Despite the challenges that banks face, there is reason for optimism. Like never before, advances in technology have opened the door for banks to collaborate in pursuit of our clients’ desire for a global real-time payment experience.
This paper is intended for readers who want to better understand the dramatic changes that have begun to take place — and that are accelerating — in the global payments industry. Based on the results of a bank client survey conducted by BNY Mellon Treasury Services earlier this year, we know that this is an area where financial institutions vary greatly in terms of their level of knowledge and perspectives and a subject that they are eager to learn more about.
In that survey, when asked, “Which reaction best describes your organization’s level of focus, attention and development in the emerging technology space?”, nearly half of the respondents — 120 senior executives representing many of the global financial institutions we currently serve — said they are, “Moving forward, but in a measured way (mostly pursued through shared resources with little or no venture investment). More than one-third said they were just “getting organized.”
Clearly, it is an opportune time to share more information about the various avenues to payments modernization and associated technologies. So herein, we will share with you more results from our survey as well as explore the factors that have spawned and continue to drive changes in our industry; tell you how both banks and their clients are being affected; and look at how banks are simultaneously pursuing new opportunities for growth while also striving to deter potential loss of market share.
It is a complex saga with numerous and diverse players — some with familiar names and some brand new to the payments business — and its cast of characters and storyline continue to evolve at an unprecedented pace.
In our opinion, the industry has never been more exciting. There is a lot going on and, for once, we have more to focus on than meeting regulations and managing risk! Truly, as a result of pressures from various innovators, payment industry participants are pushing a wave of payment transformation, focused on our clients and on what we — individually and as an industry — can do to improve our services for them. That’s a refreshing development in a field that, quite frankly, has been slow to adapt.
Veterans of the U.S. payments industry know that there has been little fundamental change in the payment infrastructure since the rollout of ACH in the 1970s. And in the cross-border arena, while generally reliable, the process long used to move funds globally is fraught with familiar challenges related to timing, cost and transparency. Until recently, however, clients were not aggressively pushing for change. Thus, banks did not attempt to fix what was not broken; they knew the amount of money, time and coordination required to effect real transformation would be immense.
The status quo might have continued were it not for several factors that combined to create “the perfect storm” for payment providers. Nimble new competitors — now commonly referred to as “Fintechs” — began looking for opportunities to apply cutting-edge technologies (e.g., blockchain) to penetrate the payments space and other revenue sources that banks have relied upon for years. Market factors such as a growing consumerism in payment solutions, more globalized trade flows, and increasing fraud and cyberattacks emerged. Concurrently, the 2008 financial crisis raised questions in some clients’ minds about how well banks were serving them. And while banks realized that they needed to take immediate action to innovate, their ability to focus was impeded by the need to divert attention and resources to issues such as compliance and risk management. Until recently, it seemed feasible that banks could lose their foothold in payments processing to Fintechs and other nonbank providers. Their advanced technology, agility, and fresh concepts appeared to be capable of addressing many of the historic weaknesses in the payments space. A media frenzy with numerous articles and announcements from the Fintech community contributed to that perception.
Today, the outlook has shifted somewhat. Both banks and their Fintech challengers have realized that, while Fintechs offer some intriguing ideas and advanced technologies, banks also bring value to the table. Banks have significant advantages in terms of network effect, established standards, regulatory know-how, and large, entrenched client bases that give us necessary scale. So both groups are asking how we can best proceed to achieve our mutual goals for success:
Herein you will find coverage of each of these approaches, along with BNY Mellon Treasury Services’ position on which avenues we believe may make the most sense for us and for our clients as we seek to provide a better payments experience. Throughout, we will also provide you with a round robin of perspectives, gathered from a range of BNY Mellon’s own senior leadership as well as respected industry experts, and share with you insights from our previously referenced client survey. And, because it too cannot be ignored, we will take a quick look at “blockchain” technology and how it factors into the transformation in progress.
As we consider the alternatives, we are all focusing on the same question. How will our clients be best served? That will drive the ultimate decision. While we welcome all innovators, banks have to be relentless in striving to create the positive experience we want for our clients and that they are seeking.
Read on to learn more about the brave new world we face in the payments industry. It is one where we all—banks, Fintechs and industry groups — have a vested interest in learning about in order to survive and thrive. Banks cannot become lax, thinking we can control the pace of change. As an industry, we need to stay focused on where we all intuitively know technology is taking us, by modernizing the payments ecosystem and striving to deliver the improvements we know clients want. Our future depends on it. The time to act is now.
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