Technology can be used not only to improve efficiency but also to open up new markets. An innovation might leverage existing systems and platforms or could try to create a new niche and spread out from there; either way, innovative technologies can change a treasurer’s experience both in the way they interact with their banks and how they operate internally.
Pre-2008, transaction banking was not the prime concern of treasurers; when the crisis hit, however corporates suddenly realised the importance of cash management and liquidity. Many corporates sought to reduce the number of bank accounts they held, streamlining the electronic banking processes used. Some looked to shared services centre (SSC) structures to reduce risk and cost, speeding up collections and concentrating and optimising their cash.
In this context, if technology can help treasurers find alternatives to previously clunky, risk-laden or over-complex operating models then it has a definite role to play moving forward. New offerings from transaction banks that are progressively re-shaping the treasury landscape include virtual accounts, mobile payments, real-time information exchanges and documentation digitisation.
In addition to these innovations that are largely driven in-house, banks are increasingly looking to the outside for inspiration – and for partners to help them think differently when it comes to technology. These collaborative partners are often small start-up firms in the FinTech space.
The rise of FinTech
Today, there are an estimated 23,000 start-ups working in FinTech. Some of them are looking to work directly with the banks whilst others are looking to provide an alternative to traditional banking models. Bank engagement with new Fintech companies is an area where programmes such as Innotribe (from SWIFT), Startupbootcamp Fintech and conference-led projects such as PayExpo’s Payments Dragons’ Den, have been operating for a number of years. They are known as ‘accelerators’, helping to develop and bring new ideas to the attention of potential users in the FI sector.
Given that some banks are necessarily wary of diving in too quickly with new technology, not least because of the compliance and integration imperative, they are very much driven by the need to see a fully worked-up proof of concept. In this respect, the FinTech companies often struggle to fully comprehend the real world experience of the banks and their clients, particularly around regulation. Thus guidance from accelerator organisations, working with their bank clients, can prove invaluable when building up a working solution and an effective business model.
In addition to the FinTech start-ups, other new entrants are taking advantage of the gateway that technology is providing into financial services. Take mobile phone providers for example, and the likes of Apple Pay and Google Wallet. Alternative financiers are also benefiting from the scale and speed that technology affords – offering them a significant competitive advantage.
Indeed, one of the biggest stories post-crisis has been the emergence of alternative lenders to fill the funding gap left by the now regulatory-constrained banking sector. Last year, the market for online alternative finance grew by 144% to almost €3bn and could grow to as much as €7bn before the end of 2015 according to recent research for the University of Cambridge Judge Business School.
Quite evidently this is still a nascent sector, accounting for only 1% of the £25bn lent to UK SMEs in the first half of 2014. But it is growing quickly. And even when traditional financing routes are available, there are plenty of other reasons why a company might choose instead to turn to an alternative provider. Technology is one of these reasons.
Take the example of Finexkap – a web platform (that companies upload their invoices to) offering working capital to small businesses in France. Credit analysis is performed using both a proprietary algorithm and a team of in-house credit analysts with factoring experience, after which the receivables can be financed thanks to an innovative financial securitisation structure.
Executives and finance professionals today want to have more time to focus on the issues that really matter to their businesses – not their relationships with their bankers. Opening a new credit account or starting a new relationship with a factoring company are activities not exactly conducive to this goal. They would rather go to a platform like Finexkap where they can access credit in 0.87 seconds rather than go through the whole audit process needed for an institutional lender.
The next revolution?
Going forward, banks will likely have to contend with even greater competition from new entrants, whether they be alternative lenders, payment providers, or otherwise. Over time, this will inevitably change the dynamic of the industry – but disruption should not necessarily be seen as a threat, in fact it is a huge opportunity. After all, change in any industry always happens when innovative players, finding gaps in the market, develop solutions to address emerging problems. In Spain during the 1980s, it was high interest rates and inflation, together with a culture of late payments that led the country’s banks to develop the very first supply chain finance solutions, for example.
In summary, the ever-changing needs of corporate treasurers will drive the progressive application of financial technology going forward. But whether that technology is provided by the banks, third parties, or through industry collaboration, treasurers must engage with their business partners to ensure that any technological innovations truly respond to their requirements.