Fintech and the Financial Ecosystem – Part Two

Over the past few years, there have been many examples of traditional lenders and fintechs working together to develop new technologies to better serve the end customer. Open banking, artificial intelligence and blockchain technology are just some of the most exciting recent developments. Since Clear Junction specialises in payments, let’s look more in depth about how payments have developed their place in the financial ecosystem.

The crux of any business is simple – money is exchanged for goods and services. A long time ago, I would have popped to the local tavern, physically handed over my silver pennies for a tankard of mead, then waited for the bartender to pour it. Now, I use my smartphone to scan a QR code at my local Wetherspoons, look at the menu and order an IPA brewed somewhere in the world. I still have to wait patiently for the bartender of course.

One of the biggest developments in payments in recent times has been real-time transaction processing. Depending on who you ask, my ordering a pint in real time might not be seen as important as a multi-million-pound transaction between two global businesses being processed in real time – but it really depends on how good that IPA is. Nevertheless, the ability to process instantaneous transactions has been a game changer for businesses both large and small.

CASHLESS TRANSACTIONS ARE BIG BUSINESS

Making transactions cashless and faster has been a lucrative source of revenue for fintech – look at PayPal and Revolut for prime examples. To give you an idea of just how big this area of fintech is, consider that the payment processing solutions market’s worth is on track to reach nearly £130 billion by 2030. With a market that size, there are lots of hungry players out there, all vying for a slice.

If any given company has funds ready and available they have a significant competitive advantage over those with a less agile cash flow. Real time payments also give a company the benefit of being able to see where their money is at a particular time, thereby reducing the reliance on predicting and forecasting when planning budgets.

Cashless transactions can be particularly important for cross-border trades. Remittance is crucial for millions of families around the world, but historically, there have been challenges in ensuring the money gets to where it needs to be at the right time. According to research from the Bank of International Settlements, barriers to faster international payments can often reside on the recipient’s end, where local monetary controls can slow down processing.

Connecting international banks and challenger banks to regulated clearing networks like SEPA enables quicker payments processing, demonstrating how fintech and incumbent banks can work together to fulfil customer demands. Connecting to a regulated clearing network provides international banks with a safe, fast and predictable method of transferring funds. Not only does this allow them to pass these benefits on to their customers, it enables them to compete with other banks already on the network. For the fintech, they now have access to the bank’s user base, as well as the revenue generated from the business deal.

THE FUTURE OF THE FINANCIAL ECOSYSTEM

As technology and digital transformation changes and grows, it presents an incentive to develop financial ecosystems of integrated products and services, ones that create the possibility of bringing together a set of providers through partnerships in the hope of achieving a desired outcome. Partnerships can prove to be a useful method to stay ahead in a saturated market, as joining forces with fintechs that have the capabilities to produce innovative solutions with fast in-house development can offer other financial institutions opportunities for development and possible access to new customers.

Another important factor to note is customer satisfaction, because being able to deliver and please the end user is ultimately what stands you out from the competition. In today’s landscape speed and efficiency is highly regarded by users. Financial institutions are becoming privy to the idea of not having to do everything by themselves as they can keep up with innovation and digitalisation by sourcing digital partners that can help them navigate through a multitude of challenges, such as compliance, digital offerings and expansion into new markets.

The future of fintech will be full of partnerships as a means to keep up with demand in innovation and speed, as well as growing technology. Ultimately, to survive the changing landscape and the need for a swift delivery, the route forward is through partnerships with fintech and digital providers.

FINAL THOUGHTS

In this two-part series of articles, we have covered an explanation of the UK’s financial ecosystem and what makes it so successful. The depth and breadth of that ecosystem makes it impossible to explain every facet, so it made sense to focus on fintech. Again, exploring every facet of fintech and its relationship within that ecosystem would require months of writing, so we took a closer look at payments processing, including how that has evolved and why.

Technological evolution, changing consumer demands, a loss of trust in the traditional banking system, and a massive injection of venture capitalist funding has created the perfect conditions for fintech to thrive in the financial ecosystem. While a disruptive and innovative fintech is still yet to wrestle a huge slice of market share from an incumbent bank – I think we’re not too far off it. The ecosystem is evolving rapidly and the pace of technological evolution is only getting faster. With the support of financial regulators in the UK, the availability of talent, and the density and dynamism of the ecosystem, the outlook for the UK’s financial sector is looking very bright.

Ross Bowes is a guest contributor from Champion Communications