Historically, banks have dominated the entire market, but times are changing and the FinTech invaders are beginning to disrupt the space. Banks certainly have their place, but their share is undoubtedly being challenged.
It may seem odd for the man who has pioneered a non-bank community-based payment
model to admit, but I strongly believe that banks will be an important part of the financial industry going forward. There are certain services which can only be offered by a traditional bank – deposits and clearing – and I do not see that changing in the next few decades, at least – writes Anders la Cour, Chief Executive Officer, Saxo Payments.
A ‘perfect storm’ for disruption
There has been a ‘perfect storm’ of events that have triggered the disruption in banking. The global credit crunch and resultant regulatory focus on the behaviour of the banks was certainly a catalyst for a new way of thinking. And the e-commerce revolution provided the impetus to bring this new approach to life.
The credit crunch caused an increase in capital and regulatory requirements, forcing banks to either divest or close non-core services. The new global consumer has driven the demand for cross border payments, and new payment methods have opened the doors for the ever-burgeoning numbers of FinTech entrepreneurs. So, for the first time in generations, the banks have serious competition – at least in some parts of their value chain.
Alongside regulatory changes favouring the competition, technological advances have paved the way for cutting-edge solutions to problems customers didn’t even realise they had. Mobile payments, crowdfunding and crypto currencies all make the customer’s financial life more convenient, more streamlined and more accessible – regardless of geography. And whilst the consumer audience has been the first to benefit from this innovation, it’s now starting to permeate the world of business.
The new generation of FinTechs, in my experience, work because they look for a gap or failing in the current offering and develop a tailor-made solution to meet that niche need. Because they are so focused on their specific niche, they invest fully in that one offering and do it exceptionally well.
Good examples of this approach include Funding Circle in the UK and its US equivalent, Lending Club, which have pioneered peer-to-peer lending. And there’s Kickstarter, a crowdfunding platform specifically helping creative projects, plus OnDeck which provides small business loans dependent on the health of the business rather than personal credit scores.
In our business, transfer fees mean businesses are losing money unnecessarily when sending or receiving payments internationally using a traditional bank. Saxo Payments is plugging the holes where banks allow money to seep through the cracks, by creating a Marketplace in which everyone can benefit. Designed to empower the swathe of FinTech businesses seeking to exploit the explosion of global digital enterprises, Saxo Payments is a seamless conduit for bank transfers; fees are negligible (less than 1% rather than around 5% with banks) and transfers occur instantly within the Marketplace, even across borders, as if the two companies were neighbours.
In this digital world, businesses are far better informed of their value. As such, there is a definite move by businesses to switch banks if they are not getting the best service, at the best price, and real added value. As with the consumer world of insurance, utilities and mobile phones, businesses are now more empowered to shop around to get the best ‘banking’ service to meet their needs. This is precisely why the disruptors are succeeding and, in my opinion, starting to put traditional banks in the shade.
Where to from here?
As the FinTech disruptors grow and adapt to the changing market and new regulations, I believe we are going to see four distinct groups emerge within the global banking industry:
- Utility banks. The systemically important banks that will be highly regulated, with little potential for growth and low return on equity.
- Larger regional banks. These banks have high capital requirements with significant resource focused on risk and compliance – also with limited growth and return on equity.
- Smaller regional and national banks. These will struggle to keep up with regulatory requirements and will lack bargaining power in terms of payments and credit.
- Niche ‘non-banks’. New entrants focusing on specific niches within banking – crowdfunding, peer-to-peer lending, crypto currencies or providing account infrastructure for other businesses. These will be able to work across borders in many different countries and they will have low capital requirements as their service will be so focused.
FinTechs are undoubtedly disrupting the playing field – an element of competition is always healthy, and ensures the customer gets the best and most efficient service. But it mustn’t be forgotten that whilst the banks’ market share may decrease over time, they will still serve a huge section of the population, as many will still require bank accounts alongside the FinTechs’ niche and specialist offerings.
That, however, is no excuse for the traditional banks to be complacent: non-banks as a whole may eventually create a sustainable alternative and take significant market share, simply because imagination and technological innovation will be their only limitations. Nonetheless banks and non-banks will continue to co-exist. There is enough room in the market for both – which will ultimately benefit the customer.
Saxo Payments enables FinTech businesses with international client bases to focus on their core activities, while extending their value chain and product offering allowing them to compete directly with the banks. As Members of the Saxo Payments Banking Marketplace, these enterprises create a new revenue stream for their business by utilising a web-platform in their own name in order to provide their merchants with bank transfer capabilities. It is a solution that is truly empowering global trade, whilst ensuring that financial regulation is completely adhered to, without impacting on business success.
This is how payments should be. Saxo Payments believes it will be the norm in future.