Banks Fending Off FinTechs, Regulators And Cybercriminals

The pace of change in the payments industry is not going to slow any time soon, according to Financial Times. The newspaper cited Ripple’s use of blockchain technology and the ability of two small banks, one in Canada and one in Germany, to complete cross-border online transactions in record time as an example of the latest banking innovations.

The banks involved claimed this was the first real international money transfer using blockchain technology. While most international bank transfers take days to complete, this took just 20 seconds.

According to FT, online shopping and the adoption of mobile payments have spurred growth in revenues from the payments sector, and McKinsey predicts that global payments revenues will increase from $1.8 trillion in 2014 to $2.3 trillion in 2019.

The FinTech companies are disrupting the industry and are a thorn in the side of the traditional players — banks and credit card companies. Many FinTech startups, like Ripple, are using blockchain to provide cheaper and faster services to consumers.

The banks are also facing increasing pressure from regulators to cooperate with the FinTech players and to lower the fees charged for payments processing, while cyberattackers are finding ever more sophisticated ways to threaten the security of banks.

The adoption of digital wallets is being fueled by companies such as Uber and Airbnb. Players in the P2P “sharing economy” are fueling the adoption of digital wallets. Global mobile payments will be worth $95 billion annually by 2018, up from $35 billion in 2015, according to research by Juniper.

The banks are responding to increasing mobile transactions from users by facilitating more rapid money transfers. Paym is a service launched in the U.K. that allows P2P payments using only a mobile number for the receiver. There are 3 million users so far.

Marcus Treacher, Ripple’s head of strategic accounts, said: “The payments industry is revving up, but it is stuck in second gear because it is being held back by the antiquated banking system.”

The failure of banks to provide cheap and rapid online overseas transfers has fueled the emergence of FinTech companies. TransferWise is a leading name in Europe, doubling in size each year and completing $1 billion of payments each month.

But some banks are competing with the FinTechs. Barclays has partnered with the Commonwealth Bank of Australia to provide a payment service between the two countries that uses only a mobile phone number.

In addition to the competition from FinTechs, banks are also facing increasing attacks from cybercriminals. Cybercriminals stole $81 million from the Bangladeshi central bank in February by managing to exploit weak security in the SWIFT international payments network.

On yet another front, the banking industry is facing regulators who want to encourage competition in the payments space that has traditionally been dominated by the big banks. VocaLink was sold by the large U.K. banks earlier this year to Mastercard for £700 million as a result of calls by the U.K.’s payments watchdog for the business to be sold to increase competition.

The Payments Services Directive 2 is poised for arrival in Europe, which will require banks and lenders to provide access to client data to third-party service providers. These changes mean that consumers will no longer have to use banks for payments and transfers.

This change could also allow companies such as Google to collect all of an individual’s financial information and provide them with targeted, personalized services. This would be a severe threat to the banks who have long enjoyed the advantage of proprietary customer data.