Banks are taking notice of the impending sea change set to wash over payments thanks to FinTech innovations like blockchain technology. BNY Mellon is just one of these banks, and the company has recently published a report that examines what these changes mean for the corporate payments space.
According to BNY Mellon’s Head of Treasury Services EMEA Dominic Broom, while retail payments have seen the most innovation, wholesale and B2B payments are up at bat.
Banks, he said, will have to react quickly, and blockchain technology has become one of the most promising drivers behind the collaboration between FinTech disruptors and traditional banks.
“The wind of change in the payments world is gaining in strength as financial technology’s potential to alter how, where and when payments are made – as well as who it is that facilitates them – is further explored and leveraged,” Broom said in the bank’s new report, “Innovation in Payments: The Future Is Fintech.”
What’s Driving Change
Businesses are increasingly looking past their own national borders when they do business, and this expansion gives rise to the need for frictionless, standardized and global payment solutions.
It’s the connection between cross-border payment needs and the introduction of efforts to standardize payment infrastructures that is giving corporate payments some star power when it comes to innovation.
“Globalization of the payments industry is being facilitated by various international agreements and bodies looking to encourage standardization,” the report concluded, offering examples like the International Payments Framework between the U.S. and Europe, or the China International Payments System.
A hot topic in B2B payments today is the introduction of ISO 20022, a message scheme that includes payments, trade services, cards, foreign exchange and securities. “ISO 20022,” BNY Mellon said, “and associated XML and ASN.1 standards have provided a common language for banks’ and payment providers’ systems to communicate, markedly increasing process efficiency.”
The rise of common standards not only makes for less complicated payment processes, but also means that added services can now integrate directly into existing infrastructure, said BNY Mellon.
The globalization and move toward standardization in B2B payments has kept traditional banks on their toes. Demand for supply chain and trade financing, for example, and competition from alternative lending, are both results of changing corporate payment needs.
While these changes have, in some ways, served as threats to the traditional financial institutions, BNY Mellon says many banks are reacting with their own innovations.
In response to the need for standardization, for example, BNY Mellon pointed to the rise in Bank Payment Hubs, which streamline their payment flows, making them flexible and adaptable to corporate needs and changing markets.
Plus, the report noted, these hubs also act as portals to collect valuable information both for the bank and business clients.
However, the launch of a BPH isn’t always easy. “The implementation of such a structure is complex and brings with it substantial risk given the complexity of implementation and the central role of payments to the majority of banks,” BNY Mellon said.
A major opportunity for banks to take the lead in payments innovation, however, is within cryptocurrency technology, BNY Mellon said.
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“The impact and usage of digital currencies on wholesale payments have been far less noticeable than in the retail payments sector, yet this is likely to change as cryptocurrencies become viewed less as stores of value and more as a means of reducing friction within the payments process,” BNY Mellon said.
Initiatives like the recent decision of several major banks to join R3 innovators to explore the potential of the blockchain, or Ripple’s own innovations in the space, are likely to grow in number as banks become more interested in partnering with innovators.
It’s a space where startups and FinTech disruptors can work in harmony with banks, not against them, the authors noted – and one where banks have a unique leg-up on the competition.
“FinTech startups will play a significant role in altering the wholesale payments space,” but, “While FinTech startups and technology providers wield huge influence, they currently lack the scale, experience, established client trust and regulatory-backing – hallmarks of traditional banks – to truly dictate how the payments sector evolves.”
BNY Mellon’s report suggests that, despite traditional banks’ reputation for being sluggish to respond to innovation and market disruptions, cryptocurrency is a space in which banks have an opportunity to fuel the changing winds, especially when it comes to B2B payments.
Collaborations with the innovators, along with strategically utilizing their own market power, means banks can pull blockchain technology into the mainstream for businesses. For BNY Mellon, the opportunity means banks have a chance “to be a real part of the new digital direction of payments.”