BANK OF NEW YORK MELLON CORPORATION (THE) The Future is Fintech
Foreword 1
Executive Summary 2
The Growth of Fintech 3
Drivers of Change 4
Consumer and Retail Payments 6
Wholesale and Corporate Payments 8
How are Banks Responding to Fintech? 13
Recommendations 16
Conclusion 17
1 Foreword
By Dominic Broom, Head of Treasury Services EMEA, BNY Mellon
The wind of change in the payments world is gaining in strength as financial technology's ('fintech') potential to alter how, where and when payments are made - as well as who it is that facilitates them
is further explored and leveraged. This paper examines the growing capabilities of fintech in both the consumer/retail and wholesale/corporate payments arenas, and discusses the monumental role fintech - and the array of solutions it presents
will play in shaping the course of the payments industry as a whole.
Without a doubt, the 'era of fintech' is upon us and banks can't merely be mindful of this; they must also have a clear plan in place in order to adapt to and benefit from fintech-fuelled changes. While the banking industry is traditionally more 'conservative' to change - certainly fast-moving change - any hesitation or ambivalence here could be costly, particularly as new technology introduces not just new solutions, but also potential contenders to banks' long-standing reign as payment processors. In order to position themselves at the centre of the payments industry of tomorrow, banks must act today to understand, interact with, and cherry-pick from the full smorgasbord of fintech developments.
The range of options to choose from is broad and diverse. As the number and type of fintech
players, developments and offshoots gather pace, the emergence of new tools and solutions (such as digital currencies and biometric security) are in turn gaining traction and reaching the market with ever-greater speed. To date, the impact of
these new entrants has been far more profound in the retail and consumer payments space (more of which in the following pages), yet these new payment capabilities and ideas are already diffusing into the area of corporate payments, as personal preferences influence corporate
demand. Furthermore, in the continually-evolving payments sector, the impact of the fintech 'revolution' isn't something occurring in isolation. It is important to remember that the corporate and wholesale payments industry isn't static,
and that technology is already being leveraged to drive industry-wide improvements with regard to harmonisation, standardisation, centralisation and the development and application of increasingly sophisticated solutions.
Following on from our wider analysis of the payments industry (please see 'Global Payments 2020: Transformation and Convergence'), this report hones in on the influence of fintech, to assess the direct (and indirect) impact of new technology on payments; the way in which
it is moulding client behaviour and fuelling expectations for better, faster, more innovative solutions across the payments spectrum, and how industry changes are set to re-shape the corporate payments landscape. This report also examines what these advances mean for banks, and the strategies they should now adopt (in particular, far closer engagement with the fintech community)
in order to understand and access these exciting developments, and thereby future-proof their long-held position at the heart of global payments.
Electrify your business with the bright sparks of fintech
2 Executive Summary
Fintech is changing the face of global payments. Global investment in fintech ventures tripled in 2014 to US$12 billion.1 As new payment capabilities come to the fore, cutting-edge technology is transforming how transactions are initiated and processed. This is no longer just a case of new currencies or faster payment methods, but an entire rethinking of transfers of 'value' and how these are undertaken. This presents both a challenge and an opportunity for banks.
A new breed of non-bank payment provider has
kick-started a surge in payments innovation, ranging from fintech start-ups (those looking to leverage technology to bring advancements to the payments space) to established non-payments industry operators (such as Facebook and Apple). More fintechs are graduating from the ranks of start-ups to multi-billion dollar listed companies: at least 4,000 fintech start-ups are active and more than a dozen of these are valued at over US$1 billion.2 These new players are seeking to improve the payments experience of their customers in order to support their core (non-payments) business. From all angles, they are leading the charge in taking payments to the next level in terms of speed, convenience, efficiency and multichannel accessibility.
We are seeing innovation in different forms depending on the payments sector and market. The most significant changes are in retail payments, resulting in the unbundling of a range of financial services. The foreign exchange (FX) market in particular is being explored by non-bank providers, which are taking advantage of the cost-saving opportunities. In the wholesale and corporate payments sector, innovation and new solutions have been helped by industry-wide initiatives such as SEPA and TARGET2, which have established market standards and increased payment harmonisation.
However, in spite of this progress, some banks are currently underprepared when it comes to adjusting to such changes. This is due in part to the plethora of new regulation in the wake of the global financial crisis, diverting precious funds away from research and innovation, into compliance-related projects.
But it is important to remember that high standards of regulation mean that banks are typically able
to provide much greater levels of security and risk mitigation than non-bank players. Few non-bank
providers want to take on the heavily regulated parts of finance. It's also worth pointing out that you still need a bank account to use most fintech services.
While obligatory regulatory changes have placed pressure on bank resources, banks must now prioritise adopting a new technology-focused strategy. A recent report by Accenture revealed that 72% of senior industry executives felt their bank had only a fragmented or an opportunistic strategy in place for digital innovation.3 The speed of fintech-fuelled change in the payments arena means banks need to shake off their reputation as being slow to adapt by implementing swifter technology development cycles and replacing legacy payments systems.
The financial services industry already has one of the highest ratios of IT spend as a proportion of revenue,4 with levels expected to reach US$197 billion in 2015.5 That said, over three quarters of this is estimated to be in maintenance rather than new services. Banks need to redress this imbalance.
Indeed, digital currency-based solutions and the potential they hold in terms of settlement
mechanisms and exchange of value are forecast to act as a disruptive force in the wholesale payments sector as various fintech start-ups launch their offerings in the medium- to long-term.
In recognition of the growing role of fintech in the world of corporate payments, banks are exploring allegiances with some of these tech-savvy start-up companies, in order to expand their knowledge
and understanding of potential developments, and to be a real part of the new digital direction of
payments. Banks are doing this through a number of methods, including venture capital investment and accelerator/incubator programmes.
As heightened demand for enhanced user-friendly payment experiences filters through from the retail space into the wholesale and corporate sector, banks - regardless of size or market - must ensure they are positioned to tap into these exciting fintech developments, and leverage the creativity and flexibility of non-bank players. Failure to do so brings the risk of being outmanoeuvred by more nimble competitors, who will be quick to leverage the numerous opportunities this new payments landscape has to offer.
http://www.fintechinnovationlablondon.net/media/730274/Accenture-The-Future-of-Fintech-and-Banking-digitallydisrupted-or-reima-.pdf
http://www.economist.com/blogs/economist-explains/2015/06/economist-explains-12
http://www.fintechinnovationlablondon.net/media/730274/Accenture-The-Future-of-Fintech-and-Banking-digitallydisrupted-or-reima-.pdf
http://www.dotain.com/Gartner.pdf
http://thetally.efinancialnews.com/2015/02/fn-fintech-focus-much-banks-spend-new-tech-investments/
3 The Growth of Fintech
The past five years have seen a growing number of fintech start-ups and non-bank payment providers venturing into - and shaking up - the payments arena, taking advantage of an array of new technologies and market conditions, and leveraging alternative business models that could both disrupt and complement traditional payments practices.
This trend has been fuelled by a healthy increase in global investment into the fintech sector (see figure 1), led predominantly by venture capital, private equity and angel investors. Last year in the US, in one year alone, fintech investment nearly tripled,6 and such innovation enthusiasm is apparent around the globe. London, San Francisco/Silicon Valley and New York
have already established themselves as key hubs for innovation, and are fast being followed by new innovation centres around the world. Amsterdam,
Stockholm, Paris, Berlin and Dublin, for example, have all been identified as key growth areas within Europe's fintech ecosystem, and are complemented by thriving sectors in locations such as Tel Aviv.7
Furthermore, innovation is emerging in a range of business areas within the finance industry, with the main emphasis on the development of solutions addressing the needs of retail and small- to mid- market players, from lending, payments and 'big data', to messaging, security and FX.
$6,000.0
$5,000.0
$4,000.0
82
$3,000.0
65
79
$2,000.0
$447
$1,000.0
128
127
117
154
141
151
159
142
194
190
180
Funding ($m) LHS # of Deals RHS
$5,589
214
250
173
161
$3,090
200
150
$1,678
100
50
$0.0
Q1 Q2 Q3 Q4
Q1 Q2 Q3 Q4
Q1 Q2 Q3 Q4
Q1 Q2 Q3 Q4
$284
$612
$481
90
$676
$722
$434
92
$538
87
$597
$625
$923
$597
$677
$737
$1,306
$1,300
$1,687
0
Q1 Q2 Q3 Q4
2010 2011 2012 2013 2014
Source: Investment Trends in Fintech, Silicon Valley Bank
http://www.svb.com/News/Company-News/2015-Fintech-Report--Investment-Trends-in-Fintech/
https://newsroom.accenture.com/news/fintech-investment-in-us-nearly-tripled-in-2014-according-to-report-by-accenture-and- partnership-fund-for-new-york-city.htm
https://jaxenter.com/best-cities-work-fintech-developer-114542.html
4 Drivers of Change
Technology is of course at the centre of the transforming payments landscape, with new and improved solutions and capabilities influencing consumer behaviour and expectations, as well as driving substantial industry change. Drivers of change include new technology itself and the subsequent chain-reaction of behavioural changes catalysed by the introduction of this new technology.
Innovation is occurring at a rapid rate, with payments-industry enhancements being developed and implemented at a faster pace than ever before, in particular around data management, security, and the move to modular IT.
Cloud-based solutions, for example, are flexible, cost-effective and can be scaled up to accommodate growing demands, enabling
businesses to build and adapt their operations more effectively and efficiently. Elsewhere, application programming interfaces (APIs) enable the interaction between two or more online connected services, providing the opportunity to build solutions that integrate and combine different services and data sources.
While such processes are available to banks, it is the start-up sector - including online payment providers such as PayPal and Stripe - that has demonstrated the highest degree of adoption.
In fact, new cloud and API technology has been instrumental in enabling the start-up sector to disrupt established players and accelerate change.
New technology has also significantly improved storage of, access to and interpretation of information and data - resulting in significant commercial benefits, yet also the need for greater information protection. Here again, however, new technology
is providing an answer, with biometric security leveraging unique identifiers such as fingerprints, facial recognition, iris scanning and voice recognition to provide stronger security, while simultaneously improving the overall user experience.
More recently, proposals have been raised to increase payment and data security by reading and interpreting consumers' spending history.
For example, card providers can use data modelling to raise alerts regarding potentially fraudulent activity, and can check a payee's location via their mobile phone's GPS, providing a further data point with which to assess the validity of a transaction. For payment providers, these and other security initiatives offer the opportunity to push services out to smartphones and other devices (in line
with customer demand) without increasing the associated risk.
For the banking industry, perhaps the biggest potential comes from the rise of 'big data'. Indeed, McKinsey, the consultancy firm, has already identified the banking industry as one of the market sectors that could most benefit from better use of customer and market data.8
Technology advancements have made it possible to effectively analyse and interpret vast, complex sets of data; uncovering untapped patterns and trends from which new client insights can be gleaned. This 'smarter' data management allows banks to create more effective, client-centric solutions that are more aligned to client behaviour and needs. Such capabilities can permit banks to optimise their
own internal processes and add significant value to clients through better understanding of their business. Banks can extend these enhanced data management capabilities directly to clients, who can use the insights in a number of ways, including
as a means of cost saving through the identification of common errors, for instance.
Certainly, better information management can be a key differentiator, and there is a growing awareness in the business community of the value this data presents, and its significance as a source of competitive advantage if fully leveraged.
8 http://www.mckinsey.com/insights/strategy/are_you_ready_for_the_era_of_big_data
If banks don't react with urgency and adapt to these developments they are at risk of being overshadowed in the very sector in which they are traditionally renowned. As non-banks continue
to introduce a host of new digital capabilities, an element of disruption is emerging within the
banking sector - and the failure of banks to keep up and offer enhanced client solutions will only exacerbate this.
Market trendsChange comes not just from these new technology capabilities, but from the way in which (and extent to which) such advances are being adopted. In today's truly globalised world - where emerging markets have the ability to 'leapfrog' their more developed counterparts, and where the transfer
of new information is both instantaneous and global - the adoption and impact of new tools and solutions is more rapid and widespread than ever before. Indeed, today's breakneck rate of adoption is itself an enormous driver of change (see figure 2), with many new innovations now achieving mass-
market penetration at a far faster rate than was ever thought possible, let alone likely.
Reprinted with permission from November 2013 HBR blog,
'The Pace of Technology Adoption is Speeding Up' by Rita McGrath. Copyright 2013 by Harvard Business Publishing; all rights reserved.
The almost inconceivable growth in mobile and smartphone usage (in 2014, the number of mobile phones in use surpassed the number of humans on this planet9) is placing digital services in the hands of consumers who previously couldn't be
reached, delivering richer, value-added experiences across the globe. Boasting access to cloud-based technology and with consistently-fast mobile signals, smartphones are enabling digital services to be accessed by almost anyone, anywhere, anytime.
Such capabilities are having the most significant impact in emerging markets, particularly those with fast-growing middle class populations. These previously unbanked populations increasingly require financial services, and mobile phone technology allows access to payment solutions without the need for a dedicated physical infrastructure - again, speeding up the rate of adoption.
Industry changeLike consumer trends, industry changes can have a huge impact on payments innovation. The global financial crisis prompted the introduction of myriad new regulations to restore confidence in the banking industry; for example, introducing a greater emphasis on intraday liquidity and risk management. The result has been enhanced
transparency and data visibility, which in turn aids cash management and can generate cost savings for clients. Furthermore, the element of security that such standards of regulation enforce is a key strength in banks' standing in the payments space.
Efforts to increase payment processing harmonisation have also been stepped up, through initiatives such as SEPA and ISO 20022. The establishment of these common standards is an important enabler in the growth of national and international payments infrastructures. Common standards have also enabled a more modular approach to IT in which new services can be added to existing systems without the need for complex intermediary layers.
http://www.independent.co.uk/life-style/gadgets-and-tech/news/there-are-officially-more-mobile-devices-than-people-in-the- world-9780518.html
5 Consumer and Retail Payments
Not surprisingly, the consumer and retail payments sector is the fastest-moving in terms of innovation and adoption of new payment capabilities. Growth in e-commerce has both facilitated and encouraged the further development of digital payments
some services, from institution to individual and vice versa. The sector has seen healthy growth (see figure 3, which highlights estimated growth in the US) with forecasters expecting such growth to accelerate in the near term.
experiences, with the movement towards a 'post-
cash' economy also being driven by a growing consumer expectation for real-time payments.
Figure 3: Forecasted growth in mobile payments100%
With initiators of corporate payments regularly exposed to the enhanced possibilities available in consumer and retail payments (and to an increasing extent as the tech-savvy youth of today become
the business leaders of tomorrow), demand for an optimised payments experience - in terms of
speed, convenience and multi-channel accessibility
- is diffusing into the corporate payments arena.
90%
Billions of US Dollars
80%
70%
60%
50%
40%
30%
20%
$28 $26
$10
$49$50
$86
Consequently, even banks operating purely in the
10%
0%
$5 $5
$7$9
$16$15
corporate/wholesale sector must ensure they
remain apprised of progress and developments
2013 2014E
Estimate 1
2015E 2016E 2017E 2018E
Estimate 2
in the retail and consumer space, if they are to anticipate and prepare for further changes to the payments business.
Such retail-side innovations include:
●● Mobile wallets
The huge market penetration of smartphones is driving innovation in 'mobile wallets', which enable consumers to make payments via their
mobile phones. For example, if a digitised version of a credit card is stored within a mobile wallet and used to make a payment, banks can link the card number to the user's account and thereby authorise the transaction.
With payment security a key concern in today's risk-averse environment and a prime factor
in consumer receptiveness to mobile wallets, risk mitigation has been a particular focus for innovation in this area. The development of biometric data and tokenisation (which translates consumer credit card details into temporary 'tokens', allowing payments to be
authorised without the need for disclosing credit card details to the retailer) are important steps towards addressing this issue and increasing confidence in mobile payments as a whole.
●● P2P mobile payments
Person-to-person (P2P) mobile payments provide a means of transferring value between individuals via mobile devices and, in the case of
Source: John Heggestuen, THE PEER-TO-PEER PAYMENTS REPORT, 2015: The exploding market for smartphone apps that transfer money, Business Insider http://uk.businessinsider.com/growth-in-peer-to-peer- payment-apps-report-2015-4?r=US&IR=T
One service called Paym uses the UK's Faster Payments infrastructure to enable customers of many UK banks to make payments directly to each other's accounts. The launch of Paym reflects the comparatively consolidated nature of the UK retail banking market.
For the moment, the impact of mobile
capabilities has been much smaller in the corporate and wholesale payments sector,
reflecting greater concerns around security and the need for more complex information to accompany transactions. But with
the infiltration of smartphones into the
payments world only expected to increase, this provides a viable opportunity for banks
to adapt and consider solutions that cater to multi-device demands.
●● Foreign exchange and remittances
FX is another area of payments being explored by an increasing number of new non-bank providers. Traditionally, organisations offering
FX charged higher rates as a means of protection against exchange rate fluctuations, but technological innovation has enabled money to be exchanged in (near) real-time, reducing the
currency risk faced by banks and money transfer
agencies. A number of alternative FX service providers have recognised this opportunity and entered the market, offering minimal costs and
- in the instance of P2P business models such as WeSwap10 - enabling users to buy and sell currencies directly at an agreed rate.
This method of bypassing banking networks is undeniably efficient and the growing presence of non-bank providers should act as a trigger for banks to consider revisiting their FX strategies.
●● Real-time payments
Consumers in retail banking are also benefitting from the development of payment systems that
Figure 4: Countries that have introduced real time payments solutionsMexico UK Switzerland Poland Sweden Turkey India Taiwan Japan
run in real-time rather than via the traditional
Chile
Brazil
Nigeria
South Africa Saudi Arabia UAE
Singapore
(and relatively slow) method of batched processing. This in turn has fuelled further innovation, enabling consumers to conduct payments without the need for credit or bank cards; instead using service layers that run on top of existing real-time payment infrastructures (e.g., the UK's Zapp, which runs on top of the Faster Payments service).
The movement to real-time payments poses serious technical challenges to the global banking infrastructure, specifically linkages to anti-money laundering (AML) and reporting databases, as well as customer accounts payable/receivable and reconciliation.
Yet with new entrants to the payments sector typically launching with real-time payments models (consider PayPal), and with clients coming to expect and demand such high standards, any failure to provide real-time payments in the long-term would leave a bank vulnerable to competition.
That said, such 'faster payment' schemes have been enabled by the introduction of ISO 20022 and XML standards, making it much easier for banks to work together on common approaches and thereby defend their ground. Indeed, a growing number of countries are exploring real-time solutions (see figure 4), making it easier for banks to meet customer expectations.
Source: Global Emergence of Real-Time Payments, 2014, VocaLink http://immediatepayments.vocalink.com/
For example, MyBank is a pan-European payment authorisation solution (operated by EBA Clearing) that enables users to authorise payments via the online banking portal of their own bank on either a domestic or pan-European basis.
While such cross-border real-time payments initiatives are likely to grow in number and size, the implementation complexity of previous harmonisation schemes (such as SEPA) indicates that building new payment platforms across international jurisdictions could yet pose a significant challenge.
●● Digital currency solutions
Digital or cyber-currencies provide an alternative to traditional 'fiat' (non-commodity-backed)
currency as a store and transmitter of value. Bitcoin is the most well-known, using a P2P structure that facilitates transactions between parties without the need for an intermediary. As payments are made, changes in the ownership of the Bitcoin are recorded on what is known as the blockchain, with a block added to the blockchain when users spend Bitcoin11 (see 'Digital currency-based solutions'
on page 10 within the Wholesale and Corporate Payments section for further details).
The Bitcoin payment infrastructure operates by converting in and out of fiat currency, and incurs much lower fees than traditional credit card-based transactions. Yet with the majority of solutions currently requiring consumers to explicitly buy and sell Bitcoin or other digital currencies, this creates a substantial barrier to adoption.
http://www.ft.com/cms/s/0/92da2498-8a9d-11e3-ba54-00144feab7de.html#axzz3hlkNGvhG
Double spending results from money being spent more than once. Bitcoin addresses the issue through the use of a decentralised ledger.
6 Wholesale and Corporate Payments
Industry changes can have a huge impact on payments innovation and it is this that is largely driving developments in the wholesale and corporate payments sector. Indeed, it must not be forgotten that in the midst of the technology advancements impacting the retail space, the
wholesale and corporate banking industry itself has been evolving.
●● Harmonisation of standards and markets
For one, globalisation of the payments industry is being facilitated by various international agreements and bodies looking to encourage standardisation. Among these initiatives
are the International Payments Framework (between the USA and Europe), the China International Payments System (CIPS), and SEPA and TARGET2-Securities12 (T2S) in Europe. T2S, for example, is a single pan- European settlement platform designed to address Europe's fragmented settlements
infrastructure, creating integration and reducing the associated complexities of working across
national boundaries. T2S also aims to reduce cross-border transaction costs, and its real-time settlement capabilities will minimise post- trade risk. Other benefits include enhanced settlement efficiency and liquidity management services.13 By way of illustration, BNY Mellon's decision to become a Directly Connected Participant on T2S in a selection of European markets means BNY Mellon can offer clients
the suite of improvements available through the new initiative. And further to its existing direct connection in Germany and the Netherlands,
by opening accounts directly at the Central Securities Depositaries in Belgium, France, Italy and Spain, BNY Mellon will be able to settle over 90% of its European transactions directly on T2S.
In addition, the introduction of ISO 2002214 (see figure 5) and associated XML and ASN.1 standards have provided a common language for banks' and payment providers'
systems to communicate, markedly increasing process efficiency.
Figure 5: Global ISO 20022 adoption by Payment Market InfrastructuresLive
Live
FI
Live
Live
CMPG, RU
CPA, CA
Live DK
UK
SEPA, EU
Live
IPFA
T2, EU
US
Live
CH
IT
Live
IN
BOJNet, JP
Live
CO
Live
Live
ZA
SADC BN
AU
SCORE
Source: Financial Market Infrastructures' Adoption of ISO 20022 by Country, SWIFT, September 2015
T2S is a European securities settlement engine which aims to integrate and harmonise Europe's settlement infrastructure, which like SEPA, will bring the European Union closer to a common market. Central securities depositories will migrate in four waves between June 2015 and February 2017.
https://www.ecb.europa.eu/paym/t2s/pdf/specser/T2S_SpecialSeries_final_01.pdf
ISO 20022 is a messaging standard for financial services providing a metadata repository containing descriptions of messages and business processes.
The establishment of these common standards is an important enabler in the growth of local and global payments infrastructures. Common standards have also enabled more modular approaches to IT, in which new services can be plugged into existing systems without the need for complex intermediary layers.
●● Bank Payment Hubs
Some banks are implementing bank payment hubs (BPHs) as a means of updating clunky legacy infrastructure. A BPH brings together different elements of banks' payment systems, enabling the better-management of payment flows and improving flexibility, thereby allowing banks to respond more easily and quickly to changing demands and market conditions. The adoption of a common platform allows ancillary services such as AML to be integrated at an organisation-wide level, as well as supplying a more open platform upon which new services can readily be built (such as value-adding cash management services). Payment hubs also leave banks better placed to handle the demands of faster payments and risk management systems.
A BPH's integration of payments data also enables banks to move away from siloed information toward a single customer view. Certainly, the increased transparency and availability of data is extremely valuable, and can add value to both banks and end-client businesses in terms of process management, cash management and cost savings.
Furthermore, BPHs move banks' payment systems to industry standard messaging, enabling them to connect more seamlessly with outside channels and partners.
While the benefits of a BPH are clear, the implementation of such a structure is complex and brings with it substantial risk given the complexity of implementation and the central role of payments to the majority of banks. This is not a strategy to be adopted without careful
consideration, yet the process has been alleviated somewhat by the introduction of software layers (yet another example of recent innovation), which allow individual system components to feed separately into the core system.
●● Supply chain finance (SCF)
Today's era of true globalisation sees businesses exploring and establishing relationships with
an increasingly disparate selection of buyers and suppliers (with markedly different financial set-ups) across the globe. This, combined
with technology capabilities that significantly enhance supply-chain transparency, is helping to create a plethora of opportunity in the field of SCF, resulting in substantial growth in usage and product development.
SCF provides an invaluable opportunity to strengthen relations with suppliers; something that is all the more important when dealing with far-flung trading partners in times of socio- economic change. Recent innovations, such as reverse factoring, look to optimise the utilisation of working capital within the supply chain, creating mutually-beneficial arrangements between buyers and suppliers. Alternatively, dynamic discounting can enable buyers and suppliers to negotiate payment terms and discounts; a particularly attractive method when buyers have capital available that can be redeployed to suppliers in exchange for better trading terms.
●● Non-traditional lending
The global financial crisis compounded the difficulties many small and medium enterprises (SMEs) faced in obtaining finance, providing fertile ground for the growth of a range of non- traditional channels. Alternative lending is now a well-established sector (see figure 6), extending credit to SMEs by deploying alternative data sources and using new sources of capital.
Figure 6: Size and growth of alternative finance categoriesBreakdown of 2014 market by platform Average growth rate 2012-2014
P2P business lending
£749m
250%
P2P business lending
P2P consumer lending
£547m
108%
P2P consumer lending
Invoice trading
£270m
174%
Invoice trading
Equity crowdfunding
£84m
410%
Equity crowdfunding
Community shares
£34m
95%
Community shares
Rewards crowdfunding
£26m
206%
Rewards crowdfunding
Pension-led funding
£25m
5%
Pension-led funding
Debt-based securities
£4.4m
117%
Debt-based securities
Donation crowdfunding
£2.0m
77%
Donation crowdfunding
Source: Understanding Alternative Finance:The UK Alternative Finance Industry Report 2014, Nesta-Cambridge 2014 https://www.nesta.org.uk/sites/default/files/understanding-alternative-finance-2014.pdf
A variety of business models have emerged to address this niche, including new form lending (which bases credit decisions on near real- time cash-flow data, giving a clearer view of a business's health than can be obtained from
historical business records). Specialist providers are often able to offer more user-friendly, competitively-priced solutions, potentially eroding the market position of banks.
●● Digital currency-based solutions
The impact and usage of digital currencies on wholesale payments have been far less
noticeable than in the retail payments sector, yet this is likely to change as cryptocurrencies become viewed less as stores of value and more as means of reducing friction within the payments process.
The potential that Bitcoin's infrastructure, the blockchain, could hold for corporate and
wholesale payments is becoming increasingly
Indeed, while it is possible that the Bitcoin may not succeed in the long-term as a cryptocurrency, it is the technology behind it
- the blockchain - that is the real innovation, which a growing number of banks (including BNY Mellon) believe may be effectively leveraged
to transform payments. The structure of the blockchain could, for instance, help to reduce risk and transaction costs, and improve speed, efficiency and transparency.
Of course, Bitcoin was designed to enable the transfer of value through the movement of Bitcoin alone, so the blockchain does
not currently support direct fiat currency transactions. A range of solutions is therefore being developed that build upon the Bitcoin infrastructure, and there is also a range of alternative digital currencies either available or soon to be launched, known as Bitcoin add-ons or 'altcoins' (alternative cryptocurrencies),
15
of interest. The blockchain is a cryptographic,
based on blockchain principles,
that more
decentralised record of each step of every transaction made, which can be accessed by any computer within the Bitcoin network. This means information is transparent (allowing the entire transaction - and therefore, ultimately, ownership - to be tracked), yet protected and unable to be changed.
specifically target opportunities in the wholesale
payments market.
Ripple, for example, is positioning itself as a layer on which remittances and currency
exchanges can take place without the need for international settlements. An innately appealing solution, this concept could even become a
http://gendal.me/2014/06/10/a-decentralized-securities-trading-and-settlement-system-is-being-built-hidden-in-plain-sight/
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