Banking is big business; if the global banking industry were a country, as of 2019 its $5 trillion revenue—40% of which comes from payments alone—would amount to a GDP equal to that of all of Latin America combined!
Payments takes an even more prominent role when we narrow our focus to just Latin America: of the $418 billion USD in total banking revenue, over $200 billion, or 48% comes from payments. Strategically, this means that if you are in the banking industry anywhere, but especially in Latin America, payments must feature prominently in your overall strategy.
To make the most of their payments modernization efforts, banks are leveraging technology developed by fintechs that would be too costly in time and resources to create in-house. A great example of this mutually beneficial dynamic is our recent strategic partnership with Grupo Financiero Banorte of Mexico.
The Emergence of Fintechs in Latin America
According to a study by McKinsey, Latin America is the fastest growing region in banking; revenue in 2019 was going up 12% or more prior to the Covid-19 epidemic, 2-3 times the growth rate of many other regions. One would be tempted to assume that banks are well-positioned to continue to reap all the benefits of a booming banking industry, but not so fast.
Banking revenue is not just revenue for banks; fintechs are becoming progressively more competitive in the field and have the potential to eat into banks’ market share. As of today, the numbers are still looking good for banks: fintechs only command $150 billion USD, or 3% of global banking revenue. However, fintechs are quickly gaining momentum, growing their revenues at more than 4 times that of banks!
Where Fintechs Have the Advantage
The main reason that fintech revenue is growing so much faster is that incumbent banks are stunted by the many challenges they have to contend with when it comes to their payments business:
- Channel proliferation: with all the new ways that customers can interact with a bank—mobile, tablet, workstation, host to host, open APIs—there are more and more customer experience channels to manage, which translates to dollars spent.
- Clearing and settlement: not only are there many new clearing options, such as Ripple, Visa B2B in the cross-border space, but banks also have to contend with ISO 20022 migrations, and the costs associated with the modernization of older clearings.
- Regulatory compliance: Needing to ensure regulatory compliance is one of the biggest drains on bank resources, and not really felt by third party fintechs.
- Competitive pressure: incumbent banks are getting it from all sides. They face competition from smaller banks, bigger banks, non-banks, and it’s only getting more intense. Fintechs have less to protect, and are able to outmaneuver banks when it comes to technology and innovation.
- Infrastructure cost: Costs associated with technological upkeep is only getting more expensive for banks, and needing to pay to maintain the status quo sometimes prevents them from being able to budget for next generation solutions.
- Legacy architecture: this is the root cause of why banks cannot be as agile as fintechs, and why it is hard for banks to take on open banking properly. Most banks’ current payments technology was not built to handle the colossal changes that are happening around the world today.
All of this is reflected in the numbers – fintechs can spend twice as much as banks on innovation—70% versus 35%—because banks are spending over 65% of their budgets on compliance and maintenance of existing systems. So, it’s no surprise that fintechs are able to pick up market share so quickly. But before we declare fintechs the winner over incumbent banks, it’s important to highlight the powerful areas where banks outperform fintechs.
Where Banks Have an Advantage
Fintechs may be the new, cool kids on the block, but banks are still the more formidable players. Banks lead fintechs in:
- Cash: Fintechs, while nimble and at the forefront of innovation, don’t have the liquidity and assets that major global banks have.
- Brand Recognition: They also have a more flimsy brand identity than brand-name banks, which makes it hard for them to win over customers who are looking for proven establishments they can trust with their money.
- Compliance & Risk Management: Banks have more experience in adhering to regulations and effectively managing risk (sensible result when you consider the amounts of money they spend on those functions).
- Government Support: Many banks, even private ones, have access to government support for funding and market support that fintechs do not.
- Additional Revenue Streams: Banks have additional sources of revenue, like lending off their deposits, something fintechs can’t do unless they get a banking license.
What’s the Solution?
To really maximize benefits, banks and fintechs should work together. There is an ideal fit, or “finTegration” between what banks are good at and what fintechs are good at, and that is why it makes sense to find collaboration models that let both maximize their capabilities, enabling each to grow revenue and profitability. This in turn also provides the best experience for the customer.
What would this collaboration look like? In one possible model, the bank would maintain the true core systems, including payments processing capability, while customer experience and value-added services development are left in the more capable hands of technology-driven fintechs. There are significant opportunities here for a collaborative model to accelerate the launch of new services in the areas of cash and liquidity management, reporting, data analytics, FX and cross-border payments.
There are other models as well, including the more “hands off” approach of banks investing in fintechs and guiding their growth, but the point is that banks and fintechs are not natural enemies; they’re poised to become strategic allies in Latin America and around the world as the banking industry continues on its payments modernization journey.
Want to learn more about the payments landscape in Latin America?
Watch a recent webinar entitled Why Open Banking is a Big Opportunity for Latin America, featuring speakers from Citibanamex, Cecoban, Banorte, Lloyds Banking Group, OpenVector, and Volante.
Visit Volante’s solutions page for Latin American financial institutions to learn how we can help you move beyond mere compliance to transform your payments business.