Redefining the future of finance – embracing convergence and innovation in payments

By Tim Moncrieff, Global Head of Strategic Growth Initiatives, Visa Cross-Border Solutions

The banking industry is undergoing a fundamental shift that goes beyond the ‘traditional’ banks vs. challenger/neobanks dichotomy. While consumers have long enjoyed technological innovation in their interactions with the banking system, that is feeding through into the B2B market with some businesses seeking a more integrated banking experience with increased speed, security, flexibility, and functionality.

Indeed, the Bank of International Settlements’ Committee on Payments and Market Infrastructure has, at the request of the G20 group of nations, set out a framework for reducing the cost of international payments, whilst increasing speed, ease of access and transparency.

Many customers, both individual and corporate, are looking for banking services that are as intuitive as their other digital experiences. Many want to be able to manage their finances, make payments, and access banking services through a single, user-friendly interface, regardless of whether they are dealing with retail or wholesale banking. This shift requires more seamless processes across retail and wholesale payments– something that will alter the status quo for traditional siloed banking infrastructure.

Competition as a catalyst

Currently, isolated and siloed systems in some banks can result in the effective separation of retail, commercial, and institutional banking. For example, domestic peer-to-peer payments use a completely different technology stack compared with settling a stock transaction.

It doesn’t have to be this way. The Bank of International Settlements’ Committee on Payments and Market Infrastructures in its report for the G20 ‘Enhancing cross-border payments: building blocks of a global roadmap’ was largely agnostic on prescribing different technologies for different payments as part of its roadmap for more speed and transparency in international payments.

Historically, real-time-payments (RTP) systems – which facilitate instant transfers between financial institutions – limited the amount of money that could be transferred in a single transaction, primarily to manage risk. Domestic RTP systems are now increasing their value limits, which may make them more attractive than slower automated clearing house (ACH) and real-time gross settlement (RTGS) systems for both retail and larger-scale institutional or wholesale payments.

Until recently, these networks have typically been limited to banks. Now, in many jurisdictions they’ve been expanded to include a wider range of participants, particularly from non-bank financial institutions such as payment service providers and e-money issuers, who are taking to these networks to offer faster services. Some challengers and neobanks have introduced innovative cross-border payment solutions, offering features such as transparent pricing, low fees, and seamless integration with other financial services.

Complexity in the value chain

Simplifying the complexity of the payment value chain requires looking beyond just payment processing. While innovations in payment systems can improve the speed and efficiency of transactions, upstream processes such as reconciliation and legal arrangements may remain opaque and pose significant challenges.

For example, for buying houses in the UK today, convoluted payment processes are required to pre-position funds and build certainty at the point of exchange or completion. In many cases, these upstream processes are more of a bottleneck than the actual payment systems, highlighting the need for improvements in areas beyond just the payment itself.

An increased focus on netting mechanisms – where multiple payments going in opposite directions are combined and only the net difference is transferred – can, particularly in cross-border, significantly reduce the actual movement of funds and increase efficiency. By combining and offsetting payments wherever possible, financial institutions may be able to reduce the value of settlement ultimately required, thus lowering costs, and streamlining processes. Implementing such solutions would require collaboration between businesses, financial institutions, and regulators to ensure the necessary regulatory infrastructure, standards, and legal frameworks are in place to ensure an improved payment experience for businesses of all stripes.

New opportunities

Built on microsystems architectures, Payments as a Service (PaaS) and embedded service providers have a unique opportunity to become ‘one-stop-shops’ for their clients. Their APIs can form the foundation of flexible and adaptable solutions that integrate with actually existing corporate infrastructure, such as enterprise resource planning (ERP) and customer relationship management (CRM) systems, embedding quick and easy payment functionalities.

The path to success in the institutional domains of payments is not without challenges. Innovative solutions entering the back-office area may struggle with adoption unless they enable “skin in the game” participation from their financial institution users. These institutions typically must also balance control and collaboration strategically, maintaining control over their core competencies and customer relationships while being open to partnerships that can expand their capabilities and reach.

As competition catalyses the evolution of banking and payments at speed, financial institutions should think beyond transactions. The shift towards more integrated, user-friendly experiences for both consumers and businesses is more than a trend – it’s a strategic opportunity. Ultimately, the winners in this space will likely be those who can offer the most flexible and adaptable solutions, seamlessly integrating with their clients’ systems and processes.

Industry collaboration and enabling regulation will likely be key to further innovation and simplification of complex payments, unlocking new avenues for business growth. By proactively seeking out partnerships and embedding their services within existing infrastructures, service providers can position themselves for success in the new era of banking.