For the past decade or two, transaction banks competed for large corporate businesses through cost-competitive plain vanilla services to clients. The model worked brilliantly for banks as it beefed up and drove revenues from fee-based activities. The fallout of the financial crisis saw regulators re-writing rules for managing liquidity risks more prudently, driving corporates to become more aware of counterparty risks linked to banks. Since then, transaction banking has been reshaped by powerful forces of dramatic disruption- one driven by a more selective and relationship-centric approach, increased regulatory scrutiny and above all the emergence of non-bank service providers into traditional business lines of cash management, payments and trade capital related services.
In between the changing picture, the regulation that has the potential to forever alter the DNA between bank-client relationships is the revised Payment Services Directive or PSD2. PSD2 mandates banks to grant access of their customer data to third parties/payment service providers (PSPs) across sectors in making payments and undertaking account aggregation services. While fostering innovation, choice, reduced costs and security for consumers, PSD2 breaks down banks monopoly on their user’s data. Clearly a harbinger of profound change, the implementation of PSD2 through adoption of external application programming interface (API’s) heralds a new era in banking the corporates.
This year at the Asian Banker’s Future of Finance Summit opening keynote session, Tim Berners- Lee, inventor of the World Wide Web, highlighted that new financial services regulations such as PSD2 and Open Banking endorse open APIs as a part of open data. “Data by itself isn’t very powerful. Data joined to other things is when you get insight, of course”.
David Chance, Senior Executive, Payments Strategy, Fiserv stated- “Open banking is changing the dynamics of the payment space and API is the real big fundamental change , not only in terms of technology approach but in terms of mindset that is encouraging institutions to form new ecosystems together”.
Catering to specific customer pain points- A mutual bank and fintech objective
Panellists representing both banks and fintechs identified huge opportunities with the implementation of external APIs. Improvements in settlement and clearing infrastructures, delivering faster/real-time, cheaper, and safer payments emerged key common objectives that banks and fintechs were either competing or collaborating for. Interestingly, many banks and fintechs are now seeing increased value in co-creating bespoke solutions for their customers, allowing both to step up their transactional capabilities. Coming from a European domiciled bank, Jan Luebke, Head of Market Management, APAC at Deutsche Bank spoke about PSD2’s demand for usage of APIs and subsequent innovation from opening up to third party providers. “API themselves will open up the value chain for banks exposing them to both greater competition and collaboration to drive innovation”. He cited SWIFT global payments initiative (gpi) to be an innovative result of API. “gpi is an innovative result of API, although gpi was 10 years older, it is through the role of technology, or because of the pressure of the fintech’s, we are able to form a community of banks and go for such an idea”, mentioning how developments on API were at the forefront of driving innovations in gpi.
Kiran Bajaj, Senior President, Business and Digital Technology Solutions Group at YES Bank Ltd was quick to identify how banks were in the middle of transforming themselves into technology companies. “From day one we are supporting the fintech ecosystem coming from a mutual learning experience perspective and story between banks and fintechs is a clear story of collaboration”. Shekhar Bhandari, Business Head for Global Transaction Services at Kotak Mahindra Bank threw light upon increasing trend in intra-industry collaboration between top banks in forming consortiums. “Top 7-8 banks coming together on a single platform, is generally the base of any technology implementation.”
To sum the above, identification of potential technology partners and leveraging the strength of fintech innovators, digital service providers and even banks, emerged as strong practices to address specific customer pain points.
Tradition is still overriding technology in cross-border supply chain finance
Issues over digitising cross-border supply chain finance were discussed extensively during the Summit. The issue harked back to the complexity and scale of existing supply chain finance solution around blockchain technology. While panellists viewed application of blockchain technology a source of greater coordination with the potential to offer hosts of benefits from cost and efficiency perspectives, they also drilled down to discuss challenges that made tradition more superior to technology.
Adinata Widia, SVP for Transaction Banking Wholesale Product Group at Bank Mandiri raised concerns on what really makes an investment in blockchain technology click. “Big question around blockchain right now is how to put real money inside blockchain”. He also highlighted the banks were still widely practicing traditional methods like L/C and open account to conduct cross-border supply chain financing.
“In Indonesia, while the regulators are supporting initiatives, it really depends upon what are the products in question. You cannot excel in every industry owing to differences in supply chains and banks cannot be greedy, they have to choose which kind of supply chain finance they want to invest into”.
From a multilateral institution’s angle, Jovilyn Cotio, a Supply Chain Finance Consultant at the Asian Development Bank (ADB), commented about the gap that existed between fintechs and banks and why transactions at banks were still paper-based. “The gap in digitising cross-border supply chain finance is large as banks are probably the most regulated institutions. In being so they play a systemic role where people are affected, whereas in a company or finetch, it’s just owners who are effected”.