The challenges of change

Canadian fintech vendor D+H, which two years ago made headlines when it acquired Fundtech in an ambitious US$1.25bn deal, was again in the news this month as a union with London-based Misys was announced.

As Edward Ho, D+H’s president – global payments solutions, noted, the forthcoming merger represented “the elephant in the room” when the group held its Insights EMEA 2017 event in London this week, attended by over 200 delegates. However, he was happy to promote the synergies.

“We regard the deal as a very complementary fit, with little overlap between the two institutions,” said Ho. “The combined group will have 48 of the world’s top 50 banks as customers and D+H Misys will become the third-largest fintech company in the world, with US$2.2bn-plus in revenues and 9,000 clients in 130 countries.”

Colleague Chris Zingo, global head of sales – global payment solutions, earlier opened the event by noting that banks and corporates alike are struggling with the pace of change and the speed of evolution. “We’re adjusting to a new era distinguished by game-changing companies and ecosystem economics,” he declared, meaning that the era of standalone businesses and operating in silos is over.

While corporates must adjust to the pace of change “there’s a danger that we restructure our thinking around key topics, but in doing so lose sight of the end game,” he suggested.

Zingo took Monetise as an example of a business that recognised the bigger picture. Set up in 2003, the fintech decided that rather than directly take on the banks, it would instead ‘expand the pie’ by helping them enter the mobile world by delivering digital services to them. “So, it’s all about expanding your offering, rather than attempting to defend legacy schemes and models,” he suggested.

Ho noted that 2016 saw US$14.8bn in funding and deal activity directed to the fintech start-ups, which potentially could carve themselves a 30% share of the banking sector’s current fee income. However, this means successfully meeting four main challenges: achieving sufficient scale to present serious competition; winning the trust of their targeted customers; coping with regulation; and the fact that they lack the banks’ full lifecycle of payment services experience.

Collaboration between the banking and fintech sectors offers a way forward. Banks are getting actively involved in blockchain, with blockchain ventures attracting more than US$1bn of investment in 2015, while both the Ripple real-time gross settlement system (RTGS) and transaction protocol (RTXP) and the R3 distributed database technology consortium are growing, despite the latter’s recent loss of key members such as Goldman Sachs and Santander. Last year, a total of 185 application programming interfaces (APIs) were published.

D+H is gearing up its own offerings, ahead of the European Payments Council’s (EPC) single euro payments area (SEPA) instant credit transfer (SCT Inst) scheme launch in November 2017.

Real-time gains momentum

In a panel session on instant payments and digital banking, Gene Neyer , D+H’s industry and regulation group leader, global payments, noted that more than 30 countries have either adopted real-time payments or are in the process of doing so, with Australia, the US and parts of Europe recently coming on board. So the focus of instant payments had shifted from promoting the benefits to how best to achieve the required scale and ubiquity.

Erwin Kulk, head of service development and management at EBA Clearing, reported that the bank-owned payment infrastructure provider had commenced work on real-time payments in 2014, once the major migration phase to the single euro payments area (SEPA) had been completed. “Each of the 39 banks funding the delivery of our pan-European instant payment system has its own take on the topic, but they all see the benefits and are keen to be frontrunners,” he said.

TARGET2-Securities, aka T2S, the single pan-European platform for securities settlement in central bank money will provide a further driver through the planned launch of TARGET Instant Payments Settlement (TIPS). “A key issue for us is interoperability; we want to be able to present our clients with a single pan-European settlement scheme and we’ve been following TIPS with interest,” said Nicola Coyne, senior product manager for Barclays. “However, we’re so far lacking the details and because of this we’re proceeding with caution.”

Hugh Cumming, D+H’s chief technology officer (CTO) said that he’d been focused on financial services innovation for the past two decades and was excited by the potential of application programming interfaces (APIs) to transform the industry via both software developers and solution/service providers. One concern though was that open API are, by their nature, extremely accessible and this introduces a degree of security risk.

A member of his panel, Daniel Szmukler , a director of the Euro Banking Association, added that banks had been focused on APIs for many years but that thinking had been restricted by their various silos and had only broken free of that limitation fairly recently.

In Europe, this thinking is very much driven by the impending Payment Services Directive (PSD2), which comes into effect next January, but in other parts of the world regulatory requirements were incidental to the rise of APIs and customer requirements and expectations were far more of an influence.

“APIs are going to disrupt the economy and create new business models,” predicted Sailesh Panchal, head of regulatory technology architecture for Lloyds Banking Group. “PSD2 means that cards traffic will move onto the new platform and a collaborative, open ecosystem will replace the current closed one.” Potentially, the impact could be as transformative as that of Uber on the transport business and the traditional taxi service.

“The API genie – let out of the bottle thanks to PSD2 – has created a world of innovation, in which banks will be challenged to innovate and will also partner with the innovators.”

Treasury and payments in uncertain times

A panel session chaired by Laura Brillinger, D+H’s global head of marketing, corporate marketing and payments solutions, included several corporate treasurers who were asked which current uncertainties topped their list of concerns.

“No two corporates are the same, but other than Brexit the biggest noise is cyber and fraud risk, particularly around payments,” suggested David Stebbings leader of Pricewaterhouse Coopers’ (PwC) UK treasury advisory team. “In the past two year, it has risen to top of mind.

“Treasurers are also exercised by the Organisation for Economic Cooperation and Development’s (OECD) moves on base erosion and profit shifting (BEPS) to combat tax avoidance and its impact on entity and cash structures.

“In the UK, Brexit and the fall of sterling has put foreign exchange (FX) risk firmly back on the agenda Many issues that were on the table 10 years ago, but appeared to have moved off it have more recently resurfaced again; in particular cybersecurity and fraud.”

Panel members were also asked if events of the past couple of years suggested that the post-war trend of greater globalisation was now under threat. For Sarah Billings, managing director, global payments and deposit platforms executive for Bank of America, the rhetoric hasn’t yet quite matched the reality. As she noted: “Once you’ve let the genie out of the bottle it’s very hard to put it back in again, so reversing the trend of greater globalisation wouldn’t be too easy.

“It’s a question of whether you’re really going to change a global structure just because of some transient local challenges. BofA still needs to cover the globe as so many of our clients operate worldwide.

“Will the political protectionism we’ve been seeing in recent times filter down even further? It’s unproductive, so we should be working to make the globe a smaller place, rather than fragmenting it.

Billings also noted that the advent of real-time payments represents the first time that countries have considered global interoperability.

“The US has typically thought about its own needs first, but in the case of real-time payments it’s in the position of being a follower and not a leader. Most countries are following the ISO 20022 standard, so the US is doing likewise.”

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