The global banking industry is struggling to keep up with the unprecedented pace of digital transformation which has been supercharged during the covid-19 pandemic. Consumer behaviour is changing, and we are seeing tech giants, such as Google and Facebook, taking advantage of this new dawn by moving into the banking space.
Adrian Mountstephens is the Business Development Senior Manager, Payments and Banking at Equinix. Equinix, Inc. are an American multinational company headquartered in Redwood City, California, that specialises in internet connection and data centres. The company is a leader in global colocation data centre market share, with 210 data centres in 25 countries on five continents. With 10+ years of experience in the data centre industry, Mountstephens immerses himself in the Payment and Banking sector at Equinix, analysing how consumer behaviour, new technology, and regulation drive constant change. As a trusted advisor, he helps clients grow their business with Equinix, guiding them through every step of their digital journey.
Mountstephens argues that the only way for banks to be competitive in the future is for them to make their services instantly available via various channels – internet, mobile and telephone.
The traditional banking industry may soon become a product of a bygone age with physical bank branches closing as businesses and consumers move towards a digital society. As a result, financial institutions are under huge pressure to manage shifting customer expectations, changing regulations, and competition from digitally savvy disruptors.
To maintain a dominant presence, the banking industry must create new and innovative digital ecosystems to keep pace with customer and consumer behaviours. The legacy approach of doing everything yourself is too slow and too expensive, so banks are looking to optimise their services by adopting a multi-partner approach instead. The industry is now shifting its focus and investment towards digitalising financial processes and embracing the latest technologies, such as cloud connectivity, APIs and AI. Banking-as-a-Service (BaaS) has become the byword for banking where services are digital-ready, often powered by technology in the cloud-ready to deliver quick to market, real-time solutions.
Collaboration improves customer experience
Fintechs are playing a key role in the evolution of financial services, collaborating with banks to improve service offerings and customer experience. Fintechs already provide an impressive benchmark for banking of the future. Often born in the cloud, they have access to IT infrastructure that provides the agility to deliver digital banking and payment services quickly. Some also offer Banking-as-a-Service (BaaS) capabilities to brands that wish to integrate financial services into their customer journey. The end-to-end model allows any brand to connect with banking services directly via modern APIs so they can deliver innovative services within a regulated infrastructure.
However, fintechs often lack the resources and legal permissions to conduct financial transactions so a partnership with a traditional bank meets multiple needs. Banks are stringently regulated to ensure deposits and transfers are secure. Historically, they are viewed by consumers as safe and reliable, too big to fail. A collaboration between a fintech and a bank combines their individual strengths to better market BaaS services and enable the bank to develop and access new and innovative services. This arrangement sees both parties win, fintechs gain customers and market share, the banks add additional revenue streams via digital channels. A recent example is Chime, one of the fintechs currently leading the US challenger banking segment, which now uses banking services provided by The Bancorp Bank and Stride Bank, NA.
Fintechs find solutions to meet financial regulations
Other avenues are beginning to open as this space matures. Fintechs are now buying banks that already hold a licence to meet the obligatory financial regulations. US financial tech company, Jiko Group, Inc., acquired Mid Central National Bank to roll-out its public facing financial platform last year. And again, proving the formula, Berlin-based fintech, Raisin GmbH, completed a takeover of MHG-Bank AG as sole owner in 2019 which saw it become the first fintech in Germany to buy a bank. Acquisitions are a fast track method for obtaining a Banking License.
With the correct backing, some fintechs can apply and acquire their own licences, a process, however, that can take several years. London-based Railsbank, for instance, is now regulated to provide fintech companies with a range of wholesale banking services while Varo Money has become one of the largest neo-banks in the United States after applying for its own banking license in 2016.
These increasingly normalised solutions have the power to deliver a digital transformation where banks, working with the fintech innovators, can shorten development times for new products, increase the exchange of real-time information and enable scalable instant payments. Collaborations like these accelerate innovation and enable digital ecosystems to expand and appeal to new participants. However, delivering these innovative digital infrastructures and services requires a direct, secure and reliable exchange of data between partners.
Demand for interconnection accelerates
The move to digitalisation has seen the demand for interconnection – the private exchange of data between businesses, away from the public internet – skyrocket, bringing financial businesses and their customers closer together through digital ecosystems. Customers today are more inclined to use alternative payment methods, such as mobile wallets or peer to peer payment solutions, including Google Pay and PayPal. Companies and customers increasingly prefer real-time digital payments, as these transfers are initiated and settled immediately, facilitated by digital infrastructure that enable companies to improve efficiency, reduce costs and better manage their cash flow.
According to Global Tech Trends Survey, financial services came out as the most likely UK sector to benefit from Interconnection. Over the next five years, 48% of UK IT decision-makers confirmed that connecting to digital ecosystems will drive banking of the future while four out of five of those surveyed (79%) said that migrating services to the cloud is now a business priority.
The global health crisis and a fear of transmission has accelerated an existing trend towards the popularity of contactless transaction technologies. Many banks and customer-facing businesses now actively recommend that consumers use contactless payment technology in the form of cards or e-wallets to avoid contamination. Payment and commerce companies can facilitate these and other financial transfers at scale by interconnecting with secure commerce exchange points adjacent to the cloud and digital ecosystems to enable real-time payment collaboration.
As with all banking services, the future of payments is reliant on fast, secure data exchange within a rich ecosystem of retail, financial services and fintech partners. Traditional IT architectures based on centralised control are unable to cost-effectively scale to support newer digital financial payment platforms and solutions. They lack the ability to rapidly respond to new service requirements or comply with regional regulations.
The solution is for payment processors to utilise a distributed, edge-based architecture that delivers proximity to dispersed users, partners, systems, data and clouds around the world. When the pandemic eventually abates, experts believe that consumers will continue using their newfound contactless payment tools and we’ll see an even greater shift away from cash. This prediction means that the financial services industry will need to re-design and update its digital infrastructure.
Regulation is also shaping the partnership model. For example, Open Banking and PSD2 laws in the European Union and the United Kingdom require banks to open APIs to third-party developers, making it easier for fintechs to access banking information. This type of regulation reduces uncertainty for start-ups and accelerates innovation and increases competition in the European banking system.
Challenger banks such as Revolut in the UK have also benefited from special licenses that allow them to accept deposits, process payments or provide loans directly. In the US, the Durbin Amendment speeds up partnerships between small and medium-sized banks and fintechs, but it operates in a different way. The amendment, in effect from 2011, aimed to lower prices for consumers by lowering bank fees on debit card transactions. In reality, banks increased other customer fees to make up for the lost income. However, the Durbin Amendment exempts financial institutions with less than $10billion, making them ideal partners for fintechs.
Digital ecosystems unlock the competitive edge
Partnerships between different but complementary organisations are steadily growing into ecosystems where financial services are exchanged and parties connect, such as the cloud, networks, banks, fintechs, payment rails, fraud detection and other service providers. By placing their digital infrastructure close to these ecosystems and using an interconnection approach, both banks and fintechs can maximise their competitive advantage.
Interconnection provides a more scalable, reliable and secure way of moving data between members of the value chain than the public internet. With a robust and future-proofed interconnection strategy, banks and fintechs can deploy a digital core, extend across edge locations and expand their capabilities through digital exchanges. This means that the financial sector can provide the very services and experiences that customers need to shape the future growth of the digitally powered economy.
