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Banking institutions must engage with emerging financial technology (FinTech) companies or risk being left behind by an industry that is currently undergoing one of the largest transformations ever seen.

This is according to a new report from BNY Mellon, entitled Innovations in Payments: The Future is FinTech, which argues that banks must have a clear plan in place for adapting to this new, technology-driven era.

Dominic Broom, head of treasury services for Europe, the Middle East and Africa at the company, says: “While the banking industry is traditionally more ‘conservative’ to change – certainly fast-moving change – any hesitation or ambivalence here could be costly, particularly as new technology introduces not just new solutions, but also potential contenders to banks’ long-standing reign as payment processors.”

Enter the new players

In the past five years, the number of FinTech companies and non-traditional payment providers looking to enter the sector has boomed. These range from small startups to established large enterprises such as Facebook and Apple that are looking to diversify their offerings.

BNY Mellon noted there are over 4,000 startups active in the FinTech space, with more than a dozen of these already valued at over $1 billion. Total investment in such ventures reached $12 billion in 2014, triple the previous year’s figure.

Key reasons for this include innovations in the technology industry that offer significant opportunities to financial firms. Cloud computing, for instance, provides flexible, cost-effective IT resources that can be easily scaled up to accommodate growing demands, enabling businesses to build and adapt their operations more effectively.

Big data is another development that offers huge potential to the banking sector, making it possible to analyse and interpret vast, complex sets of data to uncover previously unseen patterns and trends to glean new client insights.

Meanwhile, innovations on the retail side of the industry, such as mobile wallets, peer-to-peer payments and real-time payments, have transformed consumers’ expectations of the level of services they should be receiving from their bank.

The response banks need

To ensure they do not get left behind by this disruption, banking institutions must adopt a fresh approach that focuses more on innovation. However, this transformation will not be easy in an environment where more than three-quarters of current IT expenditure goes towards system maintenance, and organisations are still under pressure to rein in spending on non-core functions in the wake of the global financial crisis.

Therefore, they need to see emerging FinTech players not necessarily as competitors, but potential partners that can help them develop improved payments solutions and meet customer expectations.

“As the pace of change accelerates, banks – while not necessarily required to lead the way in terms of innovation – must engage with the FinTech community in order to better understand future challenges and opportunities,” BNY Mellon stated.

Although a great deal of uncertainty remains over the exact directions and timeframes for future changes in the payments industry, it is clear that FinTech will “radically redefine the payments landscape”, and banks that are unable to react to this will be destined to fail.

Sink or swim

Banks are at a crossroads with payments. Disruption to the payment value chain has been ongoing for years, but it’s a case of sink or swim for traditional players.

As the report states: “Banks have been the nerve-centre and backbone of payments, but if their stance is too passive they risk being left behind, with the payments crown going elsewhere.”

So, the study recommends banks take a series of steps, from “meeting and engaging” with nimble FinTech startups, to creating a “payments hub to equip banks with a flexible IT infrastructure that is more malleable and better able to adapt to changing market needs than existing legacy systems”.


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James W. Gabberty

Gabberty is a professor of information systems at Pace University in New York City. An alumnus of the Massachusetts Institute of Technology and New York University Polytechnic Institute, he has served as an expert witness in telecommunication and information security at the federal and state levels and holds numerous certifications from SANS & ISACA.

Brad Strothkamp

Marisa Mann

Marisa Mann brings over 15 years of experience in consulting and financial services industries to the Solstice team, working on large scale enterprise initiatives across many technologies, including specializing in the digital space – Internet and mobile. Mann is passionate about mobile and the endless possibilities for the enterprise, delivering business value through strong brand recognition and driving to excellence in the consumer experience. Prior to Solstice, Mann worked at JP Morgan Chase, Diamond Management and Technology Consultants, Washington Mutual, Inc, and Accenture.

Zachary Ehrlich

25-year-old writer, and as a native San Franciscan, I am unreasonably loyal to Bank of America, if only for their superhero-like origin story, involving the 1906 earthquake and Italian fruit vendors.