“Coming together is a beginning, staying together is progress, and working together is success,” said Henry Ford. Looking back at the last decade in banking, payments and financial services, this statement rings truer than ever. A decade ago, cooperation between traditional banks and non-bank financial institutions (NBFIs) in the corporate payments sector was just beginning. Many industry insiders were sceptical and expressed concerns over the stability of the ecosystem. A decade on, these concerns have proven to be unfounded. Cooperation between banks and non-bank payment institutions is at an all time high, more clients are able to access a wider variety of services, and, as a result, the payments market is more stable, more profitable, and very adaptable to change. Bank and NBFI integration has proven to be a win-win-win, with clients, regulators and market players all coming out ahead.
Historically, NBFIs of one form or another have always played active roles in global economies. Entrepreneurs were often fast to recognise new needs in existing and in emerging markets. The wire transfer, now a pervading feature of every banking system, was pioneered by the Western Union Telegraph Company in 1872, leveraging its existing telegraph network. Banks joined, and “wiring” money became standard practice during the 20th century. A mere 101 years later, in 1973, the SWIFT network was set up to facilitate international wire transfers. For a fast globalising economy, such solutions were an absolute necessity.
At the turn of the millennium, with the advent of the digital age, new technological possibilities allowed for further advancements. PayPal, being the quintessential example of online money transfers, stepped in to fill a payments gap in a new, digital market economy. Since the late 2000s novel technological solutions and a changing regulatory environment have fostered the growth of a new cooperative atmosphere in the payments sector.
Throughout the 2010s, growth in the NBFI payments sector has largely outpaced banks. There were three major reasons for this trend: growing demand for innovative services by established clients, the availability of services for previously underserved clients, and a growing focus by national and international regulatory bodies. Couple with a need for increased efficiencies in global corporate payments, these trends have transformed the global corporate payment landscape.
According to a report by Allied Market Research, the global B2B payment market was pegged at $870.42 billion in 2020, with 40% of this volume handled by digital and NBFI payment solutions. Despite appearances, much of this growth has not come at the expense of traditional banks. When it comes to B2B payments, NBFIs did not play the same role as neobanks and challenger banks in the retail banking space. Rather, NBFIs have stepped in to provide services in areas where traditional banks have been absent, working in close cooperation with established institutions.
A key feature of the growth of non-bank payment solutions has been increased access to payment markets for previously underbanked clients. These include clients whose trading volumes were too small to be profitably handled by large traditional banks, clients with innovative technological solutions or business models, or simply those not falling within the business appetite of established banking actors. Whatever the reason for their previous difficulties in securing banking services, a growing and globalised economy had to provide adequate solutions for these clients to ensure continued growth and prosperity. NBFIs provided that solution.
Rather than work independently and against banks, NBFI payment providers have expanded possibilities for clients and banks alike. The banking partners of prudent NBFIs now enjoy larger client portfolios, with much of the heavy lifting of customer service, automation, client acquisition and more handled by NBFI partners. Working together with NBFIs, banks can now focus on the provision of quality core services, regulatory excellence and in-house innovation.
As the global economy grows and become more connected, the demand for comprehensive payment services is expected to grow as well. In the coming decade, the global B2B payments market is expected to become significantly larger. Allied Market Research projects that the global payments market will reach $1.91 trillion by 2028, only six years away. As more and more businesses in the world’s largest economies and in emerging economies enter the global stage, their needs for payment services will increase.
To capitalise on expanding demand, more integration in financial and payments systems is needed. Increased cooperation between traditional banks, NBFIs, intermediaries and payment networks, mediated by regulators, will increase service availability, improve service quality and bolster the stability of the system as a whole. Forward-thinking regulators are already moving in this direction. For example, the Monetary Authority of Singapore (MAS) is moving ahead with plan to integrate NBFIs with the banking system’s retail payments infrastructure, the Fast and Secure Transfers (FAST) and the PayNow systems that offer cross-border integration to compatible in-country networks of this nature.
This move is a welcome step towards a more integrated future. As Mr Ravi Menon, Managing Director of MAS said in a statement, adoption of innovative services is slated to become even more simple thanks to these integrative initiatives.
As the pie grows, so will the opportunities for cooperation between innovative NBFI service providers and traditional banks with Regulators playing a pro-active enabling role. Helen Keller has said that ”alone we can do so little; together we can do so much”. She could not have been more correct.