By Roy Urrico
The impact of embedded payments and lending functionalities as a key source of revenue for financial institutions; an expected financial technology approach shift from ‘build’ to ‘buy’; why current levels of volatility translates to staying compliant and competitive and requiring financial institutions to implement new capabilities faster than ever; and the expected increase of the Model Law for Electronic Transferable Records (MLETR) adoption by markets and resultant impact on international trade.
These are among the trends forecasted by four senior leaders at global fintech powerhouse Finastra, which is headquartered in London, with offices throughout the world, including Lake Mary, Fla., New York City, and Mississauga, Ontario, Canada
Barry Rodrigues, Executive Vice President, Payments
“Evolving customer expectations are putting pressure on credit unions (and other financial institutions) to redefine their value propositions, particularly as customers consume financial services as a part of the user journey they are undertaking,” said Rodrigues. The embedding of payments and lending into these journeys is already upon us and will accelerate. “Embedding payments and lending functionalities will be a key source of revenues for credit unions, as they develop API (application programming interface) based technologies to extend and provide these capabilities to players that are reaching consumers through different channels.
Rodrigues observed the implementation of new payment rails by regulators worldwide, supported by innovations such as the new global standard for financial messaging, ISO 20022. “Customer demands for real-time payments are becoming more prevalent and credit unions risk losing customers if they do not provide this offering, particularly as the costs to switch financial institutions are decreasing rapidly.” The use cases of real-time payments, coupled with broader messaging standards such as ISO 20022, will give rise to new services such as “request to pay” or the ability for businesses to offer incentives for immediate settlement of their receivables. “In addition to the speed of payments accelerating, the ability to charge outsized margins for cross-border transactions will also be dramatically reduced as new payment alternatives become more prevalent globally.”
He added, “As payment volumes grow, credit unions will accelerate their adoption of cloud-based technology to lower their operational costs, as they work to cover the costs of transitioning to new standards.” They will also seek to modernize their architecture, allowing them to choose what elements of a tech stack they develop themselves and what they use third parties for, utilizing a platform that allows them to seamlessly implement third party apps to drive efficiency. “The days of credit unions building all their own technology may be past us, but they will still want to retain flexibility, which a containerized architecture allows them to have.”
Rodrigues also noted a central bank digital currency (CBDC) moving from ideation to reality. “More than 100 countries are now involved in a project, while 10 have launched their own digital currency. CBDCs are underpinned by an exciting technology that can bring specific benefits, for example in making cross-border trade and payments much more efficient and cost effective in comparison to traditional rails. In 2023, more governments will focus on developing these use cases to launch or evolve their offerings.”
Note: According to the Federal Reserve, CBDC, is generally defined as a digital liability of a central bank widely available to the general public. The Fed said, “Today in the United States, Federal Reserve notes (i.e., physical currency) are the only type of central bank money available to the general public. While the Federal Reserve has made no decisions on whether to pursue or implement a central bank digital currency, or CBDC, they have been exploring the potential benefits and risks of CBDCs from a variety of angles, including through technological research and experimentation.”
Wissam Khoury, Executive Vice President, Treasury And Capital Markets
“The pandemic, global conflicts, economic and political uncertainty: in the last few years, we have witnessed an increased frequency of extreme events that have impacted risk management and placed more strain on a bank’s balance sheet,” said Khoury. He added, because of fast-changing regulations and increasing cost pressures, meaning financial institutions have to increase their ability to adapt to new demands while decreasing their total cost of ownership (TCO).
“As these events continue to impact financial services, in 2023 we expect to see an increased importance of the role of the treasury and banks embracing digital transformation to remain relevant.” Khoury noted by phasing out legacy technology and moving operations into a cloud environment, financial institutions can adapt quicker to ongoing uncertainty and future-proof their investments through systems and solutions that provide the agility, adoption rate and functionality to meet regulatory deadlines. They can also reduce costs, scale their business and improve functionality with faster upgrades and enhanced services.
“In 2023, we expect to see a continued shift in the (financial institution’s) treasury mindset from ‘build’ to ‘buy,’” Khoury stated. Treasury involves the management of money and financial risks in a business. Financial institutions, Khoury pointed out, are increasingly buying the latest solutions from specialist fintechs instead of developing them in-house. That is why the industry expects to see particular growth in the ‘as-a-service’ subscription model due to its myriad benefits. “By purchasing and deploying fully managed solutions, which provide functional and technical enhancements in their core, financial institutions can become a future-ready, integrated platform with increased agility and lower TCO through tech stack modernization and deployment.”
Isabel Fernandez, Executive Vice President, Lending
“The current levels of market uncertainty and volatility show no signs of abating, so 2023 is likely to see rapid change in everything from corporates’ priorities, to regulation, to supply chain disruption,” maintained Fernandez. She explained staying compliant and competitive will require financial institutions to implement new capabilities faster than ever, while minimizing disruption for customers. She also pointed out financial institutions cannot achieve this level of agility on their own. “More will embrace a collaborative, platform approach – which will be increasingly cloud-based – enabling them to tap into fintech ecosystems to find ready-made solutions that meet their needs as they arise, then implement them quickly via open APIs.”
Fernandez said, “This trend will intersect significantly with the rise of embedded finance and ESG (environmental, social, and governance), with the latter having already transitioned from being a ‘nice-to-have’ to a ‘must-have’.” For instance, as businesses increasingly track their ESG credentials within enterprise resource planning (ERP) systems, financial institutions can embed green loans, financing for projects that have an environmental impact, within these platforms to extend their reach. “With the increased access to data, they can help more corporates improve their green credentials through personalized and incentivized loan offers.”
Similarly, fintech solutions can help banks and credit unions assess their customers’ climate impact, enabling them to manage loan book risk and significantly enhance their ESG reporting. “With a platform approach, financial institutions can transform their ESG capabilities quickly, turning obligation into advantage,” added Fernandez.
Iain MacLennan, Vice President, Product Management Trade Innovation
“Digital trade ecosystems will accelerate in 2023. Paper documentation and signatures have long burdened the industry, stunting the growth of digital and inclusive trade. Overcoming these barriers is no easy feat, but progress is happening. In 2017, the United Nations Commission on International Trade Law adopted (UNCITRAL) established MLETR to lay the foundation to make electronic documents legally valid, explained MacLennan. MLETR has since seen implementation by several jurisdictions, including Bahrain, United Arab Emirates, Singapore and recently the United Kingdom. Transferable documents or instruments typically include bills of lading and exchange, promissory notes and warehouse receipts.
MacLennan added they expect more markets to adopt MELTR in 2023 and beyond, which will have a significant impact on international trade. “It will become easier and cheaper for firms to buy and sell internationally, while promising real progress in reducing the trade finance gap for MSMEs (micro, small and medium-sized enterprises).” To support this infrastructural growth, financial institutions need to prioritize digitization through ecosystem play. “By integrating channels and third-party services and connecting digital islands, they can provide corporates with the services they expect while supporting the journey towards a sustainable and inclusive trade finance industry.”