Consumers demand simple, real-time payment capabilities, often sacrificing layers of security. Can the correspondent banking model keep up?
Can you imagine life without a smartphone? In under a decade, the device has become so essential that a generation of consumers cannot envision life without it.
Three hours of a Millennial’s day is spent on a mobile device – Millennials who, by 2025, are expected to comprise 75% of the global workforce. Smartphones are used to conduct business and personal activities, such as ebanking and eshopping globally. It’s estimated that nearly one-quarter of all retail sales will be driven digitally, up 15% from 2015. (Source: TNS, Deloitte and McKinsey Global Payments Map)
An increasingly tech-savvy consumer base, the impact of globalization and continued development of the digital economy are all demanding that the payments ecosystem become simple, intuitive and accessible. Millennials value speed and a seamless user experience, oftentimes overriding all other considerations - including extra layers of payments security. Many Fintech platforms have responded, adapting to meet consumer needs. Can banks adapt? Can the instant delivery of products and services be matched by the instant delivery of payments. And, can this happen while helping ensure the security of payments and data?
The rise of millennials is shaping the future of financial
services. By 2025, they’ll form 75% of the global workforce.
Source: Deloitte Millennial Survey 2014
The average millennial spends almost one whole day every week on their mobile device
Source: Adapted from TNS, 2015
Paul Taylor, Head of Sales in Europe, Middle East and Africa, Global Transaction Services at Bank of America Merrill Lynch, has thoughts on what we can and must do to adapt.
What do consumers want from a payment experience?
With 86% of tech startups having some cross-border activity, digitalization is the catalyst that is driving global commerce. Millennials and other consumers, accustomed to the connectivity, speed and ease of shopping, expect immediacy in payments in any online interaction. So it’s up to payment providers to bring simplicity and immediacy to a complex, integrated payments landscape. (Source: McKinsey Global Institute - 2016)
A number of Fintech companies have focused on simplifying the user experience, which shields consumers from the underlying payments complexity. They obtain the necessary information in advance and then enable rapid payments with a reference ID or tokenized alias, such as an email address or phone number. Compare this to the antiquated way of originating a wire transfer, which requires multiple touch points, especially when information about the payee or beneficiary needs to be verified.
How will consumer demands impact cross-border payments?
Delivering a consistent user experience across borders remains an elusive goal. Some innovations, like SWIFTgpi, update the current correspondent banking model by addressing the need for greater transparency and speed in cross-border payments. Distributed ledger technology holds the promise of streamlining the transfer of money across borders, and banks are joining consortiums to formulate policies to govern the application of these kinds of emerging technologies.
Increasingly globalized commerce means we are already seeing many more cross-border wire transactions at lower values, and this trend will accelerate. This will provide a greater incentive to connect domestic payment systems to each other to create a lower cost means of moving money around the world.
Over time, we expect domestic real-time payment systems to accommodate international transactions. These systems are currently very domestically focused, but the newer ones, such as Australia’s New Payments Platform, due to be launched second half of 2017, have been constructed with the potential for cross-border functionality in mind.
Global payment values are falling as volumes rise: in mature markets the average wholesale cross-border transaction will be 6% smaller by 2025—but there will be 70% more of them
Source: Adapted from BCG Global Payments Report 2016
Doesn’t “faster and simpler” also mean “less secure”?
The quicker a transaction is processed, the harder it may be to identify potential problems, such as fraud. Yet, most security breaches occur before a payment enters the system, for example if someone’s password is compromised, or if they’ve been the victim of “phishing” or spoofing. Fraud incidents could rise since millennial consumers often prioritize simplicity over security, not as a conscious choice, but as the result of using devices and services that promote a seamless user experience at the expense of security safeguards, such as repeated confirmation of credentials.
The ideal state is one in which consumers enjoy speed, simplicity and security. Providers are increasingly focused on the importance of cybersecurity and the shared responsibility to be aware and employ preventive measures. Providers must continue to educate their customers on the importance of protecting their information. To stay on the leading edge, providers can collaborate in any number of industry-level cybercrime information-sharing and simulation initiatives to help reinforce preparedness. SWIFT’s Customer Security Programme (CSP) also addresses some issues by improving information sharing and auditing participants’ system security and practices.
The average global organizational cost of a data breach
rose from $3.5 million in 2013 to $4 million in 2016
Source: Ponemon Institute/IBM, 2016
Corporate clients want choice in how to pay their clients. How can banks meet that need?
Because payment choices are proliferating, one way for banks to meet this changing need is to partner with Fintechs and non-bank service providers. By collaborating with Fintech platforms that have achieved critical mass, banks can enable their wholesale clients to connect to their customers in precisely the way that works best for all. For instance, in 2016, Bank of America Merrill Lynch formed a strategic relationship with ModoPayments to enable connectivity to emerging payment networks worldwide, providing a gateway for clients to reach their increasingly dispersed consumer and employee populations. Prior to that, we launched Digital Disbursements to enable US clients to pay their customers digitally via an email address or mobile number, without the need to issue a check. This flexible access to different payment platforms has paved the way for paying the final recipient in the manner of his or her choice.
What does this ultimately mean for the correspondent banking model?
Ultimately, the correspondent banking model will be completely transformed. By working collaboratively through initiatives like SWIFTgpi and groups such as the Global Payments Steering Group (GPSG), banks can make great strides towards transforming the model, influencing industry standards and pursuing increased efficiencies.
There is strength in numbers, and banks have a long history of working together to initiate change. Today, however, the pace of change is that much faster. Banks need to collaborate with partners who offer solutions that can satisfy the immediate demands. It is estimated that 82% of global financial institutions expect to increase Fintech partnerships in the next three to five years and 77% expect to adopt blockchain as part of an in-production system or process by 2020. Indeed this looks to be a positive response in trying to keep up with the Millenial demands, but we must also be able to provide a more simplified user experience that matches the rest of customers’ digital lives, or risk becoming irrelevant. (Source: PWC – Global Fintech Report 2017)
At Bank of America Merrill Lynch, we view disruption as an opportunity, not a problem. So in a world where continual change is the norm, we tailor solutions that help future-proof our clients’ businesses and propel them forward.
Our next article in this series will explore macroeconomic risk and regulatory changes disrupting financial institutions and business models. For more information please email firstname.lastname@example.org
- Digitalization is the catalyst that is driving global commerce.
- Millennials expect immediacy in online payments, often sacrificing layers of security for a better user experience.
- Distributed ledger technology holds the promise of streamlining the transfer of money across borders.
- 82% of global financial institutions expect to increase Fintech partnerships by 2020.