Question Answered: End of bank monopoly?

Published: Sep 2019
Person rolling dice onto a monopoly board game

This issue’s question

“How much longer will banks have the monopoly on treasury services?”

Lionel Taylor, Co-Founder, Trade Advisory Network

Lionel Taylor

Trade Advisory Network

There is much debate around the threats that banks are facing with the advent of fintech and the disruption this will cause to their businesses.

There is no doubt that the aftermath of the global financial crisis damaged the reputation of the banking world and led to a period of introspection, coupled with increased regulatory resilience measures. As a result, banks must hold more capital to cover the perceived risks of their activities as a requirement.

In the meantime, fintechs were able to exploit the weaknesses in the banking system with the promise that new technologies would transform the provision of banking services, whether or not the banks were ready to play.

In the last few years, banks have repositioned themselves, with some deciding to focus activity on specific countries, product areas, or the servicing of particular customer segments. Much of this has affected their provision of services to the SME market rather than the major and global corporate companies. Banks have also begun to embrace the world of fintech by adopting the new technologies, and joining transformation programmes to change some of the paper driven and commoditised services into digitised and streamlined processes.

However, there is much evidence to show that fintechs and other companies that provide complimentary services to banks, or hold and manage mass amounts of data, are nibbling around the edges of what was once the preserve of the banks. For example, foreign exchange services, payments, and cash management are becoming readily available through non-bank service providers. Open banking and the increased availability of real-time data have created further opportunities and competition, and with treasurers being more attuned to the efficiency gains that can be achieved through these new service providers, further growth is expected.

While the non-bank sector can claim to be more flexible and innovative, they do not have the history and long-standing relationships that banks and corporate companies maintain. Banks have more experience and knowledge of the treasury support required by corporates and so remain their trusted partner, despite not being able to deliver services as efficiently as some of the new players.

Banks cannot rest on their laurels. As fintechs gain more experience and traction, there are now more receptive treasurers who are open to learning about their advancements and offerings. In the meantime, banks are reacting through increased collaboration with the fintech world, and, for some banking services, maintain the risk appetite and balance sheet that cannot be matched by a fintech or non-bank player.

Therefore, it is my view that while the banks will not have a future monopoly on treasury services, they will retain a dominant position in the servicing of the major corporate sector.

Warrick Carey, MBF, Manager, Actualize

Warrick Carey

MBF, Manager

If one were to cast their mind back ten years ago, from a corporate treasurer’s perspective, all financial services required to effect cash and risk management were largely enabled through the offerings of their organisation’s banking partners. For a long time, banks enjoyed a dominating monopoly on treasury services offered to corporates. This was before the financial crisis. When it came time for the surviving banks to dust themselves off and pick up the pieces, their focus was on getting their core operations back up and running, and attention to technological progress and advancement was relegated to the back of the queue.

It was at that point that the mantle of innovation in IT and financial services was taken up by financial technology firms (fintechs) who were able to develop new products with the pace and agility that banks were unable to replicate. It was the fintechs who first championed and encouraged the use of application programming interfaces (API) in banking and finance.

An API is a set of functions, communication protocols, and procedures that enable the communication between two applications or systems and facilitate the exchange of data rapidly and at a reduced cost allowing for increased operational efficiencies. These relatively new advances in technology, coupled with recent changes in banking regulations, have altered the industry landscape quite significantly and in favour of the fintechs who, up until recently, weren’t able to compete effectively with the banks without the equivalent means of product and services distribution.

In March 2015, HM Treasury announced in its Budget Report that the UK government was keen to drive increased competition in the banking market to enable banks, alternative providers of financial services, and fintechs to be able to compete on even terms in winning new and retaining existing customers.

Fast forward to today and the revised Payment Services Directive (PSD2) throughout the EU as well as in the UK via the Competition and Markets Authority mandated roll out of the Open Banking Standards has lowered the drawbridge on customer data held by the banks and enabled the fintechs and other enterprising third parties to harness APIs that could potentially, in the very near future, benefit treasurers immensely.

APIs work at much faster speeds than batch processing or host-to-host bank connections, and as a result a corporate can obtain real-time views of their cash. They could utilise an API to go out to all their banking partners, collecting the latest view of their transactions and balances, thereby enhancing their cash management and reporting abilities, all from one platform developed by a fintech. This is instead of needing to go through individual banking portals or waiting for prior day or intraday statements to be pulled in.

Instant payment capabilities have also come about through the use of APIs offered by fintechs with benefits, including instant feedback on payment status and notifications of successful submission or errors. These are just a few examples of the possibilities that fintechs are developing, leveraging the open playing field.

Banks have not ignored this fact and have started building out their data strategy to include collaborations with fintechs and increasingly leverage APIs to not lose market share or the customer experience. But one thing is for certain: the current situation is vastly different and large banks may not hold the upper hand in the treasury services arena for too much longer unless they can begin to evolve as quickly as their more agile fintech competition.

Next question:

Steve Jobs: “Innovation distinguishes between a leader and a follower.” Discuss.

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