Why Partnerships Between Fintech & Traditional Banks Are a Winning Proposition for Cross-Border Paymentsby Sheshagiri (Sukesh) Malliah, Regional Director – APAC, TerraPay November 7, 2022
As our society becomes more globalized, there will soon be no borders for capital. Globally, the amount of money being sent as allowance has seen significant growth as a direct result of increased migration as well as expanded business activity on a worldwide scale.
Many developing nations acquire a considerable economic boost from remittances sent home by their citizens. A year-long standard study indicated that these payments are equivalent to more than 10% of the GDP of emerging nations. These payments are of utmost significance, not only for the expansion of national economies but also for the global economy.
Considering these developments, banks’ decision-makers should be aware of the changing needs of account holders, whether they are individuals or small/medium businesses. Nowadays, consumers and companies have heightened expectations and want to match payments with their hectic, 24-hour-a-day environment.
Overall, the expansion of digital ecosystems, adjustments in regulatory policies, and an increase in client uptake are some of the factors driving the evolution of collaboration between banks and Fintech companies. Moving forward, banks should consider cooperating with Fintech to implement quicker, less expensive techniques for processing cross-border payments.
Background of Traditional Bank Procedures
Historically, banks have relied on conventional payment systems, which entail a network correspondent bank providing settlement and pay-out services. Nevertheless, these traditional procedures are costly and time-consuming. Many times, they have obscure fees, including Foreign Exchange costs.
As traditional cross-border transactions are routed via a network of correspondent banks, each of these stops must be paid, resulting in additional expenses. No doubt, the digital experience lacking rapid payment is often subpar, falls short of consumer expectations, and puts merchants at a disadvantage.
Given the present paradigm for the movement of capital from other nations via traditional banks, this partnership between banks and Fintech companies has been more robust. Moreover, there might be complexity and a lack of charge and timeline clarity regarding payments. Due to the potential use of several intermediaries and standard services, there is a risk of unknown taxes until the money reaches its destination.
Currently, Fintech enterprises are posing a threat to banks by adopting more efficient techniques to execute cross-border transactions. Customers, individuals and businesses alike are drawn to low-cost and quick payment/remittance options.
Exploring the Emergence of Fintech
The Fintech sector is not only expanding, it is increasingly focused on payments as part of broader responsibilities in financial services, or as part of a digital “platform” strategy that merges several services into a single-digital offering.
Furthermore, there are no indications that the fast convergence of the financial and technology industries will slow down. According to CB Insights, there were 2,745 large-scale Fintech businesses around the globe in 2020, an increase of more than two-thirds over the preceding five years.
Uncovering the Benefits of Partnerships between Banks and Fintech
By forming partnerships between innovative Fintech enterprises and traditional banks, we can significantly reduce the time required to bring a new product to the market and realize cost savings across the value chain. To date, the alignment of these two domains was prompted by the need for an agile and secure service for transferring funds by individuals based overseas, whose families rely on this transfer, which they would ordinarily consider part of their income.
Therefore, traditional banks should explore the possibility of forming agreements with Fintech entities that currently have an extensive network of payment channels and nations. Finalizing a single integration makes it possible to access hundreds of different marketplaces and channels. In this way, the requirements to handle several settlements and complicated reconciliations will be eliminated, and clients will be able to take advantage of inexpensive and speedy international payment services
Fintech provides a viable option for remittance enterprises and clients to select how to receive payments from overseas. Besides, banks will have a more transparent picture of the money’s path, with no hidden fees or expenses. Another breakthrough development is that the technology businesses may give account validation to ensure the recipient will receive the funds. Additionally, the financial flow can be accelerated so recipients receive the funds when they need them the most.
For banks seeking a cross-border partner in the Fintech industry, here are some crucial characteristics to consider:
- Global Reach: How many nations, currencies, and payment alternatives will be made available to your consumers, and how quickly will they get their money? Traditional bank accounts apart, are mobile wallets also able to receive money deposits? Are rare currencies easily accessible for purchase?
- Payment Gateway Application Programming Interface: How do you plan to connect with the partner? Can the service be provided under your brand and, if so, who is in charge of the price for the end-user? Are there settings at your disposal that enable you to take command of the user experience?
- Capabilities for Compliance: Does the partner adhere to the same stringent procedures as your financial institution? How does the partner collaborate with regulatory bodies located all over the globe to guarantee that its financial network is compliant with international standards?
- Stability of the Partner: How long has the partner been in the business of cross-border payments? What is their operational cash flow? Can they manage the amount your institution is expected to send via its rails?
Fostering partnerships between Fintech and remittance companies can speed up this process while also providing far more attractive rates and, most importantly, improved customer service.
Ultimately, banks have two primary reasons to work with Fintech startups. Customers have become accustomed to a smooth digital experience and want the same from their bank, a service only a few institutions can offer. Moreover, as a result of the advent of these one-stop points, Fintech businesses have shifted from offering a single service to providing a suite of services.
Developments in Fintech, partnerships with traditional banks and further digitalisation within the remittance industry will lead to an expansion of this source of revenue for migrant families. In turn, this will contribute to the reduction of poverty and inequality as well as an increase in their access to financial services. Women who are young and educated, live in vulnerable homes, and in rural regions stand to benefit the most.