Are non-bank specialists challengers or partners to banks?

Pockets of innovation are appearing in the global transaction services (GTS) landscape, with non-bank challengers exploiting inefficiencies and perfecting their niche. Rather than being seen as a threat to the GTS operations of the large banks, however, the challengers are opting to partner with the banks rather than compete with them. 

The trend is in line with the banks focusing on services – rather than products – and building solutions that may need the expertise of a non-bank specialist.

The pace of innovation in GTS is typically slower than in the consumer market. Large corporations are slower to introduce changes because of their organisational complexity and the large sums at stake. The technology must be tried and trusted; an iPhone app, for example, is more feasible for a consumer paying for a coffee rather than a corporate treasurer transferring millions of dollars. 

But that does not mean that world of transaction banking and corporate payments is not innovative. “There is a quiet revolution of things going on,” says John Chaplin, president of payment services company Ixaris. 

Success stories

Much attention has been paid to the success story of PayPal, and the explosive growth of the mobile money scheme M-Pesa in the individual consumer space in Kenya, and similar innovations are creeping up the chain to the corporate level. PayPal’s success is tied to the growth of eBay and e-commerce, which allows individuals to become businesses and accept payments from overseas over the internet. The industry is watching closely to see whether PayPal’s evolution will move from individuals to small businesses, and eventually to payment services for large corporations. 

In the physical world, individuals are now beginning to accept card payments, which is opening up the same kind of potential that PayPal did in the virtual world. For example, Square enables one-man businesses to accept card payments with a device that attaches to a smartphone. “This is happening under the radar of banks,” says Paul Rasori, senior vice-president of marketing at VeriFone. 

Mr Rasori makes the point that the solution is innovative as it is going after a different segment of the market, one that has been ignored by banks and allows small vendors, such as street artists or plumbers, to accept card payments. For now, the banks are not threatened by Square because their merchant services divisions have only offered services to larger retailers and merchants, and this model is not taking away any business from them. 

Relationship focus

While much of the discussion around innovation has been focused on how individuals interact with each other, in the GTS space attention is being paid to how businesses – and large organisations – interact with individual consumers. 

Mike Walters, head of UK corporate payments at Barclays, points out that a large volume of corporate transactions originate in collections from and settlements to the consumer base, with large volumes of payments being made to utility companies and insurance companies, for example. While innovations such as PayPal allow individuals to settle payments between each other, in the business and corporate world, cheques are still used to pay bills or to receive payments from large organisations.

The impact of the use of the smartphone – with examples such as Square – will not necessarily mean that non-bank providers will be taking business away from banks. “From a corporate perspective, we as an organisation have to understand the implication of the underlying change in their activity. It is not that these payments are disappearing out of the bank system; they are changing their profile,” says Mr Walters. 

With examples such as M-Pesa, users are able to bypass the banking system altogether and transfer money by their phone. In a sense this has not threatened the core business of banks in the market as these are customers who were not served by the banks anyway. The banks, however, have missed out on an opportunity to serve this market and exploit the use of mobile technology. But when they do introduce mobile into their offering, they do it with the advantage of being able to offer it in combination with other banking services aside from mobile money transfer. 

Threat to banks?

In the retail banking space, when it comes to mobile solutions, banks are typically concerned with who – the bank or the mobile operator – owns the individual customer relationship. With GTS, this is not the case, as the focus is serving the client and bringing together the solutions they need. Since the bank is not tied to developing its own solution, it could be argued that this gives GTS executives the freedom to be more innovative.

An example of a mobile GTS solution would be for a large company that employs hundreds of workers in rural areas in Kenya. Paying the workers with cheques is not feasible since many of the workers do not have bank accounts. Instead of providing a cash-based solution, the company’s bank could provide a mobile payment service for its clients by entering into a partnership with a mobile operator.

Such an example shows how a large corporation can use the services of a non-bank provider – through their bank – in order to make small payments. And such innovation is not limited to the consumer or retail banking space. 

“People often assume that low-value payments are consumer payments,” says Mr Chaplin at Ixaris, a non-bank payments specialist that has found a gap in the corporate payments market. By bridging the payment systems – such as Swift, automated clearing houses, or Visa and MasterCard – Ixaris uses a combination of payment methods to provide a seamless service to the client. For example, a large corporation may need to make low-value payments to overseas contractors. If a market researcher has done a morning’s work from another country, the fees on a bank transfer soon wipe out the earnings.

Mr Chaplin explains that a company with agents in 100 countries can pay them by sending an e-mail and notifying them that their account has been credited with the funds, which could come in the form of a virtual Visa payment card. This prepaid voucher, which does away with the need for the physical plastic card, is a card number and authorisation code with funds that are already loaded on it, and can be spent online in the same way as a regular payment card. 

Such innovations of non-bank specialists are made more possible in the EU because of the Payment Services Directive (PSD), which was created with the intention of boosting competition in the payments industry. Under the PSD, a company can become a payment institution, which allows it to be a direct member of the payment schemes without needing to be regulated as a bank. 

Working together

Another such non-bank provider that focuses on lower value payments is Earthport, which offers an alternative to the inefficiencies of the correspondent banking system. If money is being wired internationally, rather than moving the money along international payment rails, Earthport uses cloud computing to treat the payment as two separate domestic credit transfers. It has segregated accounts around the globe. When a transfer is made domestically into one of these accounts, Earthport is able to send a payment instruction to the recipient country’s equivalent account to say that the funds are there, and from that segregated account a domestic transfer is made to the beneficiary.

“What we are doing is leveraging the investment that has already been made in the domestic payments schemes,” says Neil Burton, director of product service strategy at Earthport. 

He explains that this is suitable for low-value transactions, and in sums of up to £10,000 ($16,300) the company offers a strong competitive advantage to transaction banks. Because it is low value does not mean it is limited to individuals, as large corporations still need to make many of these payments, as part of their expense management systems, for example. The opportunities are not in competing with the banks, however, but in partnering with them and offering white-labelling services. 

Enrico Camerinelli, senior analyst at Aite Group, points out that another area where non-banks are successfully helping corporations is in the attainment and improvement of liquidity. Initiatives such as The Receivables Exchange, an eBay-style auction marketplace for receivables where buyers and sellers rate each other, is one such example where banks are potentially being disintermediated. 

Another example of a non-bank provider in the GTS space is Bolero, which provides an internet technology platform for banks and corporations to arrange trade finance in an automated way. Arthur Vonchek, the company’s CEO, explains that five or six years ago corporates had to deal with each of the banks separately, all of which had their own systems in place. Now Bolero provides a multi-bank platform whereby a corporate is no longer forced to deal only with one bank for its trade finance. 

Picking up the pace 

The pace at which decisions are made is being sped up by such innovation by non-bank specialists. With Taulia, which offers dynamic discounting, the circulation of money is being pushed through the system quicker. “It does not make sense that payments are the same as they were 30 years ago,” says Bertram Meyer, CEO of Taulia.

Large corporations typically do not have to pay the invoices of their suppliers for 30, 60 or even 90 days. And small businesses, whose access to credit is more expensive than corporations, are being forced to shoulder the burden of the delay in the payment cycle, says Mr Meyer. Through dynamic discounting, the suppliers give a discount on the invoice if the large company pays early. The solution saves money for the corporate, and enables the funds to reach the small business quicker, making them less reliant on more expensive forms of credit. This kind of solution has exploited an inefficiency in the GTS market and has allowed a non-bank provider to focus on a niche.

The partnership model is a common theme, with the emphasis on working with the banks rather than competing with them. Mr Meyer says: “For us, banks are a partner." 

Many GTS executives take a similar view, arguing that they embrace these non-bank players rather than competing with them. They do not necessarily take a defensive line when it comes to the possibility of whether these specialists could go it alone and compete independently from banks, and are open-minded about the form that future innovation will take.

Challenges remain

Mr Walters at Barclays says “never say never” when talking about the challengers in the GTS space. He points to the examples of PayPal and M-Pesa, whose growth in recent years has been greater than many could have anticipated. But he does add that even though there is innovation out there, it does not necessarily mean that corporate clients want to be a part of it. They expect their bank to observe the trends and innovations and carefully select which ones are worth using, rather than jumping on the bandwagon of every new idea that comes along.

Mr Walters says: “Does a corporate want to manage large numbers of settlement partners? They are more interested in a bank that identifies how to work with those parties." With a brand that is often hundreds of years old, a bank has to be careful about tying up with a company that has only been in the business for a couple of years. It is unlikely that corporates are going to start selecting all these new non-bank partners themselves.

This echoes the view of Karen Fawcett, group head of transaction banking at Standard Chartered, who points out that, unlike retail banking, clients are much less likely to disaggregate with GTS. At the consumer level, for example, an individual can go to one provider for a mortgage, and another for a credit card. With GTS, however, the need is for the clients to have a whole package of solutions.

“Corporates want a bundle and a linked-in proposition,” says Ms Fawcett, and that is where the strengths of a bank in the GTS space lie. This, of course, does not mean that banks offering the full-service offering can rest on their laurels, and Ms Fawcett argues that the non-bank challengers will keep banks on their toes and keep the market competitive.