“Digitise or die” is increasingly becoming a mantra for banks and financial services providers. A recent Misys survey of small to mid-sized (SMEs) corporates across North America and Emea reports that companies’ abilities to manage working capital is not being supported effectively by their banks. According to the survey, banks must digitise to compete with alternative financiers and meet corporates’ needs in the lucrative mid-size market.
The numbers speak loud and clear: 62% of corporates surveyed lamented poor automation as a barrier to accessing bank trade financing, and saw it as becoming a deterrent to using banking financing tools. After all, 45% of SMEs and mid-sized corporates now require their online and mobile activities to be integrated directly with their enterprise resource planning and treasury management systems.
The survey also found that almost a quarter of working capital financing is funded through a mix of traditional and alternative financing options, with 9% of respondents reporting a greater reliance on alternative funding than two years ago. “Banks have not stepped up to provide the requisite automation, digitisation and multi-bank connectivity tools these corporations need. As a result, we are seeing an increasing loss of market share, particularly in straight lending and supply chain financing, to non-bank alternatives,” says Alex Kwiatkowski, senior banking strategist at Misys. “The survey highlights that if banks act quickly with more connected corporate banking they can seize the opportunity and compete in a world where non-bank alternatives are here to stay,” adds Tim Tyler, global product manager for FusionBanking Corporate Channels at Misys.
Co-operation between banks and fintechs is a recurring theme, and a few banks have set up accelerator programmes to help fintech start-ups develop their products. One such bank is Barclays, whose New York-based accelerator programme has recently seen close co-operation with Chainalysis, which looks into obtaining information from blockchain about customers’ financial transactions, and with Wave, which is experimenting with an electronic, paperless bill of lading process using blockchain technology. The trade finance community is keen to see whether the latter will be able to reach the critical mass of paperless trade that the industry has yet to experience.
Barclays isn’t the only bank looking into using blockchain technology. A total of 22 major banks have signed up to the initiative championed by R3, a financial innovation start-up run by former ICAP Electronic Broking CEO David Rutter. The goals are to create a co-operative space to experiment with distributed ledger technology and agreeing to common standardised practices in developing a shared platform that could handle the billions of transactions occurring in the financial industry.
Co-operation is being initiated by fintechs too, who are becoming increasingly proactive in promoting the digitisation of trade transactions. For instance, shipping and trade e-documentation provider essDocs has created an ad hoc consulting arm, essDocs Consulting, to support the use of digital transactions documents and fintech solutions in trade transactions and supply chain finance processes, including customised training services.
We’re also seeing some examples of partnerships that bypass banks altogether in developing new financing products using blockchain technology and trade finance tools. Epiphyte, a fintech provider for the instant settlement of financial transactions and trades, has been working with Visa Europe Collab, Visa Europe’s Shoreditch-based innovation hub, on how to develop a lower-cost, faster and less-complex remittance service. The remittance would take the form of a cryptocurrency-denominated contract between the two parties, containing all the information needed for the transaction, ensuring a real-time payment across borders. “The area of remittances, or inter-country payment transfers, is one where there is an opportunity to develop an improved service for both the sender and receiver of payments in terms of fees, speed and ease of use. As a digital currency, we want to understand bitcoin’s potential to remove cost and friction from the experience for all parties,” says Epiphyte in a statement to GTR. The two companies are halfway through their proof of concept initiative, and more updates will be released in due course.
The use of digital currency and blockchain technology to improve access to credit is also something FIX Trading Community, the non-profit, industry-driven standards body of global financial trading, is looking into. The organisation has announced the formation of a new working group to focus on digital currency and blockchain technology initiatives, enabling community members to participate in wider business and technical discussion and collaboration.
The goal is also to identify, analyse and define use cases and integration points for digital currency and distributed ledger technologies across the spectrum of capital markets requirements, and recommend best practices for FIX (financial information exchange) implementation and usage of this emerging technology in financial markets.
Chairing the group, which is also looking for volunteers to assist with the work streams, are Sean Ristau, head of wealth management and derivatives at Raptor Trading Systems, Ron Quaranta, CEO of Digital Currency Labs, and Ryan Pierce, director and technology architect, engineering and execution at CME Group.