The new economy opportunity
What service providers can do to make a difference
New economy companies are becoming an essential part of our daily lives. While the emergence of these types of companies are a welcoming sign for the average user, they also indicate an exciting new opportunity for transaction banks looking to increase their flows.
The potential of these type of companies were on display earlier this month when Alibaba the world’s largest e-commerce platform set a new record in retail sales during its annual Singles Day shopping festival selling US$30.8 billion in gross merchandise volume in 2018 compared to US$25 billion in 2017. Overall e-commerce sales is predicted to grow 14.2% year-on-year in 2019 to reach US$1.2 trillion in sales, according to data from Fitch Solutions.
New economy companies extend beyond just e-commerce flows and include ride-hailing apps such as Grab, online food delivery companies such as Meituan, fintech (financial technology) companies such as Momo and many more all in need of a suitable partner to handle their financial transactions.
The question now facing banks is how they can add value to their relationship with these new economy companies other than just being the pipe that facilitates fund transfers between entities.
Like any business, new economy businesses need visibility of transactions. Dealing with low value and high volume processes on a daily basis, the use of a virtual accounts solution, which aids in account reconciliation for instance could strengthen the relationship between the parties. Bank Danamon in Indonesia has, for example, worked very closely with peer-to-peer lender Investree in tracking transfers between borrowers and investors helping the company gain visibility on their financial positions.
Other areas of differentiation for banks looking to work with new economy companies involve speed, particularly when it comes to offering real-time payments solution. With new economy companies looking to offer a seamless user experience, having transfers approved and settled instantly is vital in maintaining their competitive edge.
“That technology aspect is important when we are looking at banks,” explains Patrick de Courcy, head of Asia Pacific at Payoneer a financial services company that provides online money transfer/digital payment services. “We are increasing our expectation in terms of the speed of payments so that we can process payments at low cost, efficiently and at real-time.”
“Banks traditionally had a turnaround time that was really long. They have several levels of reporting mechanism. Sometimes they can be slow. On the other hand, fintech companies are developing very fast,” says a treasury manager from an Asian-based payment service provider.
According to the manager, it took a global bank 18 months of due diligence before their company could be onboarded to the bank’s system.
Speed is also critical for banks looking to onboard new economy companies to their respective systems. With many of these companies less than a decade old, banks need to be both flexible and thorough with their due diligence when accessing a particular company.
Important in this free flow of information between a bank’s system and the backend of any e-commerce platform or ride-hailing app is open banking application programming interface (API) capabilities.
Generally known as an instrument that transports selected information between different systems, APIs have grown in popularity in the financial services community for their ability to effectively connect third party developers to a financial institution.
It’s an item that many banks including Deutsche Bank’s transaction banking unit is quite keen about. “In the last seven years, we have seen a number of companies coming to the fore with very different user cases that they want to bring to market,” explains Thomas Nielsen, chief digital officer at Deutsche Bank, global transaction banking. “Being able to serve these new scenarios and still keep the banking aspect intact, is the promise of open banking.”
For Nielsen, embracing the idea of open banking makes it easier for the bank to work with a number of companies without having to create a specific link for them. “One technology which will have an immediate impact today is open banking. I think that open banking has the biggest opportunity for a treasurer and for a bank to essentially become more of a platform player,” he shares.
In an effort to understand the processes of some of these new economy companies several global transaction banks including Deutsche Bank have taken stakes in small up-and-coming fintech companies. In fact the Frankfurt-based bank is aiming to invest up to 11 billion into digital technologies by 2020.
Aside from the technological product offerings from banks, good old-fashioned advice holds true in appealing to these new economy companies. For example Payoneer, which conducts transactions in around 200 countries and territories has to make sure they are diligent in complying with various laws and regulations.
“Regulations are very different in the places that we operate in terms of what we can process not only cross-border payments but also non-resident type bank account structures,” highlights de Courcy. “We are looking at banks that are capable of providing very good advice and are clear about how we need to operate in order to provide our service.”
Both cross-border and domestic capabilities are key factors that new economies look at when choosing their service providers. With several of these companies such as Lazada and Go-Jek publicly announcing plans to expand their user reach, expect more demand for these regional type solutions.
“We work with banks and licensed payment providers in every country where we need to receive funds or make payments,” shares de Courcy. “It goes all the way from global large transaction banks to much more domestic focused banks that can give us the capability to pay in local currency on the local payment domestic system of the country that we need to make payments.”
For technology offerings to advisory services, banks that will succeed in the new world of platforms and app transactions are those that are quick enough to detect the expanding requirements of this profitable market segment.