FinTechs are transforming the banking industry in a number of sectors, especially payments, where businesses are increasingly expecting hassle free, fast, and low-cost ways of managing cross border transfers. This has resulted in a growing band of foreign exchange (FX) and international payments startups, offering businesses genuine alternatives to traditional banks.
The large incumbent banks are secure for now, as their core customer base will be around for a while yet. But Generation Y comprises a significant proportion of business banking customers who are unwilling to accept delays, high costs or a poor user experience from any sector in the digital realm – including finance. This constantly connected demographic are the most likely to move away from banks to use financial services from FinTech challengers.
Banks have started to embrace tech innovation in order to meet consumer demand, with the development of new products such as mobile banking apps. They have also adopted next generation security technologies to improve the consumer experience. However, little has been done by established financial institutions to meet the demands of businesses that want to extend their value chain when it comes to managing the way in which they make international payments.
One reason the banks are lagging behind is legacy infrastructures, which are not flexible enough to change overnight. More established financial institutions have to charge higher fees as they have a higher cost base. The more agile FinTechs, who have none of this baggage to contend with, are filling the gaps – giving them a clear competitive advantage.
Banks should be worried about these disruptors. FinTechs are able to undercut them with lower fees; do things faster; and with significantly lower overheads, taking more market share away.
With FinTechs being able to fulfil customer expectations with faster payment solutions, banks will need to innovate in this area to avoid being left behind. Arguably banks should focus on improving existing infrastructure and bringing in FinTechs could provide the necessary support – after all, it makes more sense to collaborate than to scrap entire systems and rebuild them.
Indeed, many of the traditional banks are investing in FinTechs to offer better payments services in recognition of the fact that they cannot tackle the overhaul of back-end systems alone. For example, Barclays has launched an “accelerator” programme for startups. For established financial institutions, it may now be a case of ‘if you can’t beat them, join them’.
The changing regulatory framework around payments, including the Faster Payments infrastructure opening up to providers other than established banks, has opened the door for FinTechs who are able to improve the efficiency and effectiveness of making international payments.
The new Payment Systems Regulator will also be looking to make improvements in the industry to ensure that the customer comes first, and these changes will no doubt have an impact on all financial institutions that provide payment services.