Tuesday , November 28, 2023

COMMENTARY: Banks Must Embrace Fintechs If They Want to Reshape the Future of Global Payments

The world of global payments is undergoing major changes as new technologies and players enter the payment space. While banks and financial institutions have historically dominated international payments, we are seeing new innovations and non-traditional competitors redefine how money moves across the globe.

In recent years, the entire payments chain has seen modernization, driven by innovations like smart phones and digital wallets. As a result, we now have faster, more open and standardized payments and additional value-added services. With improved data collection, banks can help boost credit provision to customers who previously didn’t have access to credit.

Driven by the adoption of the ISO20022 regulation, much of this change has established a global standard for financial data used in transactions. By unifying the way organizations share and store data, financial institutions gain richer insights. And when coupled with analytics and artificial intelligence, organizations can expect greater efficiency in services like receivables, reconciliation, financial-crime monitoring, and risk management. As the industry evolves, success will depend on making good use of these value-add services.

Bhatnagar: “Banks that fail to take advantage of … innovations risk falling behind competitors that embrace change.” 

In addition to the move toward enhanced data collection, several new payment networks aim to create a more open and inclusive ecosystem by reducing friction for cross-border transactions.

For instance, India has linked its Unified Payments Interface (UPI) with Singapore’s fast-payment system, enabling consumers in both countries to pay using their domestic platforms. While UPI is often compared to real-time gross settlement (RTGS), they serve different purposes and operate in unique contexts. In another example, RippleNet utilizes blockchain and digital assets like XRP for real-time settlement and liquidity management across borders. Since launching in 2012, RippleNet has processed $30 billion in up to 20 million transactions globally.

Fintechs are also simplifying consumer remittances. Companies like Bolt, AeroPay, and Stripe are enabling retailers with more payment options, driving new competition with traditional banks.

As the payments ecosystem undergoes these shifts, banks face relentless pressure to keep up with more agile competitors while modernizing legacy systems. And, as this trend unfolds—and is coupled with rising consumer expectations for fast, transparent, low-cost, and low-friction transactions—competition for customers is heating up.

Yet banks should see new entrants as partners, not rivals. Many central banks have collaborated with tech firms on digital currencies, with tech firms benefiting from direct access to the central bank’s resources in an arrangement that results in faster transactions. At the same time, by tapping external tech expertise, banks can better position themselves to stay ahead of new competition rather than play catch-up.

Lastly, banks should also focus on making payments invisible, similar to how companies like Uber and Amazon make payments so embedded that completing a transaction is seamless. Supporting businesses and retailers with application programming interfaces enables frictionless customer journeys, removing payments from the foreground.

As the payments market continues to evolve, it is critical that banks position themselves to capitalize on the benefits of this transformation. By partnering with technology providers and fintechs, banks can provide superior, frictionless customer experiences, help businesses reduce costs and purchase goods faster, and use AI to ensure regulatory compliance worldwide while combating illegal payments. Banks that fail to take advantage of these innovations risk falling behind competitors that embrace change.

—Ashish Bhatnagar is head of cards & payments at Cognizant.

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