Jul 21, 2021 | Risk Management

Financial Institutions and the Future of Banking

Business man wearing shades
What can Fintechs do to stand out?
The banking world is undergoing a revolution under the realm of Open Banking. Historically dominated by large banks, the financial landscape is unravelling with new opportunities for smaller Financial Institutions that are fast-moving and keen to compete in a globally connected market. In this new era for the financial world, new regulations, digitisation, and the real-time mobile demands of today’s consumer are redefining how financial institutions interact with each other to meet these needs.

Financial institutions and Fintechs have a great deal to offer each other. By partnering up with the right player, both parties can scale up their business to reach a larger customer base, bolster their competitive position and improve product efficiency. Where the larger, older party may offer an established customer base, a large infrastructure and experience, the newer, smaller institution could bring innovation, speed to market, technological expertise, and modern IT systems. It could be a marriage made in heaven. As with all marriages, the key lies in finding the right partner.
How can Fintechs find the right partner?

In the world of dating apps, we are used to swiping on many to find the right partner. Luckily, in the world of Fintechs, finding your soulmate is easier. With a plethora of options for partnering up, Fintechs can differentiate themselves by partnering with the right global payments player, rather than building the system from the ground-up. As the global volume of international payments explodes, the need to collaborate is instrumental to ensuring that smaller Fintechs thrive and provide consumers with more options and more choice.

How do you know if it’s the right match?

Fintechs and smaller financial institutions can gain peace of mind by working with a trusted partner who is committed to compliance and experienced in international payments across the globe; this is especially important in a post-pandemic world where uncertainty prevails.

The focus should be on finding a trusted payments player with the right in-house compliance measures, advisory role, industry experience, and global network. These partnerships would be primarily fuelled by technical integration. But equally important is the partners’ ability to complement each other as businesses, the global partner’s risk appetite and the ability to work jointly towards success.

Integration: Financial Institutions wishing to integrate with an existing vendor’s platform can consider two different models: White labelling or API integration.

White label: The term “white label” is used when a company provides a product or service that can be used by the purchaser under the latter’s own brand name. When a Financial Institution uses a white label solution, it is effectively utilising a ready-made application which is built to deliver a set of financial services. These would be pre-agreed and put in place with the vendor. It is a “bare” application where the Financial Institution can add visual features such as brand name, logo, brand colours, page design, and use their own domain name to help build a consistent experience for users, integrating it with their other portals and pages.

APIs: An API, or “Application Programming Interface,” is a computing interface that defines interactions between different software to make different calls or requests from each other, share data according to set criteria and extend functionalities between them. 

Financial Institutions, particularly Fintechs use APIs to connect their applications or platforms to many services, like lending products, cash management solutions and payments networks. This enables them to display billing details on a bank’s website, for example. By connecting Fintechs and other third parties to banking systems directly, they help them to layer their offering on top of a payment provider’s infrastructure. This technology is considered a key component of open banking.

Legislation a driving force for financial inclusion

A lot of this change is being driven by banking legislation. Open banking is one area where new rules are forcing banks to share data, enabling smaller players to muscle in on new customer groups. Another is the Revised Payment Services Directive (PDS2), which is designed to increase pan-European competition and participation in the payments industry. We believe that open banking is good news for consumers and businesses, as it creates greater competition, greater choice, and an expanded global marketplace.

PDS2 is governed by the European Commission to regulate payment services and promotes the participation in the payments industry of non-bank players. It enables third-party access to account information, and thereby opens the door for smaller players and newcomers in finance to enter the market and launch innovative services.

The environment created by the development of Open Banking and PSD2 enables small to medium businesses to partner with large, established payment networks, such as Western Union, for growth and global expansion. In the past, small or young companies have found it difficult to enter the global marketplace, so this is a significant step in creating a level playing field.

As such, the advent of open banking enables these small companies to partner with global payment providers and offer their innovative solutions globally. Finding the right partner for innovation and growth are key.

Innovation is also driven by the increasing prevalence of faster real-time payment networks. The pickup of instant payments, where consumers have come to expect real-time settlements is accelerating around the globe. It is pushed by initiatives such as the UK’s Faster Payments Service (FPS) or Clearing House Automated Payment System (CHAPS) and the Eurozone’s TIPS (TARGET Instant Payment Settlement.

A partnership based on trust

The world of international payments is growing exponentially as more digital citizens set up their own payment networks; new technologies and collaborations will enable players to keep pace with the changing demands of consumers. For new entrants into the payments world, the priority is to find a trusted payments partner with the right in-house compliance measures, advisory role, industry experience, and global network.

There has never been a better time to enter the financial services marketplace. Opportunities abound after the challenges of 2020, and the demand for innovative tech-based financial services are sure to continue. Legislation is actively encouraging competition, and helping to create new possibilities, meaning financial institutions of all sizes can take their business to the next level.

In international payments, we expect to see many new partnerships forged. By collaborating with a global provider, a Financial Institution has access to a cost-effective, fast and secure way for their customers to move money around the world, but they don’t need to invest time or money in building and maintaining a global payments network of their own. Harnessing a partner’s global reach and online solutions means the costs of establishing multiple currency accounts, the associated maintenance fees, and the operational burdens of transacting across the world, can be reduced significantly.

Through partnerships, Fintechs get to scale their technology and access capital to grow, while financial institutions gain assistance in their efforts to improve product offerings, increase efficiency, and lower costs.

Partnerships like this will deliver innovation in products, services and tools. For the market and the end user, this means better services, faster delivery and higher standards. The increased efficiency and lower costs are also good news for low-income customers, who need products that are convenient, inexpensive, and high quality. That makes Financial Institution-Fintech partnerships a crucial strategy for meeting the financial needs of the unbanked and underbanked around the world.

Western Union Business Solutions

At Western Union Business Solutions, we are trusted by more than 60,000 organisations to move money around the world. We have an extensive global network, spanning 200 territories and 130 currencies, and an in-depth knowledge of local markets and compliance.

If you are looking for world-class cross-border payments services, or counsel on Open Banking or PDS2 and what they could mean for you, please contact our partnerships team at xx or by completing xx. We’ll be more than happy to talk about how we can help you manage your international transactions.

If you are looking for world-class cross-border payments services, counsel on Open Banking or PDS2 and what they could mean for you, or just further information about how we could help Financial Institutions please contact us: uk-payments@westernunion.com.

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