A quiet revolution is taking place and it’s radically changing the banking landscape.
The payment industry has undergone a historic shift across Europe. While handling payments has long been associated with the banking profession, today it is rapidly becoming a specialised expertise. And the market is huge. According to a McKinsey survey, the global revenue of cross-border payments represents a potential of USD 40 billion in the EMEA region. SME payments represent a space of particular opportunity.
For a long time, bankers claimed they were the only ones with the expertise in the international payments market. The common thread between their historical role of collecting savings, granting loans and processing payments is money.
However, while the payment industry gets its value from protecting customer funds and ensuring the quality of execution, savings and loans require the acceptance of risk.
These two opposing visions are too contradictory to coexist under the same roof.
As a result, new actors are storming the market. There is a general consensus that, over time, specialisation will become the norm in international payments.
There are many reasons for this European shift:
Specialisation in the international payments segment is primarily the result of two European directives: PSD1 and PSD2. Implemented in 2007, the aim of the first directive was to liberalise the market and ensure a better regulation of electronic payments within the European Union while PSD2, implemented in 2018, was intended to further strengthen the security of electronic payments and open the door to specialists. Opening the banking application programming interfaces (APIs) to third-party payment service providers brought in a breath of competition.
Pure players are benefiting of this opportunity. To their advantage, they do not depend on archaic and cumbersome IT infrastructures, nor do they have to bear the structural costs of large financial institutions. This means they can start from a blank page to invent the most powerful and intuitive technological interface possible.
In addition, they have an unmatched ability to invest heavily (up to 20% of its turnover in the case of iBanFirst), in research and development (R&D) which gives them an unparalleled strength to reinvent the experience of international payments and develop unique features.
Today, a new element is added to these two assets: trust. And this trust has shifted. In Europe, Payment Service Providers (PSPs) are subject to very strict legislation that give them a great, threefold advantage:
- First, there is the segregation of client funds. All payment institutions are required to segregate client funds, separating them from other funds belonging to the company, and ensuring that only clients can access their funds.
- Secondly, there is the safeguarding of client funds. Each PSP has to safeguard funds intended for the execution of payment transactions by depositing client funds in joint client accounts held at EEA credit institutions.
- Finally, as payment institutions (in contrast to a bank regulated as a credit institution), these companies are not allowed to carry out any banking services, such as credit granting services, deposits, wealth management or any service that may expose them to market risks. And in this period of uncertainty such a constraint becomes a huge competitive advantage in terms of safety.
The shift towards actors specialised in international payments is only part of the transition towards a new center of gravity in banking. This shift is challenging conventional thinking and is based on three new paradigms:
- Calling on specialists allows companies to take back control of their money and their payments and avoid systemic risks.
- The future will not oppose pure players and banking institutions, but rather ecosystems capable of associating the best partners.
- In this new world where the notion of time is abolished but where physical borders, procedures and uncertainties surrounding business are coming back, companies increasingly need agile partners to ensure their margin: both safety and profit.