By Thomas Anderson

Digitalization has been central to banking since the introduction of ATMs in the late 1960s. It has led to a rapid change in the way customers want to interact with money or matters related to it. With accelerating digital transformation changing operational risks, there has been a fundamental shift in the way businesses perceive banks or want to engage with them.

The pandemic forced almost all industries to reflect on their customer experience strategy which also meant assessing their current banking partners for seamless digital payments. According to the World Retail Banking Report 2022, 95 percent of executives found the current outdated legacy systems and technological capabilities of banks unable to fully optimize their data for customer-centric growth strategies. While scaling banking technologies to meet customer needs can be challenging, 80 percent of financial institution (FI) executives believe that banks can profit by embracing platform business models.

Business platforms: Opportunity in disruption
Considering the present economic and technological disruptions, banks have shown readiness in business platforms that can help them thrive in the new environment. By offering personalized products and services to their clients, banks have been able to gain access to profitability, innovation, and market growth. Businesses alike have benefited from this converged style of operations, helping them with risk management and providing valuable services to their partners, customers and / or employees.

By breaking down barriers in a move to scale technology, leading banks and FinTechs are already working to build an inclusive and flexible financial ecosystem that is customer focused. This includes partnering with financial third parties to offer Banking-as-a-Service (BaaS) through their ecosystem. This model has shown promise especially in B2B transactions by allowing businesses to scale their financial service offerings based on their customer needs.

Flexibility and ease-of-use, a unique characteristic
Banking-as-a-Service (BaaS) makes it easier for banks and businesses to send and receive payments using application programming interfaces (APIs). Transforming the B2B banking ecosystem, APIs offer scalable business opportunities to each stakeholder involved in making B2B payments. In comparison to traditional systems, they are flexible, cost-effective, and easy-to-use, which is paramount to what customers want in this digital age. Its novel banking capabilities have helped businesses run operations across the globe leading to emergence of new sectors such as the gig economy. However, just over half of a bank’s B2B APIs are currently used to connect its internal systems, according to McKinsey’s latest global survey on the State of APIs in Global Transaction Banking (GTB). While some traditional banks remain wary of this FinTech innovation, the ratio is expected to shift with most new APIs connecting banks to systems outside the organization.

This also presents an opportunity for banks to leverage APIs in order to expand their products and service offerings, thereby creating a new revenue stream that previously did not exist.

Banking-as-a-Service (BaaS): A trillion-dollar market
With a potential to reach $7 trillion value globally in close to a decade, BaaS empowers businesses with new functions that unites customers in a single ecosystem. It wraps seamlessly around banks’ existing infrastructure making the solution cost-effective and easy to launch. While the majority use the service to offer domestic payments, some are already planning for the future.

The digital disruption has empowered businesses to expand their operations cross-border, making foreign exchange a greater part of their day-to-day business needs. Therefore, finding partners who can not only provide the API technology, but also help with evolving customer demands is critical to the future of banking. This includes protection against cybercrime, regulatory excellence, and personalized services to create real-time experiences for the customers. However, adapting to new banking platforms would mean that banks need to find the right talent, strategy, and operational techniques to drive growth and market expansion.

International B2B payments and FX needs
BaaS is creating rapid changes and innovations in the payment space, but B2B cross-border transactions still have significant hurdles that have yet to be overcome. One key factor that hinders many fintechs looking to tackle global payment problems is the inability to issue an International Bank Account Number (IBAN). Being able to offer IBAN accounts to customers can allow fintechs to easily set up cross-border transactions and remove the need for complex reconciliation processes that often come packaged with international payments.

However, being able to just offer IBANs alone is not sufficient. Cross-border payments come with many other challenges such as high transaction fees, unfavourable exchange rates, and payment regulations in different jurisdictions. BaaS providers that can issue IBANs and have multi-currency management tools can make it easier for businesses to integrate their payment flows into an all-in-one ecosystem. An alternative solution to these challenges is to offer personalized services to clients, having account managers that are experts in currency markets and have a full understanding of a specific business’ needs. With either solution, one thing remains clear — BaaS providers and fintechs looking to innovate cross-border B2B payments must find a solution for the FX needs involved.

The digitalization of banking has come a long way since ATMs and with the advent of fintechs, is now an indispensable part of the financial space. This movement of digitalization, combined with a global market landscape, has caused a massive shift in how consumers make payments and has subsequently made companies dissatisfied with the status quo. The pace of business and the need for international B2B payments has increased significantly, but the backend processes are still stuck in the bygone era of paper cheques. Cross-border transfers face many hurdles but through BaaS and APIs, these challenges can be overcome. The partnership of banks and fintechs, combining established infrastructure with quick and agile innovation, will drive the future of cross-border transfers. While it may not happen immediately, BaaS will become the core of a digital revolution for international B2B payments.

Thomas Anderson is Managing Director, Moneycorp Americas.

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