A couple of years ago, JPMorgan Chase CEO Jamie Dimon famously remarked that fintech “is out to eat our lunch”. He was referring, of course, to the slew of alternative providers making inroads into the traditional banking business; the first time in a century or more that his industry has been under threat on several fronts at once.
Dimon has been proved right. Since then, these disruptive, digitalised upstarts have shown they not only want the banking industry’s lunch, but its dinner too.
In this regard, the industry’s main weakness is in the area of payments, a seemingly mundane but highly lucrative service that is being rapidly commandeered by a vast array of providers.
Even more threateningly, these hi-tech revolutionaries are using payments as a springboard into offering an array of other services the established industry has long seen as its prerogative.
The world of digitalised payments has become very broad, extending beyond the simple money transfers with which it began into big-ticket corporate services. UK-based Crossflow Payments, an alternative finance platform, is a good example.
In February, Crossflow signed a three-year deal with Maplin Electronics, the UK’s biggest technology retailer, to provide the chain with up to £360m ($471m) of payables across more than 100 suppliers.
Although established as recently as 2015, Crossflow can already fund up to £2.4bn ($3.14bn) in payables in the supply chain market, which clearly puts it on a bank-like scale.
Like similar payment platforms, Crossflow has jumped into a giant gap in the market that was vacated – or neglected – by established commercial lenders in the wake of the financial crisis.
Nimbler and more solution-focused, new kinds of lenders such as Crossflow allow suppliers to firms like Maplin to greatly increase their working capital while also benefiting the retailer, as the enhanced liquidity strengthens its supply chain.
The entire payments market is undergoing a dramatic structural transformation at both corporate and consumer level, fuelled both by customers dissatisfied with the services provided by mainstream banks and by the advent of new technology that enables the payments industry to marry with consumers’ needs in highly original ways. What’s more, 2017 promises to be a watershed year for the industry.
Wherever they are based, banks are disadvantaged compared with their more agile rivals
As Maurice Cleaves, CEO of trade association Payments UK, said in January: “I have worked in the payments industry for more than 30 years, and it seems to me that we will look back on 2016 and 2017 as the time when the foundations were laid that changed for good the way we pay. We are on the verge of a whole range of new services that will benefit many different types of customers.”
It’s little wonder that banks feel threatened. A few short years ago, nearly all payments went through high street institutions, whereas today, in the UK alone, there are more than 2,500 providers of payment services. And most of them are offering products and services that run rings around the banking industry in terms of convenience and cost.
Developments in Europe and the UK may set the pace for the rest of the world. As Cleaves pointed out, other countries have tended to follow the UK’s lead in chip and PIN technology, contactless payments, and other innovations.
Across the Atlantic
However, North America isn’t far behind. In the retail arena, for instance, the US is moving rapidly towards tokenisation as a security measure, card-not-present transactions, point-to-point encryption, and mobile and contactless payments, all of which make transactions faster, safer and more convenient.
As Randy Vanderhoof, Director of the US Payments Forum, wrote in the European Payments Council newsletter in early March, the speed of payments adoption is accelerating: “From what our chip-enabled merchants are telling us, chip-on-chip transactions are increasing at a very solid rate, and our larger enabled merchants are seeing most of their transactions come in as chip transactions.”
Already, roughly a third of US merchants are equipped to accept chip cards, and about three quarters of consumers carry at least one chip card in their wallets.
The infrastructure on which this revolution depends is racing to catch up with the payment preferences of consumers. Vanderhoof regrets a shortage of access points such as in-store point-of-sale terminals at mid-size merchants, ATMs, and automated fuel dispensers.
“These would help speed up the migration to chip-based transactions and reduce in-store counterfeit card fraud, which is the largest source of fraud in the US, particularly at petrol pumps,” he noted.
In the meantime, there’s no better example of the power of technology harnessed with payments than M-Pesa, the mobile payments system launched in Kenya and Tanzania by Vodafone in 2007. Both countries lacked – and still do – anything like a nationwide banking network.
But, funded by a UK grant, the introduction of M-Pesa allows users to easily deposit, withdraw or transfer funds, and pay for goods and services using mobile devices, all from even the most remote of locations.
Industry infrastructure is racing to catch up with the payment preferences of consumers
What’s more, circumventing the banking system, customers can deposit and withdraw funds from a steadily widening network of retail outlets and other approved sources. All this happened without any bricks-and-mortar banks.
In a once cash-based society, M-Pesa has greatly reduced robberies and other forms of financial theft. That’s why, in other banking-starved countries, M-Pesa is winning a huge following for its simplicity and convenience. It’s spread beyond Africa to India, Afghanistan and even Eastern Europe.
Life without cash
Although Europe and North America are at the forefront of the revolution, other regions aren’t exactly dragging their feet. In the Asia-Pacific region, Singapore is aiming to be a cashless society within the next 10 years. If it succeeds, it won’t be far behind Australia, which has set a similar target.
This isn’t a pipe dream either. As Visa pointed out in a report in March: “Consumers in Singapore are already spoilt with a wealth of cashless payment options.”
These range from credit and debit cards, mobile wallet platforms launched just last year, and online shopping products such as Visa Checkout, which allow consumers to make transactions with a single sign-on.
Singapore also deploys token services, which allow payments to be processed without exposing account details. These work by replacing sensitive account information, such as the 16-digit card number, with a unique digital identifier called a token.
With all these options available to them, it’s not surprising Singaporeans are the regional leaders in the usage of electronic payments.
However, as the Visa report also revealed, corporate payments in the region lag behind those in North America and Europe: “They are still heavily reliant on cash and cheques.”
The result? The clearance system moves at a snail’s pace compared with the Northern Hemisphere. It takes an average of 14.2 hours for a company in the Asia-Pacific region to prepare each payment run internally.
The number of cheques processed annually in the UK
The number of UK payment providers
Banks then take an average 10.9 hours to process it. Even in tech-minded Singapore, which prides itself on being a smart city, roughly a third of companies report that it takes up to three days to access received funds.
They then have to wait an average of 50 days following an invoice submission before payments turn up. As Visa concluded, the solution they need is “higher levels of automation for payments”. It’s here that banks are fighting back.
In Singapore, for instance, Citi recently launched an electronic payment system for major clients. Citi’s RenePay is a cloud-based, fully automated, B2B e-procurement platform that promises to be a boon for corporate cash flows.
Indeed, across the region, companies say they would be prepared to pay an extra 20 percent to get their hands on cash sooner, such is the value of liquidity.
Wherever they are based, however, banks are disadvantaged compared with their more agile rivals. Stuck with slower and more expensive legacy systems, they are handicapped in terms of speed and convenience because of the astounding advances made in digital technology.
An alternative payments provider, for example, can process on a simple desktop device the volume of payments that would normally be done by a small bank.
And, as payments expert Paul van der Valk of the Payments Advisory Group explained on corporate treasury site GT News: “It’s now possible to handle all the payments processing of a second-tier bank on a server that fits under your desk.”
Over the horizon
Looming on the horizon is another development in payments: the system of transacting payments based on blockchain. Also known as distributed ledger technology, it promises to greatly simplify transactions, as well as to reduce risk as payments work their way through multiple sites, locations and institutions.
All participants in a blockchain-enabled network have their own identical copy of the ledger, and would pick up within seconds any undue changes – for instance, if it were hacked.
Of course, banks can use blockchain – and the industry is taking a close interest in it – but they would have to compete on price and convenience. And that’s where they’re at a disadvantage already: the bird may have already flown.
In the meantime, a new kind of bank could be emerging. In the Netherlands, Bunq, which calls itself ‘the bank of the free’, is a payments-dedicated institution with a mission. “Your money should be easy to use and share,” the founders promised. “Instead of accepting the banking system, we decided to change it.”
So saying, Bunq won’t use clients’ money for ‘risky investments’ or sell their personal information, both of which the established industry has done as a matter of routine. This is a long way from the pre-2008 world of inflated bonuses and salaries, not to mention 30 percent fees for processing payments.
In Europe, the revolution is gathering pace. Payments experts predict the EU’s new payments services directive, known as PSD2, will spark the creation of entirely new types of payment companies and services.
Simultaneously, the Bank of England is developing a real-time gross settlement system that will enable consumers of all types to use trusted third parties to make much more individualised payments, thus circumventing the legacy banking industry.
Veterans of the payments industry have compared the situation to the launch of the mobile phone 20 years ago, when not even the most far-sighted observers predicted it would become the all-purpose tool that it is today.
As the revolution rolls on, the payments industry will drag even the most conservative consumers into the 21st century. It’s even working to accommodate those diehards who still insist on using cash and cheques – around 500 million cheques are still processed in the UK every year.
On the horizon is cheque-imaging technology that will clear paper-based transactions much faster and, in addition, provide new ways of paying cheques into accounts. Even the staunchest Luddites couldn’t complain about that.