EXCLUSIVE: ‘We’re in it together…’ – Jon Levine, Banking Circle in ‘The Fintech Magazine’
According to a recent White Paper from Banking Circle, partnership working is very much on the agenda at Europe’s big banks… and that’s good news for the SMEs they serve, who are desperate for better, cheaper financial services as they struggle to hold up the economy, says Jon Levine
“Small business is both the Holy Grail of the banking market and also its biggest challenge,” says Jon Levine, co-head of institutional banking at Banking Circle, the payments bank.
There is an argument, of course – levelled by many SMEs and the organisations that represent them – that they’ve been left at the bottom of the list when it comes to legacy institutions updating their banking services in the UK and Europe. Perhaps because, until recently, SMEs had nowhere else to turn, but to them. That is no longer the case.
Even before the pandemic, which many see as a tipping point in alternative financial services provision for SMEs, a key indicator of small businesses’ loyalty to traditional banks showed signs of strain. According to an Organisation for Economic Development and Co-operation (OEDC) report in 2019, bank lending to SMEs in the UK remained flat in nominal terms over the previous 12 months, while finance from alternative sources, such as P2P business lending and P2P invoice finance, rose markedly, albeit from a small base.
The following year’s pandemic forced the UK government and others to engage with challengers to deliver recovery programmes for SMEs, bringing many business owners into contact with what were once ‘alternative’ and are now increasingly mainstream providers of financial services for the first time. Challenger Starling Bank, which currently has less than five per cent of the SME market but has worked hard at creating a marketplace of integrated third-party services for small businesses, predicts that the pandemic will help accelerate its share to nearly 20 per cent in five years… and that’s just one bank.
A raft of other niche fintechs and paytechs have started to unpick banks’ relationships with SMEs, offering alternative services and a toolkit of useful plug-ins, made possible in many cases by open banking. Now, according to Levine, these providers are very much in banks’ sights – not as rivals, but as potential partners to deliver payment services in particular. SME payments have tended to be very expensive; they don’t have the volume to leverage discounts that large firms with purchasing power enjoy. That is changing, although probably not fast enough.
“I think many an SME owner or manager would tell you they still don’t have the banking experience that they aspire to. But, to be fair, I think many banks would tell you the same thing; that they’re still working hard to get it right,” says Levine.
The genesis of Banking Circle was never as a rival to financial institutions. Instead, it set out to provide them with a non-competitive, shared payments resource – a new infrastructure to speed up delivery of services to their account-holding customers, while lowering the total cost of ownership for innovative solutions to some very persistent problems.
“Our mission is always to enable other financial institutions to serve the end customer,” says Levine. “It’s the way we’re set up. It’s in our DNA. So, we’re never banking the last mile. We’re never KYC-ing an SME; we’re never facing them. Rather, we’re serving their banks, and their fintech providers, with the services to allow that bank, or other financial institution, to provide them with a great customer experience.”
One of the solutions it’s providing is to help clients tackle the adoption of new instant payment schemes for businesses. Much still needs to change before real-time payments become more widely adopted for corporate use, especially for business trading across borders. For many banks, it comes down to addressing the inherent legacy systems on which their operations are built. For example, there are often issues connecting banks’ front end, what the customer sees, through to the instant payment schemes themselves.
Managing liquidity by bank treasuries outside of normal working hours is another issue, and the dreaded payment repair queue – where a payment issue prohibits straight-through-processing – can diminish the benefits of instant payments. The need is urgent to make instant payments for corporates a top priority, not least because they always have funds tied up in the payments system. That means vast amounts of cash that’s inaccessible and unusable. For large companies, that adversely impacts working capital metrics. For smaller companies, the issue is much more critical. A delay in cash flow can have far more significant consequences.
“You have to find new methods and tools that haven’t been used in large scale before. That’s exactly what we are doing,” says Levine.
It’s using that technology approach to lower the cost and improve the experience for both banks and SMEs involved in cross-border payments to address a structural problem with correspondent banking. A recent Banking Circle White paper, Better Business Banking: Collaborating For Success, showed that, at the majority of banks interviewed, at least half their small business customers required international payment services. But, on the whole, experience of the service has been slow and expensive to provide and to use.
According to a McKinsey study, the cost of making a cross-border payment for a bank is around $25 to $35 for each transaction – a high burden, particularly amid competition from new, nimbler entrants offering lower-cost options.
“There are bits of correspondent banking that, historically, have been expensive, unpredictable, and slow, but it doesn’t have to be that way,” says Levine. Worryingly, some major banks have derisked by pulling out of correspondent banking geographies, or been removed from the network because the volume of payments they handle doesn’t justify them having a place – all at a point in time when businesses and consumers are wanting to transact abroad more than ever.
“So customers of those banks now face an extra processing delay because their banker didn’t send enough payments to the global correspondents to stay in the system. That’s something we can fix. If you can get banks plugged back in, closer to the infrastructure, it speeds up the overall payment journey for customers,” says Levine. “The closer you are to the central clearing infrastructure, the faster your payments are going to get settled. And so, as a firm, our ethos is to be as close to the clearing system as possible and, generally, to join the relevant clearing systems that matter to our customers – we have an articulated strategy around joining currency systems as direct clearing members. Then you can look at the way they process and handle payments. There are going to be, for example, false matches on Office of Foreign Assets Control (OFAC sanctions) lists that have to be resolved.
Do you resolve those in four hours, or four days? What I’m saying is, there are things that can be done to speed up the process.” Partnerships such as the ones Banking Circle has forged with hundreds of financial institutions, Levine argues, can improve the bottom lines of institutions by, for example, bringing new products to market quickly.
It also gives a competitive edge – or at least keeps them in the race – against others that set out to exploit a weakness in legacy banks’ product offering.
”If a partner has the product ready to go, your time to revenue is going to be much faster than if you start from scratch and build it in-house,” says Levine. And that accelerated product delivery – of everything from better payment solutions to accounting services – motivates SMEs in particular to stay on board.
Interestingly, the White Paper survey involving 300 senior decision-makers at banks and payment service providers (PSPs) across the UK, the DACH and Benelux countries, revealed that, for most, working with third-party service providers already formed a key part of their business planning. Half of them had partnerships in place or planned to work with an external provider within the next month. A further third had partnerships on the agenda over the following 12 months. In total, 80 per cent had either partnered with an external provider for services including payments, FX and trade finance, or planned to do so soon.
As Mark McNulty, head of payments and receivables EMEA at Citi, pointed out in a recent Banking Circle webinar: “Banks don’t need to be present themselves in 40 countries to offer payments services in 40 currencies to their clients. They can clearly partner with others to leverage other networks and capabilities.”
The White Paper findings revealed that ‘collaboration is no longer a novelty’ and the shift towards partnerships has become more pronounced due to COVID-19. And there are a number of strategies to choose from, says Levine, from a straight-forward supplier relationship to something a lot more strategic.
“There is a debate within the banks, about what do they build, how do they partner, what do they buy, and that’s playing out across institutions in ways that best suit their business model. “One approach is to just go out and negotiate a commercial contract, terms of a service, and proceed. And, in fact, that’s how we normally work with banks. But there are different models that we see in the market, including where a bank will take an ownership stake in a fintech, usually a minority stake. It tends to happen with slightly earlier stage fintechs: it benefits from the capital of the large institution, the large institution benefits from the resource and the expertise that the fintech brings.”
That ‘symbiosis’ as he describes it, could be seen playing out in the SME banking market when Spanish giant Santander splashed out £350million in 2019 to acquire a 50.1 per cent stake in Ebury Partners, a UK provider of corporate banking services to SMEs that trade internationally. Ebury, which operates in 19 countries and 140 currencies, has processed £16.7billion in payments for its 43,000 clients trading across Europe and the Americas. For Santander, it was a turnkey solution to the problem of servicing SME customers fairly and competitively.
“If someone is going to spend time investing in a partnership, they want to know what they’re getting out of it,” says Levine. “Certainly, in our discussions with banks, they’re very focussed on customer outcomes, revenue potential, and the nuts and bolts of how it’s going to work.”
There are cases – as indeed with Banking Circle itself and, recently, with Cloud payments platform Form3 in which Lloyds and Nationwide both have an interest – where banks are happy to share a resource. Such services are usually doing the heavy lifting for banks in some fundamental area of the business. The collaborative approach works best ‘when there’s some expensive component that has to be built’, says Levine.
Serve one, serve all Banking Circle announced last month that it would be working with the Netherlands’ PSP Online Payment Platform to provide a fast payment solution for around 170 marketplaces that it runs in Europe. OPP is currently expanding into the UK and France, so having access to multi-currency accounts offered by Banking Circle, as well as its virtual IBAN solution, making it quicker and easier to allocate received funds to merchant accounts, made a lot of sense – benefiting not just OPP but each individual SME trading over a marketplace.
It illustrates how a partnership model ultimately helps the financial services providers supporting those small businesses working on often tiny margins and frustrated by slow and expensive financial infrastructure. As Levine says: “It enables them to grow overseas, or to grow domestically, when their banks serve them well.”