The financial sector as we know it has undergone many changes over this last 12 months. Even though there has been a disturbing lack of innovation from within the sector itself, the accelerated development of new technologies is making up for that. If all things go to plan, technology firms will be able to offer access to the payments system without relying on larger banks.
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Big Banks Feel The Heat From Tech Industry
Despite the wave of innovation sweeping through the technology industry, the financial sector is not following the same pattern. In fact, things have stagnated in the world of finance for the past 50-60 years, to much dismay of everyday consumers and tech enthusiasts alike. Even the new “range” of mobile payments are held back by having to rely on the traditional financial system.
One of the major hurdles to overcome in the traditional financial sector is gaining access to the payments system. The way things stand right now, only big banks can provide access to the payments system, which is making it hard for new up-and-coming banks. More competition in this sector will be beneficial to everyday consumers, but major banks aren’t too keen on sharing the pie.
A new initiative has been launched, which sees technology offering access to the payments system without relying on the approval of major banks. While this initiative will be limited to Great Britain for the time being, it sets a precedent for the rest of the world. Should this initiative prove to be a success, challenger banks will no longer have to pay fees to larger banks for access to this basic service.
Smaller banks are faced with limited access to the payments system, as they are in direct competition with larger financial institutions for the same customers. Fidor Bank even had to delay their UK launch earlier this year, simply because none of the country’s major four banks wanted to offer them access to the payments infrastructure.
The Faster Payments system, as this service is called, allows customers to make nearly instantaneous payments through Fintech companies, rather than major banks. This system takes a page out of the traditional financial sector’s book and improves upon its business model by removing the barrier to competing on a level playing field with major banks.
Fintech companies will get the same level of access to the payments system and have the ability to resell this access to challenger banks. As a result, challenger banks should receive a lower cost per transaction until they grow to the level of [more than] 13 million transactions per year. At that point, challenger banks are faced with a price per transaction on par with big banks.
At the time of publication, ten large Fintech players have access to the payments system and roughly 400 smaller companies are paying them for direct access. Four of these Fintech companies have agreed to create their own systems providing access for smaller banks, whereas three others are on the cusp of launching their service. The final three companies are expected to release their platform in the near future.
“Europe is looking at real time payments, as are the US and the Australians. So, there is a strategic advantage to Fintech firms which is that, if you are a UK Faster Payments accredited aggregator, it would be of value to you to bid for future contracts in the US and Europe.” – Faster Payments Chief Executive, Craig Tillotson comments on possibly expanding this type of service outside of Great Britain.
Bitcoin The Driving Factor For Financial Disruption
It is a positive sign to see Fintech companies looking beyond how they can improve the services provided by major banks, and disrupt the financial system at its core. Smaller banks are more open to technological innovations compared to their larger counterparts, and it only makes sense to see Fintech companies offer a new type of service to them.
Bitcoin, the disruptive digital currency, has started off this new wave of technological innovation in the financial sector. Ever since Bitcoin was introduced, developers from all over the world saw the advantage of disrupting finances. Even though Bitcoin has become quite popular over the past few years, most everyday consumers still prefer to use the traditional banking system.
Regardless of how you want to look at things, the financial system will need to change sooner or later. For now, there are still plenty of consumers and companies willing to give major banks a chance to change of their own accord. Failure to do so will eventually result in their demise, as Faster Payments and Bitcoin take over.
Source: Telegraph UK
Images courtesy of Shutterstock, Faster Payments