Banks are dead? Long live banks!

A few weeks ago, Zil blogged about the recent set of reports that he and I wrote on reimagining payments relationships between banks, retailers and Fintech. They were commissioned by ACI Worldwide, and the reports took a perspective of each party. Given the current focus on the topic in the industry, we highly encourage you to read them. But it’s worth just summarising our thinking in a few sentences. Contrary to what many people think, we don’t believe that Fintechs will replace banks, but that all three parties will co-exist, and rather than Fintech being a wedge between bank and client, they will become the glue, and an increasingly important part of the ecosystem. Whilst I trust our insight was unique, the topic certainly isn’t. It seems mandatory to have Fintech in every press release and every conference! What is interesting though is that many people seem to see Fintech in isolation, and that there are many other things happening that are not just enablers, but perhaps multipliers of the impact that Fintech will have. Take PSD2 and the XS2A provision. We’ve covered this numerous times in reports, but in short, is a mandated requirement to allow third parties access to account level information, and the ability to initiate a payment from that account. In theory then, a Fintech can now access your data at your bank and, with your permission, pay anyone directly from your account. In the context of above, what is interesting is the responses we’ve seen from the industry. A few banks have seen the opportunity. Most see it as a threat and/or a regulatory burden they have to fulfill. Few Fintechs seem yet to have publicly declared any interest – or indeed, knowledge! – of the PSD2 at all. The most interesting conversations seem to have been coming from the merchants. They’re exploring the potential to bypass cards. The appeal is obvious – if they become a third party provider, they can get the consumers to push payments directly, with no fees payable by the merchant. Given the growth in real time payments, these will be increasingly good funds, with instant value. One scenario then sees the merchants dramatically impacting the business model of the banks, with card revenues plummeting, with the merchants benefiting from improved cash flow. Yet there are other implications in that scenario. For example, can those merchants actually handle the volume of payments? Is their ERP system real-time, and able to reconcile at the same speed? Are they sophisticated enough to cope in the change in their cash management profile? Yet central to this change remains the bank. Those merchants will need the banks more than ever, not less. The services might change, the business model might change for most of the parties involved, but the requirement remains as strong as ever. Banks are dead? Long live banks!