2018 payment predictions: the year of the financial utility

2018 is set to be an eventful year, with a royal wedding, ongoing Brexit negotiations, the FIFA World Cup, and predictions of an extremely close midterm election in the US in November. How these events impact the global financial landscape - good or bad - remains to be seen.

One overarching trend predicted for 2018, and something to be incredibly excited about, is the rise of the ‘financial utility’.

Banking provides an essential service to both consumers and businesses, but the incumbent infrastructure that underpins it makes it difficult to innovate in the same way as other utilities have. This is where we have seen financial utilities emerge, acting as the ‘rails’ or ‘pipes’ to deliver optimised non-core solutions to banks and other financial institutions and their customers.

Traditional cross border payments will become a thing of the past

International trade is booming. However, slow and expensive cross border payments are preventing businesses of all sizes and industries from receiving the benefits.

With legacy infrastructure holding back innovation, the correspondent banking network has been under pressure for some time. This trend will continue into 2018, but it presents an opportunity for financial utilities to step up with solutions that make cross border payments faster and cheaper than ever before.

A financial utility can replace the legacy banking infrastructure with a super-correspondent banking network which is capable of facilitating cheaper, faster, and more secure core banking services. By outsourcing non-core activities to a third party, financial institutions are able to innovate and expand their core domestic offering, whilst focusing its own resources on improving and maintaining client relationships.

Merchants forge partnerships with PSPs to expand internationally

Research into the major pain points for merchants who trade internationally revealed that they were being held back by slow services, including settlement times, responses from banks or other payment providers, and delays in banks providing funding. Because speed is so crucial for merchants, many are deciding to avoid the additional risks that come with expanding further – even though some do already trade across borders.

With the barriers to cross border trade gradually coming down, payments must follow suit to meet increased demand. Payment service providers must work harder to provide new global payment methods, which meet the needs of the merchant and their customers – secure, fast, low cost and transparent payments, minimal transaction fees, and competitive FX rates.

Merchants need to partner with the right payment solution provider in order to make international expansion possible, viable, and even profitable. Financial utilities are able to provide access to a global account infrastructure, removing barriers to international trade by providing cross border payments as if they were local.

By partnering with a financial utility, financial institutions have the opportunity to address this challenge and help merchants to reach their global ambitions. Without this, merchants will simply not be able to reach their potential in the international market.

The non-bank banks: Tech giants throw their hat into the ring

The current vertical separation of the value chain in the financial industry has created an opportunity for established tech businesses to monetise their user base by providing banking services.

Trusted tech companies such as Amazon and Google are perfectly placed to offer financial services, and a recent survey revealed that a growing number of people would consider switching. These tech giants have enormous customer bases who already trust them with huge amounts of their personal data, access to funding and the ambition to rapidly increase scale and reach international markets. With Facebook, Apple, Android, and Samsung all offering payment solutions, granting a tech company access to manage other banking functions doesn’t feel like such a radical idea anymore.

Looking ahead

These changes will undoubtedly have a dramatic impact on the financial services landscape. By 2020, the banking industry is likely to be more fragmented, with a broader range of methods for delivering banking services, powered by utilities.

Toward the end of 2017, the value of Bitcoin soared, bringing cryptocurrencies into the mainstream. Whether or not cryptocurrencies will play a part in that future banking industry will be fascinating to watch in the coming years.

Competition will increase with the help of financial utilities providing non-core services, allowing challenger banks, FinTechs and alternative payment providers to compete alongside traditional banks, improving the overall offering available to consumers and businesses.