PAYMENT SYSTEMS VS BANKS: COMPETITORS OR PARTNERS?

It is hard to overrate the impact of payment systems on the global financial system. What do they mean for banks – a clear competitive threat or opportunity to widen the scope?

In order to get an average view of trends in this direction, it’s enough to only arm with a couple of facts. The first one is that during the first half of 2018, global investment in Fintech amounted 57.9 billion US dollars, which indicates significant growth, since for the whole 2017, the same figures were only 38.1 billion. The second clear evidence of Fintech expansion was the recent launch of TIPS (TARGET Instant Payment Settlement) – an internal market infrastructure for pan-European instant payments. For calculations, it uses money from the central bank, and operations take up to 10 seconds on average, and are carried out with a fixed price of 0.20 eurocents. This laid the foundation for innovative retail payment solutions convenient for the customer.

Aspects of cooperation between banks and payment systems

By offering a single payment gateway in partnership with acquiring banks, payment systems create a significant base of benefits for both clients and the bank. The banks in this case receive a wide range of services in a single gateway, reducing costs that would be caused by the integration. The regional banks may significantly benefit from such cooperation. 

Considering that the market is still actively developing, regional players are not as competitive as their international partners. After all, all that they can offer is a simple connection between the bank and the seller. While international payment service providers have extensive experience and can offer a comprehensive package of services that would include a range of additional services and payment solutions adapted to the specific needs of customers.

Aspects of competition

The expansion of the global presence of payment systems has had a significant impact on the global payment system. In business and banking, it is payments that are most affected by competition from financial technologies, the use of which entails a reduction in income from commissions. In response, many banks were forced to adjust their strategies and invest more funds in the development and implementation of technologies, as well as in establishing partnerships with fintech-representatives of the market.

An important factor that positively distinguishes FINTECH is time: if registration of the payment system takes from six months – up to a year, then for banks this period is much longer – obtaining a license takes from 1 year to 3 years, besides, the duration of this period directly depends on a certain jurisdiction.

In case of payment service providers and acquiring banks fail to find the concepts of cooperation, this will create a real threat to the banks. After all, payment service providers can follow the path of development from a simplified gateway to a sophisticated from a technical point of view buyer much further, and proceed to obtaining a license of the issuer of electronic money or even a banking license. And this will expand the possibilities of fintech companies to direct competition with banks.

Fintech and crediting

Payment systems can bring diversity and healthy competition to the financial system by offering faster, more accurate and cheaper financial services. But beyond that, they can lead to new risks by overfeeding the market. A positive impact can also be made on crediting: if a large payment service provider can speed up the processing of applications, improve credit risk assessments and lower transaction costs, this can increase the competition in credit markets.

By increasing their market share, such companies can promote the diversification of sources of credit to the economy and significantly stimulate investment and growth. Of the minuses, it is worth noting that credit platforms are unable to transform liquidity and provide long-term loans for borrowers and short-term liquidity services for depositors. They are also less stable than banks during periods of market stresses and have a far greater tendency to fluctuate the appetite for credit risk and freeze financing. And banks have a higher level of capital that supports lending during periods of similar recessions, as well as insured deposits with depositors’ funds. Therefore, today credit platforms are unlikely to threaten banks in this area.

Scenarios of the development of relations between banks and payment systems and their consequences

Competition between banks and payment systems at this stage can be regarded as a positive phenomenon, which can bring customers long-term social benefits, increased efficiency, stability of payment systems and widen their choice.

However, there are several scenarios for further developments. Within the first one, banks will accept the challenge in the field of fintech and modernize their systems, thus joining with payment systems. So far, the situation looks optimistic and promises the development of just this scenario. This is evidenced by the fact that IT spending in global banks increased since 2013 from $ 180 billion to $ 250 billion in 2017.

The second option implies the refusal of banks to provide digital financial services that are in demand among clients. This will entail dominance of large technology companies with extensive customer networks, which in turn will entail risks for the entire market.

So far, global regulators tend not to tighten control over the FINTECH sector, creating conditions for healthy competition between banks and payment systems. This gives a good opportunity to the introduction of technology by banks and has a positive effect on customers. In addition, this opens up opportunities for expanding the boundaries of fintech, and those who would like to become a market participant in this role should hurry while the conditions are so favorable.

Such companies as SBSB provide comprehensive legal services in fintech and offer the establishing of turnkey banks and payment systems. By relying on professionals, you can enter the market in a fairly short time and become its worthy, competitive player.