With increasing globalization, cross-border, or global, payments have become a very big piece of the banking business.
The space is also a hotbed for competition as a number of non-banks are offering the multicurrency payment processing capabilities that businesses need more efficiently and at a better value than the big banks.
Needless to say, banks are feeling the pressure on all fronts to get their capabilities aligned with what the innovators around them are already providing.
Currencycloud’s latest white paper, Global Payments: How FinTech Partners Are Helping Banks Transform, lays out the complexities that banks face in trying to keep up with the rapid pace of globalization and how partnerships with FinTechs may be an alternative path to success.
Mike Laven, CEO of Currencycloud, told Karen Webster that banks are now realizing how critical digital transformation is, but they are struggling with how to get there.
Turning payments challenges into opportunities isn’t easy, but there are four key points to keep in mind when observing how banks will address the impact that globalization is having on business-to-business (B2B) payments:
- Globalization is fueling incredible growth in multicurrency transactions, particularly from small and medium-sized enterprises (SME), which is driving the demand for faster, digital services.
- Managing costs and finding revenue opportunities within a low-interest rate environment is a huge challenge for banks, many of which can’t afford to take on the cost of innovation.
- A big part of being successful in multicurrency payment processing is building a solid compliance regimen, which adds on another layer of complexity for a highly regulated banking industry with ever-changing regulations.
- Banks must be able to do this all in a way that is both efficient and maximizes revenue.
Laven and Webster took a deeper dive into each of these points as they explored the current landscape of global payments and the role traditional banks will play in it.
New Challenges, Old Systems
Laven explained that the reason it costs so much for banks to process B2B payments is due to the complexities caused by the ongoing use of legacy systems.
“The reason things are expensive in the bank is not because banks are full of bad people who want to charge a lot of money. It’s because they have historical, inefficient systems that were priced when there was less demand and cost consciousness in the marketplace,” he said.
In fact, according to Laven, more than 90 percent of these costs are attributed to banks’ back office operations, rather than the technologies and networks that handle the fund transfers between banks.
When it comes to dealing with global payments, it requires the involvement of many departments within the bank, each of which are compensated differently and have different systems behind them.
For small to medium-sized banks, the problems multiply because they typically don’t have a foreign exchange department in place, so they are forced to correspond through larger money-centered banks.
In many cases, they don’t have a front-end system that’s efficient enough to deal with the customer, and they are reliant on the infrastructure that comes from their banking supplier, which is likely old, non-transparent and antiquated, Laven noted.
Changing this on their own would require banks to alter their entire core banking system, which is a massive and difficult task for even a big bank to take on.
But with new market entrants and new options being made available to those looking to move money, banks have a tough decision to make.
“Banks will be forced to bring those costs down,” Laven emphasized. “Banks can decide — as they have in other markets, such as equities and trading — that they are under pressure from new entrants and need to bring their costs down precipitously.”
At the end of the day, everyone wants things to be faster and cheaper.
What’s A Bank To Do?
Banks can no longer afford to simply look at FinTech players as competitors.
When it comes to pursuing a digital transformation, some financial institutions understand they can’t get there alone and decide to build a digital stack outside of their existing system. The digital platform typically includes a range of financial services, some built by the bank and others purchased from third-party payments companies like Currencycloud.
On the other hand, some banks prefer to identify the specific digital services they need and work with a firm that specializes in that offering so it can be interfaced within their existing system.
Then there are those financial institutions that won’t do anything at all.
No matter the approach, Laven explained that the main focus of helping banks rise to the challenge of serving the growing global payments marketplace is so that they can offer more transparency while also holding onto the accounts of their business clients.
“Our discussion with a bank is not about the bank making more money — it’s not even about the bank reducing its costs, though those are certainly always important. It’s all about the bank providing a better deal and ease of use to its customers and maintaining those customer relationships over time,” Laven said.
He noted that Currencycloud’s real proof point is its ability to maintain the same level of compliance and regulatory management that a bank has now, while providing faster services to its customers, lower costs and overall better customer satisfaction.
Though banks certainly have many things to worry about in consumer payments — at the top of mind is maintaining a presence in peer-to-peer (P2P) against services like Venmo and holding tight to digitally inclined customers — many are recognizing the need to capture the more lucrative segment of payments: cross-border business payments.
And yet while there’s been a great deal of innovation on the consumer banking side with P2P or even personal cross-border remittances, business payments are complex.
Given increased cross-border regulations, high volumes of payments, business’ requirement for data maintenance for each payment, processing times between correspondent banks and approvals needed within banks, modernizing business payments is considerably more difficult.
“Like in many other industries, the consumer problem gets solved first, and then you have to get firms like us to build the technology to solve the business requirement,” Laven said.
“We talk a great game, but the FinTech market share in many of these areas is really small. What banks have to fear most is smarter banks,” he said.
The smarter banks will be the ones that take on this challenge, master it and squeeze out the other financial institutions that haven’t made it yet.