Fintechs vs. Banks: Who Will Win the Instant Payment Battle?
Real time payments (RTP) are fast becoming the ‘new normal’, with open banking and the second Payment Services Directive (PDS2) driving demand for the immediate transfer of funds, 24 hours a day, seven days a week.
To date, fintech innovators have been leading the charge, while the big banks and credit card companies, naturally conservative and operating under a heavy regulatory burden, have been slower to grasp the nettle.
So, as consumer and B2B customers continue to demand the instant digital payment solutions on offer from fintech players, will the big banks get left behind?
“Smaller newcomers are attacking the edges of incumbent profit strongholds and pose an existential threat to traditional financial services providers, who in turn must battle their peers and new entrants for relevance and scale."
Rising demand for instant
Cold, hard cash is fast becoming a thing of the past. There were 12 per cent more non-cash payments made in 2018 when compared to the previous year, and that proportion is only expected to increase.
But whether its consumers buying a coffee with a contactless card or a business paying for stock via bank transfer, such transactions are rarely authorised immediately.
In our interconnected world, where everything from TV shows to shoes, films to furniture, is available instantly, this lag in processing seems positively archaic.
That’s where RTP comes in. Such systems allow for transferred funds to be available to spend immediately, with confirmation of the payment being sent to both payor and payee straight away. Effectively, RTP is the digital equivalent of cash for the digital, cashless society.
This is already happening, most notably in the person-to-person sphere, but it is the business world that, arguably, stands to benefit most of the RTP revolution.
It could provide more flexibility in paying staff and suppliers, improve cashflow, while facilitating cost saving “just in time” stock ordering policies.
Importantly, instant payment systems hold the potential to unlock a whole range of invaluable consumer behaviour data.
Governments and central banks around the world recognise this opportunity. In the UK, for example, the Bank of England is busy building the centralised infrastructure, or Realtime Gross Settlement (RTGS) systems, needed to facilitate instant clearing, and plans are afoot to upgrade the country’s Faster Payments Scheme to a New Payments Architecture.
Fintech vs big banks
At the same time, open banking and PSD2 regulations, which were designed to stimulate innovation and competition, have driven both development and demand.
While fintech has leapt to the challenge by designing a slew of RTP technical solutions, the big bank and credit card companies, due in large part to their size and complexity, have been slower to adapt.
Such organisations also face something of a compliance burden, according to a report from The Emerging Payments Association.
“The amount of innovation a financial institution can deliver is being severely hampered by the growing number of regulatory compliance projects that have to be completed,” it said.
Globally, it went on, banks spend $270bn a year, and dedicate between 10 and 15 per cent of their work forces, to compliance.
How these two sectors fit together, the report said is “critical for long-term success”.
“Banks need to decide how they wish to treat fintechs. Should they compete, partner or acquire them, or a combination of these?,” the authors asked.
Teamwork & M&A
Our market report suggests that the banks and credit card companies have decided on their direction of RTP travel.
In its largest ever purchase, MasterCard bought leading paytech company Nets for $3.2bn The acquisition targeted the Nordic firm’s clearing, instant payment services and e-billing software, and will allow the multinational to deliver cross-border payments to bank accounts, digital wallets, or e-wallets, and cards.
Ultimately, when added to existing MasterCard assets such as Vocalink, Transfast and Transactis, it propels the company to the forefront of the move to real-time payments.
And just last month, Visa paid $5.3billion for open banking software company Plaid, providing the credit giant with the opportunity to deliver enhanced payment capabilities and related value-added services to fintech developers.
Partnering for an instant future
Traditional banks and credit card companies face a stark choice: embrace instant payments or become irrelevant.
Partnerships, such as those demonstrated by MasterCard and Visa in recent months offers a solution.
Mixing the nimbleness and innovative abilities of fintech with the experience, expertise and brand awareness of financial institutions offers a win/win for companies, consumers and investors alike.
"The heat is being applied on the new battleground for relevance and scale... The new battleground requires new capabilities, and incumbents must adapt and acquire now or will lose out later."
About Hampleton Partners
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