A royal wedding, the FIFA World Cup, predictions of an extremely close midterm election in the US and the on-going negotiations for the UK to exit the European Union. 2018 is already looking likely to be an eventful year on the world stage. We at Saxo Payments Banking Circle are most excited about the rise of the Financial Utility.
The demise of traditional, slow, expensive cross border payments
The correspondent banking network has for some time been under pressure, and 2018 will see that trend continue. Financial Utilities including Banking Circle will step in to pick up the slack.
International trade is growing rapidly, and cross border payments must not stand in the way of businesses getting involved. As we reported in our latest white paper, in 1990, the total value of global flows of goods, services, and finance amounted to $5 trillion, or 24% of world GDP. By 2014 that had risen to $30 trillion, equivalent to 39% of world GDP. According to a McKinsey survey in 2016, 86% of tech-based start-ups report some type of cross border activity.
Banking Circle is leading the rise of a super-correspondent banking network which is able to facilitate cheaper, faster and more secure core banking services. Allowing a third party to handle non-core activities enables financial institutions to innovate and expand their core domestic offering, whilst focusing its own energies on improving and maintaining the all-important customer relationship.
PSPs will help merchants to expand internationally
As we explained in our white paper “Cross Border Payments for Cross Border Merchants: An Internationally ‘Local’ Future”, merchants need the right payment solution in order to make international expansion possible, viable and even profitable. The solution must remove barriers to international trade and provide cross border payments as if they were local. Without this, merchants will simply not be able to reach their potential in the international market.
Our study into the major pain points for merchants who trade internationally revealed that, unsurprisingly, speed was a major issue. Speed of settlement. Speed of response from the bank or other payment provider. Speed with which banks can provide funding. Delays in these areas are potentially fatal, particularly for smaller merchants. As such, 39% of the merchants we spoke to have decided to avoid the risk by not expanding any further internationally – even though they do already trade across some borders.
However, many barriers to cross border trade are coming down, and payments must follow suit by removing cost and time barriers sooner rather than later. Payment Service Providers (PSPs) must work harder to provide new global payment methods, which meet the merchant’s needs – fast payments, low fees, good FX rates, transparency, compliance, security. Otherwise, merchants will be forced to seek alternatives and PSPs will be left behind.
The emergence of financial utilities, like Saxo Payments Banking Circle, now provide an opportunity for financial institutions to address this challenge and help merchants to reach their full, cross border, potential.
Tech giants moving into Banking
2018 is being tipped as the year of the Bank of Amazon or Google Bank. The current vertical separation of the value chain in the financial industry has created an opportunity for large tech businesses to monetise their user base by delivering financial services. Trusted household name brands such as Amazon and Google are perfectly placed to provide banking services.
Not only do they have the funding and ambition to rapidly increase scale and reach international markets, but they have enormous customer bases who already trust the firms with huge amounts of their personal data, so using them for banking is not such a big step. Facebook is already using Messenger to provider payments, and Apple not only provides ApplePay but is also allowing Peer-to-Peer payments via iMessage. A recent survey showed that 40% of millennials around the world would consider switching to banking services from Amazon or Google.
2018 and beyond
These changes – Tech firms moving into Banking, Financial Utilities and the need for merchants to operate globally – will have a dramatic impact on the financial services industry. By 2020, the banking industry will be more fragmented than we see today, with a broader range of methods for delivering “banking services”.
As it was expected to take the payments world by storm, but has yet to reach anything like the promised scale, whether or not cryptocurrencies will play a part in that future banking industry will be fascinating to watch in the coming years.
With the help of Financial Utilities providing non-core services, challenger banks, FinTechs and alternative payment providers will be able to compete alongside traditional banks, improving the overall offering available to consumers and businesses. Financial Utilities are able to provide access to a global account infrastructure which meets the needs of internationally trading merchants, helping them to reach their potential in all the markets within which they want to trade.