With the 10 year anniversary of the financial crisis approaching, the global banking industry begins to reflect upon the road to recovery, which has been a slow and arduous uphill slog. Despite the industry showing signs of being healthier in the last couple of years, profits have not been as buoyant as expected. But why?
According to McKinsey, global banking revenue growth slowed to 3% during 2016 – for the period 2010 to 2015 this averaged 6%. New market entrants are cited as one of the reasons for this, as their typically lower operating costs and agility in a fast-evolving landscape means that they can be more reactive than their incumbent counterparts. This shift has happened faster than many predicted, and is expected to continue at a rapid pace, particularly in emerging markets.
To counter this, banks need to embrace digitisation, and streamline their services. FinTechs have captured market share in retail banking, with international money transfers proving to be a niche that was capitalised on quickly. With the B2C market becoming saturated with disruptors, commercial and corporate banking is now being eyed. However, while some FinTechs are focusing on going head to head with the banks, some are seeing the benefits in working with banks to optimise traditional processes, rather than disrupting them.
To avoid being stuck in a rut, the global banking industry needs to shift from a strategy that leaves them isolated, to one that is open to innovation.
Revenues at risk
While cross border payments make up just one part of global banking services, they do generate a significant proportion of revenue. The world has become more intrinsically connected than ever before, yet the correspondent banking model has remained largely unchanged for decades.
Open banking initiatives are allowing new players to connect directly to banking rails and access customer payment information, eroding the banks’ monopoly on the customer relationship. Payment Service Providers are finding new ways to help their merchants expand reach through acceptance of alternative payment methods, and are simplifying integration with technology platforms through APIs to add value to their proposition.
Increased pressure for banks in the form of new regulations and fines for non compliance are proving to be prohibitive in conducting business in foreign countries
Rebuilding existing banking infrastructure from the ground up is expensive and slow, and investing in building a bolt-on solution on top of the legacy infrastructure presents issues with future scalability. With all of these challenges in mind, how do banks fit in with this new payments ecosystem?
The financial utility may be able to solve this issue by taking on the responsibility of managing and maintaining the platform that underpins core services. Our own solutions, for example, give banks direct access to corresponding banking relationships and the ability to transact at a low cost in real-time without having to make any investment in their own infrastructure at all.
Banks need to own the customer relationship to survive and thrive in an increasingly competitive space, and to do so, they need to forge partnerships that address the challenges caused by their low-innovation capabilities.