What banks vs fintech debate is getting wrong
The boom in real-time payments is reverberating around the world, and by 2026 they will account for 25% of all electronic payments. Market forces and the global pandemic accelerated adoption to new levels, giving consumers and businesses cheaper, faster and more efficient ways to pay – and there’s no looking back.
And as more and more countries launch schemes often mandated by authorities and regulators, transactions will increase further. But the success of real-time rails ultimately depends on the overlay services that these countries and their stakeholders develop.
While instant payments are increasingly embedded in non-financial digital apps and services to provide a more hyper-connected experience, modernizing these payment processes depends on the decisions of individual financial institutions. To win in this expanding competitive landscape, many operating systems are reinventing themselves for a new real-time, cloud-first and data-centric business environment.
The fintech effect
As open banking matures and related innovations allow direct links to the payment rails, countries that allow and operate an open banking system and take advantage of new market services come out on top in terms of real-time transaction volumes.
The 2022 report from ACI Worldwide and Cebr, which looks at the growth and impact of real-time payments (RTP), reveals that they can generate a tangible economic multiplier effect. The world’s top five RTP markets – India, China, Thailand, Brazil and South Korea – executed 92.9 billion real-time payments in 2021, helping facilitate USD 54.6 billion in additional economic output; a figure that is projected to rise to $131.1 billion by 2026.
Asia continues to be the region of innovation for instant payments, as fintechs simultaneously gain market share in real-time. India’s highly successful Unified Payments Interface (UPI) service processes more than 7.5 billion transactions per month. This is now being extended to cardless cash withdrawals and support for the country’s digital currency, e-RUP. Singapore also has two well-developed real-time payment systems, FAST and PayNow, while Thailand’s PromptPay service enables residents to easily receive and transfer money using their ID or mobile number.
Brazil is another RTP success story. The payment transfer system PIX had over 100 million users by July 2021 and processed 1 billion transactions per month by October of that year. Incoming new features such as PIX Withdrawal and Change, which enables customers to withdraw cash at any participating merchant, and Request to Pay, using QR codes, will further accelerate growth and increase average transaction value.
A combined solution
The rise of real-time payments to meet evolving consumer and business needs has put increasing pressure on financial institutions to look for digitally focused solutions. This need has led to the emergence of a whole new ecosystem, one that is more diverse and where fintechs and smaller banks take an increasing share of the real-time market.
By turning traditional infrastructure procurement on its head and standardizing related operational and security functions, the cloud is inevitably reshaping the payments market. To cut through, financial institutions should partner with fintechs to deploy cloud-ready infrastructure to provide administrator insight or automation around inventory and inventory, sales performance, reconciliations and reporting.
A modernized system will also, as we have seen, provide an improved experience for customers looking for a hyper-connected, frictionless experience. Utilization of RTP networks has further enabled banks to launch new services such as real-time alerts on app spending to customers, making it easier to manage personal finances. Banks can also use this data to upsell products to existing customers, for example giving those with a good credit score an extended overdraft or credit card.
Other benefits include expanded in-store and online payment options and peer-to-peer lending, as well as monitoring and tracking potentially fraudulent account activity via AI software (rather than taking a reactive approach). All this can only contribute to the banks building better trust and increasing trust in their customers.
Existing infrastructure does not need to be automatically replaced, but it must be kept relevant and combined with hosted solutions and managed services. The result will be a hybrid architecture of best-in-class services and infrastructures that will enable financial institutions to design a real-time payment strategy around outcomes and experiences.
