Banks are hearing from their customers that they want better experiences — better experiences in banking, borrowing and in payments.
Joining me today on the podcast is Finastra’s global head of payments, Paul Thomalla. The banking software provider recently launched a new product that makes it easier and quick for mid and small-tier banks in Europe to participate in real time payments. Paul describes how smaller banks can maintain a competitive edge in payments.
It’s the most exciting time to be in payments. Both perhaps in a negative way, and frankly, an extraordinarily positive way. The industry is at a strange pivot point, which, for all the thousands of years when people have been doing payments, either through bartering or through using coins or checks, it’s been a completely analog process. And now we’re getting to a digital process.
The underpinning of the whole thing is the fact that we’ve had checks for 370 years. We still support them. But in fact, when we move to real time payments, which is pretty much the trend across the world, that also brings in a move to the digital world. And with ISO 2002 — pretty much everyone is using that as its messaging format now or certainly the go forward messaging format — actually what’s happening is a mixture of digital messaging and APIs.
But the real truth of it is, we still have a lot of silos, there’s a lot of value to unlock. And our customers’ customers, in this case, the bank’s customers are really saying, hey, I need a lot slicker integration into what I have for my customers. And depending upon where you sit in that value chain, you would treat those changes as very different opportunities. You will treat the opportunities that are being forced upon the industry either because of regulation or because of demand very differently. And that’s what we’re super, super focused in on trying to deliver.
Moving across the market
Finastra spent nearly all of its time focusing in on the very large banks. We work with HSBC and Barclays, that scale of bank. WE do pretty complicated payment hubs. We have vast experience working with those guys who are international, probably working in 30-40 different countries, transporting all of those different currencies together so that their payment hubs can be really very slick.
But the other 99% of banks think very differently. And what we’ve done is to try and take all our international experience, and really take it into a system where we can allow it to be implemented and managed in a very easy way. We’re taking all that experience working with the largest banks and saying, hey, a payment flow is a payment flow, and we’re going to standardize that payment flow. We’re going to do it in a very digital way, get you up and running in three or four months, have it run as a service. But you’ll be a compliant digital player looking after the standardized flow.
The argument basically goes along the lines of, rather than spend all our time just working with the large banks, we should take our own medicine and build all that work for the smaller institutions, which are still doing substantial flows, saying to them, here’s a way to get out of all that legacy, get it up and running very, very quickly, and effectively pay as you go, because different types of banks have different types of needs.
Smaller bank competitiveness
Interestingly, the smaller banks could actually challenge the larger banks, when they go through the digital change, which I suspect they’ll be able to do a lot more quickly.
If you’re a large bank, you probably have substantial homegrown payment systems, some actually commercial, but they all do slightly different things. And all do it in a slightly different way. We’ve been trying to get our major banks to transfer and manage that to a payment hub over the last 10 years or so.
And I think the issue that we have in the smaller institutions is that they still do a significant, large amount of transactions. But the same team that’s looking at a compliance statement, that is looking at the latest modifications, that is looking after the clients, tends to be the same people. And the question then becomes, what’s more important: Is it more important keeping this plate or that plate spinning?
For a smaller bank, chances are I’m mostly a domestic bank, looking after my local clients, giving them what they want, and my differentiation — there will be all the benefits that I can get from the digital world, or the integration work that I can do, or the localized focus that I can do.
And really, if I can move my platform to a digital platform, get it up and running in three, four months, then actually, I will be able to focus in on what the true differentiator will be — which is giving value to my client.
Payments to Go
The 1% of banks do the bulk of the transactions. They do the real complicated, hardcore payments: many countries, many currencies, etcetera. But when you look at the payment system, at some point, it’s just moving value from A to B, an exchange of a good or a service and the data that it spins off.
If you look at the other side of the scale of banks, the sheer volume of banks, they tend to be smaller. The curve comes down very, very quickly, but the bulk of them all have the same problem. All their analog systems make it very difficult for them to integrate into their clients, make it very difficult for them to truly add value, other than, yeah, I’ll do your payment, send me the file, I’ll process it and get it done.
A lot of clients now want integration into SAP, into the supply chain, into adding value of banking, rather than just adding value of payments. So when you look at that, we said, well, why can’t we go after this market?
That’s why we brought out Payments to Go as a tool set. A payment flow at a mid tier bank is probably the same payment flow, whether it’s in France, or it’s in the US or in the UK. So the payment flow is a standardized process, the value becomes on what you do with the payment, the added value you give to your client and the integration that you can get with your client. That’s where the value is.
And I think that’s the pivot point. Medium sized banks can be a lot more agile locally. And I think that’s what we spotted. And we asked, well, what could we do to make that happen? Well, keep it evergreen. Keep it fixed price, keep it standard, straight out of the box, get it up and running really very quickly and wrap it round with all the API’s and the ISO messaging you want. That’s what we focused on when we started to deliver Payments to Go. And now it’s out in the market. And I can say it resonates extraordinarily well with small and medium-sized banks.
Entrance of non-financials into banking
I sense it a little bit in Europe. But all over the world, we see NBFIs who are trying to enter the market. But the issue for me is that my customer really wants banking services. It doesn’t just want to pay, it wants to know how I can integrate into ERP systems, how I can integrate into supply chain systems. And if I can do that, can I start to take away the horrendous costs of accounts payable and receivables?
Now if I can do that, can I get insight into the supply chain? Can I add bridge loans? Tradelines? Can I offer different sets of banking services rather than just a payment service? And I think that’s really the exciting thing that’s coming along. It’s going back to basics, in many ways. I’m a bank, I offer banking services. But for a long time, I’ve made money out of payments. Now we’ll be making money because of payments from the banking side, but only if it’s digital in nature. That’s what we really focused our time and energy on.
In terms of integrating into blockchain technologies, I expect, yes, absolutely, that we’ll eventually integrate. In terms of replacing the core processing microservices with the blockchain? No, I don’t think that will happen. I think that there are too many things that need to go on the blockchain that it doesn’t add enough value in that processing. It does around it. But you know, it’s a transaction processing engine at the heart of it.