What’s next for payments?
2015 was a huge year for the payments industry. While some of last year’s predictions may have fallen short of expectations, many experts got it right when it came to a greater focus on fraud and security, acquisitions, increased investment into innovation, and product launches – but not so much when it came to predicting significant increases in the adoption of mPayments and digital currencies such as Bitcoin.
The 2015 FinTech 100 published by H2 Ventures and KPMG in December further demonstrates the rise in new innovations in the payments sector. Nearly a quarter of the companies listed in the top 100 are disrupting payments.
The B2B international payments sector began to heat up in 2015, with a number of FinTechs surfacing to challenge banks. With no legacy infrastructures, lower running costs versus incumbents and increased transparency, FinTechs in this niche are poised to thrive in 2016.
Adopting new platforms and making major changes to legacy infrastructure will be crucial to meet the need for real-time payments
IBM have predicted that firms will need to move ahead in adopting new platforms in an effort to meet the need for greater fraud and risk control, and real-time payments, but highlighted that many financial institutions still lack the technology required to meet those needs. IBM have used the term ‘next gen’ in their recent white paper to describe what action needs to be taken to bring banks – and their own payment services infrastructure – to the next level due to pressures from consumers, clients, and a shifting regulatory landscape.
FinTechs are already enabling faster payments – even across borders. Banks must adapt quickly, as more than 35 countries around the globe have announced plans to develop, or are already developing, faster payments networks.
Banks should look to FinTechs for collaboration – not incubation
The rise of P2P money transfer services such as Transferwise, may only be taking away a small percentage of revenue from banks, but if their API takes off this year, this may be the green flag that banks were waiting for – especially if they find that it is more cost effective to collaborate with FinTechs than it is to develop these products and services on their own, or to set up incubators where FinTech visions are quashed by the restrictive environment associated with incumbents.
A number of major banks developed FinTech ‘programmes’ in 2015, including Barclay’s Accelerator and Santander’s InnoVentures incubators. FinTechs have been sceptical about ‘getting into bed’ with the banks, with Rhydian Lewis, CEO and founder of the peer-to-peer lender RateSetter, warning startups that “banks are wolves in wolves’ clothing. They don’t do things to be nice”.
He goes on to explain that “it’s in banks’ interest to work with startups in order to easily access their technology and innovations. This saves banks the time and expense which would be incurred if they developed similar technologies independently”.
McKinsey have also predicted that acquisition and mergers are likely to increase in 2016, describing the payments sector as “the epicentre of FinTech innovation”. With almost 5,000 FinTech companies now operating in the payments space, it is clear that banks need to take action now – or risk being left behind.
Costs expected to rise for international trade
Craig Ramsey, ACI Worldwide, predicts that as international trade increases, so will the regulatory pressure on banks as they expand into emerging markets.
Craig said: “Banks will no longer be able to make ‘easy’ profits in all the markets in which they currently do business. And that will cause them to reduce their own local footprint, but as global trade increases, they will rely on correspondents more. That will come at a higher cost, which is unlikely to be absorbed by bank profits, but rather passed on to the end customer, hence the cost of trade instruments, borrowing and supply chain finance will all increase.”
The increased costs to banks is likely to result in cross border payment fees increasing even more in 2016 – not good news for SMEs wanting to expand their business globally this year – or for the economy, as growth of these businesses is stifled.
Will 2016 be the year of cryptocurrencies?
The momentum around blockchain and cryptocurrency is gathering at an extraordinary pace. In 2015, it was reported that Bitcoin surpassed Western Union in daily transaction value, with an increasing number of merchants accepting Bitcoin as a payment method.
There are numerous benefits to cryptocurrencies such as Bitcoin. Companies who accept it as a method of payment can avoid paying high transaction fees, as there are no banks or traditional financial institutions involved. The risk of fraudulent purchases is removed, and there are no FX fees to consider when accepting payment from overseas, as Bitcoin doesn’t have to be converted into local currency.
While Bitcoin may become more commonplace in B2C and P2P in 2016, businesses are far less likely to move away from traditional currencies. We believe that FinTechs are in the perfect position to bring innovation to the international B2B landscape and a number of brands have thrown down the gauntlet during 2015.
With no legacy infrastructures, lower running costs versus incumbents and increased transparency, the new breed of disruptors can finally get B2B payments moving. And it isn’t just a question of charging less than traditional banks and cutting them out of the picture. FinTechs can collaborate with banks to help them successfully move into the digital payments market. In turn, banks can offer FinTechs the additional security through their regulation, offering added peace of mind to their customers, as well as dragging the payments process into the future.
2015 has been a year where the FinTech sector has moved on significantly – not least through the growing consumer appetite for better and quicker ways to pay – think tap and pay. 2016 has to be the year that the business marketplace gets in on the act.