Transaction Banking: Good Enough Is Not Enough

The words “innovation” and “disruption” have been almost synonymous with discussion of new technology in the payments industry over the last year.

Yet, at recent banking events — including the annual BAFT Conference this month — the commentary about this progress has not been one of excitement or alarm, but rather that the existing technology powering international payments is “good enough for right now.”

It worries me that banks believe this. Far too many leaders in the space are missing the forest for the trees — shrugging off advances as not important to their business objectives today, or in the future.

The data is clear: Transaction Banking is in trouble. Banks have already lost 40% market share globally for consumer-to-consumer (C2C) cross-border payments to non-banks. For consumer-to-business (C2B) payments, that number is 30%, for business-to-consumer (B2C) and business-to-business (B2B), around 5%.

Not only are those numbers accelerating, but non-banks are moving up-market. TransferWise grew from directly serving consumers to now including small- to medium-enterprises (SMEs) in just the last year. This growth included the added ability to process batched payments.

Their team has clearly got its sights on the corporate segment, and this is just the beginning. Payments are the insertion point for non-banks. TransferWise has successfully gone from being a cross-border payments service to a multi-currency account holder for businesses. It now interfaces as a deposit holder with its customers.

TransferWise is not alone. FairFX, PayPal, and many more are executing on a version of the same strategy. These non-bank-financial-institutions are starting to own these customers through payments. Once they do, they will expand into other traditional banking services. Play this out, and banks are no longer essential and are faced with becoming just a “utility” in the system.

Being a utility means that services are commoditized and there is a race to the bottom between financial institutions. Some might argue that because only a few banks have the necessary global reach, they’ll continue to maintain the pricing power they have now. Well, that’s changing too, in a big way.

Global behemoths like Citi and HSBC have spent decades building their global network. They are able to offer this global network through vostro accounts that smaller banks can open with them, providing them with local liquidity so that they can process cross-border payments. That’s how transaction banking has worked until now — banks with the largest networks have been able to sit at the apex.

Digital assets, for the first time, are affording small banks and non-banks with the ability to send money across borders without needing pre-funded destination liquidity. As new tech allows for financial institutions big and small to access a faster and cheaper global payments networks, size and history alone no longer matter.

This means that global access is getting democratized and the hierarchy of financial institutions is going to be re-shuffled. In this new world, those at the top will win because of their customer experience.

This is the big picture. It isn’t about incremental innovation. It’s not just about a payments tracker (welcome to the 1990s!), it’s about a scalable, real-time, on-demand infrastructure that can deliver excellent customer experience while reducing the marginal cost of a transaction (including liquidity costs) to ZERO.

The traditional banking infrastructure is failing and banks need to employ new technology today to remain competitive. Because payments are just the beginning. Losing payments leads to losing a lot more.