to create solutions that compete against the experience provided by closed-loop platforms,” Wadivkar said.
Georgakapoulos called for a level regulatory playing field, but banks will have to adjust business models or find new ones as well.
Today fintechs have only 10 percent of global cross-border payments – but they’re growing at breakneck speed, especially in the wake of COVID-19. Banks can see they are at risk of losing control over collecting data while having to maintain their costly processes.
One solution could be for correspondent banks to tap into domestic faster-payment systems. Last November, for example, Australia made it technically possible for correspondent banks to connect cross-border payments to the domestic FPS (by allowing for time to run compliance and risk checks).
Australian banks, however, are currently only able to provide this service when participants of the closed user group join the network, says Luke Perkins, director of clearing services at ANZ in Sydney.
The challenge is to create solutions that compete against the experience provided by closed-loop platformsShirish Wadivkar, Standard Chartered
“We’ve done a pilot,” he said. “We know it leads to good customer outcomes. Now it has to be commercialized,” which will take time to figure out.
If payments can be simplified with the use of aliases – such as allowing companies to send money to a mobile number or an email, as India’s UPI has enabled domestically, or a comparable token – then cross-border flows become a lot smoother. But this will probably require a coordinated approach by regulators.
The reality is that, for now, it’s difficult to funnel payments from overseas into domestic faster-payment systems. Are there other tech solutions to help them compete against fintechs? Surely all of those reconciliations mandated by regulation could be automated on a distributed ledger?
Tech versus regulatory solutions
Bankers are skeptical that technology offers a silver bullet. Blockchain-based solutions require everyone in the industry to join a network, so investing in it risks creating a new problem of insufficient adoption. Moving transactions to cloud holds its own challenges for banks. API connections are too bilateral to scale.
“The capabilities for the tech are there,” said Perkins. “How do we use it to deliver on outcomes?” For example, wholesale payments occur on the back of some other activity by the clients: just as consumer banking involves embedding payments in an individual’s lifestyle needs, a wholesale transaction ultimately comes from non-financial purposes.
For correspondent banks, which sit between all of these players, tying blockchain, cloud and APIs together has to scale to meet that ultimate customer need.
Banks are therefore keener on harmonizing regulatory standards around reconciliation and data, and promoting universal standards such as ISO20022 for transaction messages. Then if cross-border flows can be plugged into domestic faster-payment systems, banks can compete against fintechs.
The fleeting advantage
Banks do have two advantages. One is their huge global networks. The other is their breadth of product. If they can make better use of customer data to put those payments into context – if they can understand why a company is making such-and-such a transaction – they can cross-sell.
But their current business model is not competitive when it comes to pricing. This is something they can change, but this would require biting the bullet even in prosperous times.
The capabilities for the tech are there; how do we use it to deliver on outcomes?Luke Perkins, ANZ
In a zero-interest rate world, however, banks are dependent on fees for things like foreign exchange – but these are exactly the areas in which fintechs excel, at least at the consumer level.
It will take fintechs time to wriggle their way into corporate business, but they have already begun to attack the SME segment, and they will work their way up the value chain.
Some banks are responding by trying to build platform businesses of their own, combining domain expertise of client industries with digital technology to generate software-as-a-service fees. They may match fintechs on the front end, but they will still remain tied to legacy I.T., the same problem they have when it comes to their traditional fee-income revenues.
If banks maintain their pricing levels for things like forex, they will keep losing market share. They will keep losing access to data. At some point if they lack enough data, they can’t work out how to cross-sell. Their biggest advantage could disappear.
The alternative is to hope they can get governments to increase regulation of tech companies, or to harmonize compliance policies that make correspondent banking more efficient.
Such outcomes are not in the hands of the banks, however. What they control – the part that is “up to us” – is their business model.