Banks have come up against numerous challenges in the last decade, with slow recovery following the financial crisis, and a new wave of disruptors changing the way banking is done.
Deloitte has released an in-depth article outlining how the industry is expected to evolve in 2020 and beyond. Here are some of the highlights.
Incumbent infrastructure holding back innovation
Despite many banks talking about prioritising improvements to infrastructure and technology, in reality, they are still falling behind when it comes to implementation. Legacy systems remain one of the biggest barriers to growth, and while IT spend on digital transformation has increased, underspending on infrastructure in the past has resulted in banks being outmanoeuvred by their more agile FinTech counterparts.
Tier 2 and 3 banks are particularly vulnerable to being left behind, as it is costly to develop the infrastructure needed to deliver core banking services more efficiently. However, there are ways for them to remain competitive without having to invest heavily in rebuilding platforms from scratch.
Financial utilities, like Banking Circle, are enabling banks to gain direct access to clearing that bypasses old, bureaucratic, and expensive systems. This allows banks to focus on developing technology to improve how they deliver services to customers on the front end, where expectations for a frictionless user experience are high.
Platforms are the future for financial services
Non-banks, with more advanced and agile platforms, are stealing share from incumbents, especially in the digital lending marketplace. Not only are peer-to-peer lending platforms increasing in popularity, new solutions for SMEs – a sector which banks have long struggled to service – are now becoming available.
In Asia, mobile-first, consumer-facing FinTechs are dominating financial services and have begun making strides in expanding globally, particularly in the payments space. This leaves localised, small and mid-tier, and digital-only banks facing challenges with scaling and servicing their clients in a fast and cost-effective manner, as these providers can offer cheaper alternatives to traditional banks, and already have huge customer bases.
As well as facing competition from non-bank challengers, interoperability is still a major issue that needs to be addressed. Fortunately, APIs (Application Programming Interfaces) go a long way to resolving many interoperability dilemmas, and are becoming more widely adopted by banks. This is allowing them to scale quickly by offering access to secure, reliable automated channels for communication between existing systems and that of the API provided by the financial utility.
With direct access to APIs for developers, new banking services can be implemented quickly with minimal effort and investment from the bank.
Further innovation in payments
The pace of innovation in payments has made it one of the most exciting and dynamic areas of banking, but incumbents, who are unable to act quickly, are losing market share as a result. In the next decade, experts predict that payments will be invisible, seamless, and real-time, putting even more pressure on banks to deliver.
Steps have been made to improve existing interbank and correspondent banking models, but the ecosystem remains fragmented, resulting in delays in payments being settled for businesses across the globe.
Banking Circle was one of the first to address the B2B cross border payments pain points for payments businesses, and has since expanded to offer these services directly to banks. No matter where they are based, payments businesses and banks can take advantage of faster and cheaper SWIFT payments, SEPA payments, UK payments, and other local clearing schemes, managed through the Banking Circle web platform, or API.
Real-time solutions for banking customers of all sizes and industries
Digitisation in B2C banking has heightened expectations in corporate and SME banking. Demand for real-time liquidity management solutions has increased for treasury departments, while the need to secure faster, more flexible funding is top of the wish list for thousands of SMEs.
Larger companies typically have better access to lending than their SME counterparts, but innovation is still lagging behind in treasury, FX, and cash management. Real-time FX platforms are giving banks and payments businesses the ability to manage their treasury functions end to end and monitor live exposure to reduce risk, while also streamlining reconciliation.
But it’s important for banks not to forget about serving their smaller business clients, too. Lending platforms, while not yet able to process business loan applications in real-time, can provide a significantly faster decision than banks currently can. Banks, who may take months to approve or deny a loan, simply cannot compete with lending platforms able to process an application in as little as one or two working days.
These platforms also have the capability to access merchant transaction data via their Payments Service Provider or PSP in real-time, and loans can, therefore, be more flexible. Merchants can increase loan repayments when business is good, while scaling back when things are slower. This is especially important for seasonal businesses that have fluctuating revenue streams.
FinTechs and banks build partnerships – but who can offer solutions to support them?
While FinTechs were previously seen as direct competitors, there has been a huge increase in banks investing in FinTechs as the benefits of collaboration become clearer. By partnering with one another, banks are able to provide a sandbox environment that gives FinTechs the opportunity to test the feasibility of new products, which, if successful, can then be rolled out to improve the service for its end users.
However, changes in regulations, such as PSD2 and Open Banking initiatives, means FinTechs are now able to apply for direct access. As a result, FinTechs are gearing up to diversify their portfolios, which may present new challenges for traditional banks.
Despite this, the path to accessing banking infrastructure directly and independently is long, and the majority of FinTechs do not have the necessary clout, from both a financial and legal standpoint, to make pursuing it worthwhile.
This is where financial utilities come in. For banks and payments businesses alike, a financial utility can provide a range of banking services, without being restricted by legacy infrastructure, or being a competitor. This allows for faster, direct access to services such as accounts, lending, payments, FX, and compliance at a far lower cost, which can then be passed on to their merchant customers, enabling financial institutions across the ecosystem to enhance their propositions.
Banking Circle can offer Banks and Payments businesses the infrastructure they need to expand their offerings so they can better service their own clients, rather than focusing on building out additional infrastructure in-house. To find out more, get in touch.