Fintechs have exploded onto the banking scene and have been challenging the incumbents, particularly in consumer banking. Could the same thing happen in transaction banking, where corporate treasurers pick and choose their own solutions without the need of going to a large one-stop shop bank?
After visiting a fintech innovation centre in London where start-ups were being incubated, a senior transaction banker had something of a lightbulb moment. They came out saying, “My goodness, these people are going to eat our lunch!”
That was a few years ago, and so far the fintechs have not displaced the large transaction banks; corporate treasurers – although they may have reduced the number of banking relationships – still very much rely on large institutions.
In retail banking, however, the fintechs have been chipping away at the dominance of the largest brands. PayPal, Revolut, Klarna, WeChat Pay and GrabPay are just some of the solutions that consumers are adopting on a mass scale. Instead of going to a bank for all their needs – loans, payments, savings, investments – individuals can pick and choose and manage their financial services from a number of providers. Could the same thing eventually happen with corporate treasurers and treasury fintech innovation? Will corporates always need the one-stop-shop bank to cater to all of their financial needs?
On this question of whether corporate treasurers can do it themselves without a bank, David Blair, Managing Director at Acarate Consulting says, “Technologically, the power of application programming interfaces (APIs) enables what used to be called ‘mash-ups’ of different services, so the mixing and matching of different best of breed services into cohesive solutions is really doable, and indeed some treasuries are already working in that direction.”
Reet Chaudhuri, Co-Lead, Asia Payments for McKinsey, comments that it is necessary to take a nuanced view of the ‘fintech vs bank’ question because of the range of clients in the corporate banking space. When compared to retail banking, where there are not many differences in the segmentation of customers, transaction banking covers a range of customers that have vastly different needs. At one end of the spectrum are the large multinational corporations (MNCs) with multiple enterprise resource planning (ERP) systems. Then there are the large, single-country corporates, who have sophisticated treasuries and use treasury management systems, but do not have the same scale and complexity of the MNCs. And then there are the small and medium enterprises (SMEs).
Most of the interest in fintech is in select topics such as advanced cash flow forecasting solutions, says Chaudhuri. However, for smaller companies, he says, “They may not have the time or the inclination to make the effort to understand what is the best possible fintech solution for them.” The best option for fintechs targeting this segment is to partner with a bank where the solution is a white-labelled or co-branded offering.
And at the larger end of the scale, where multinational corporates do have the resources to scan the fintech landscape themselves, there are still hurdles to overcome. Many of these fintech solutions are cutting-edge, explains Chaudhuri, but they still have to be integrated into older systems. “There have been some challenges with the complexity of these MNCs and multiple ERPs in different countries” says Chaudhuri.
The adoption of fintech has been slow for corporates, especially when compared to the pace of innovation for consumers. Expectations are beginning to change, however. And as many transaction bankers point out, corporate treasurers are also consumers and have come to expect the same user experience they get in their personal lives.
Donald Hoye, Capital One’s Head of Specialised Markets, Treasury Management Sales, says that corporate customers are increasingly asking why the experience is not the same as it is for consumer banking. They often say “Why can’t I do this, as well?,” Hoye says. Capital One, like many other financial institutions, is making a significant investment on bridging that gap and making its treasury and overall business solutions more streamlined and user friendly.
User experience is just one of the expectations that has changed for corporate treasurers. McKinsey notes that in recent years the treasurers’ mandate has changed and they are becoming more strategic and they have shifted to ‘owning’ the full suite of enterprise liquidity instead of a more traditional, narrower role. With this comes a need for solutions that accurately predict liquidity, cash flow and foreign exchange exposures. The 2021 McKinsey Global Payments Report states that the main pain points were in cash forecasting and currency risk, invoice processing and payment reconciliation.
Adopting the latest technology, however, can take time. Blair at Acarate Consulting comments, “Treasurers are a risk averse bunch, and the prospect of different parties passing the buck for problems looms large, so many treasurers prefer to minimise the number of service providers to reduce operational risk. Banks have been capitalising on such fears to promote their role as curators of fintech products.”
Blair continues, “Some treasurers will prefer to engage directly with fintech; others will prefer the perceived safety of known counterparts. To some extent, we also see this playing out in the acquisition of fintechs by treasury management system (TMS) providers.”
Banks are grappling with their strategy, especially as corporate expectations are going up.
Reet Chaudhuri, Co-Lead, Asia Payments, McKinsey
There are other factors at play, notes Blair. Would corporate treasurers ever be able to manage standalone services, in the same way as individuals do with their financial services? “The proximity of the fintech offering to banking or core TMS also affects the desirability of curation by established players. Thus we see wide acceptance of trading services and cash flow forecasting fintechs as stand-alone solutions. Bank connectivity is also starting to be seen as a viable stand-alone service on the back of increasing standardisation. Supply chain finance (SCF), which used to be a bank service, is increasingly disrupted by fintechs,” says Blair.
Judging on the state of play from Citi’s Treasury Diagnostic Report from September 2021, however, it seems that many companies still need to focus on the treasury fundamentals. Citi found that 64% of companies in the survey reported that their TMS was either not integrated or only partially integrated with their ERP systems. And 79% reported that they do not have a full integrated TMS/ERP platform with their banks.
Given the complexity of the treasurers’ needs, an effective banking relationship is essential. In the consumer banking world, banks have started to be disintermediated, with the rise of peer-to-peer lending, for example, and payment options that don’t run on the bank rails. Could transaction banks be ultimately disintermediated? A number of transaction bankers told Treasury Today that corporates will always need transaction banks – they wouldn’t be able to do it themselves like in personal finance – because they need the clout of a bank’s balance sheet, and banks are regulated institutions, which ultimately keeps their money safe.
Blair comments, “As long as banks are protected by governments, they will be around for a long time, but they will morph to adapt to changing circumstances. For example, the advent of central bank digital currencies (CBDCs) may result in less need for basic account holding services, in which case they will focus on investment and market services, and possibly cash management if that does not get taken over by specialised fintech service providers.”
“In a world of CBDCs, it is definitely possible that treasurers will construct viable operations solutions from clusters of fintech services, without the need for any banks at all. In the advent of CBDCs, and if that means the end of fractional reserve banking, banks will have to become much more lean to compete with fintechs – this will be hard for them if their regulatory environment lags market developments,” adds Blair.
For now, however, the most viable route for fintechs is to collaborate with banks. Many treasurers that Treasury Today spoke to still prefer to have their bank filter the fintech solutions out there on their behalf.
For the fintechs that try to beat the banks at their own game, that could be more challenging, says McKinsey’s Chaudhuri. “It is unclear how long that approach would be sustainable,” he says. Chaudhuri argues that the best prospects for fintechs are not as standalone solutions. “The sensible approach is for them to partner with banks,” he says. He argues that banks already have the client relationships and they are well positioned to offer an integrated one-stop solution.
This is an approach that Capital One has taken. Hoye explains how the bank has introduced its clients to fintech solutions where there is a true benefit to the client. “We like to build it if we feel it is in our wheelhouse, but if there’s a fintech company fulfilling a niche client need, we’ll often partner to offer that to our clients,” Hoye says.
In one example, explains Hoye, the bank introduced its healthcare client to a fintech company to help with the area of patient refunds, something that the industry has typically struggled with. While it could be viewed as them giving away business to a potential competitor, Hoye doesn’t see it like that; they are providing a solution that is best for the customer.
In considering the trajectory of fintech innovation and the comparison between retail banking and transaction banking, Capital One actually itself is an interesting case study. Starting its life as a monoline credit card issuer – and nipping at the heels of the large incumbent banks – the company became a full-fledged bank with competitive offerings in the retail banking market. From there it moved into banking for businesses and nowadays offers a range of treasury solutions for small business and mid-market customers in the United States.
In the retail banking space, there have been numerous players that started out as fintech startups and then moved into full-service banking, with a full banking licence. This path means that they can evolve and grow organically without partnering with a bank.
When asked if it is possible for corporate treasury fintechs to be successful without collaborating with banks, Blair at Acarate Consulting says, “Absolutely yes!” He continues, “We are already seeing success for many treasury fintechs in areas not too close to banking and core TMS such as trading, cash flow forecasting, SCF, and bank connectivity. The great thing about the fintech ecosystem is that participants are hungry to try new things and willing to fail, and then pivot as dictated by market needs. Many fintechs will fail, some will end up curated or acquired, and others will thrive on their own. Cautious treasurers will probably have the option of playing safe, but new ways of working will continually evolve and find niches amongst more adventurous and ambitious treasurers from which to grow,” says Blair.
In this environment, banks need to decide what role they will play. “Banks are grappling with their strategy, especially as corporate expectations are going up. Banks have to think about how they bring multiple fintechs under their umbrella and package them for their clients,” says Chaudhuri at McKinsey.
For those banks that successfully do this, and work out their role in the face of the fintech challenge, they will probably get to keep – and eat – their lunch.
