Payments: The Financial Ecosystem Growing in the Banks' Shadow
The Secret Growth of Cashless Payments
Payments, specially cashless payments, have accompanied the existing banks round like a shadow. Before this wave of Fintech, the banks couldn't conceive the notion that cashless funds would occur devoid of them.
Of direction, payments itself existed method before banking used to be instituted—with cash or the previous store of worth (e. g. Gold). But while banking first all started to apply paper to replace gold, then virtual bytes to replace paper, it used to be assumed that the money process was component and parcel of the banking business.
Well, instances have modified.
There is now a thriving environment developing within the banks' shadow. No, this is not 'shadow banking', but rather, a whole new ecosystem of processing cashless payments, and it's developing under the lengthy shadow of the banks.
It is similar to how whenever you transfer, your shadow strikes with you. So once you start taking walks down the street, your shadow will observe your footsteps. Now, if you walk away, your shadow stays there. And, scarily sufficient, it seems like your shadow is beginning to move independently of your movements.
That's how a lot the payments industry has grown, vis-à-vis the banks.
How has this impacted the banking industry? Well, let's discover. . .
PIZW
The Banks Have Withstood the Regulatory Onslaught
If you aren't conscious, the banking industry is one of the extra heavily regulated industries.
The payments industry, then again, seems to are becoming off gently.
This is simply because the principle recognition of the regulators are the banks. In the aftermath of the Great Financial Crisis, the regulators piled up the regulations thick and speedy, and the banks have needed to shoulder this burden for the longest time.
The payments firms, however, have managed to break out this scrutiny (for now. . . ).
Additionally, a key element of world laws, the Anti-Money Laundering (AML) laws, had been dumped on the banks. The bulk of KYC (Know Your Client), CDD (Customer Due Diligence), and AML necessities be fulfilled by means of banks, and the payment provider suppliers can just leverage on the banks to have done the right KYC. After all, one significant regulatory hurdle is cleared if the fee serrvice providers are entitled to place confidence in the CDD performed by way of the banks, and so do now not should perform most of the same exams on the payments they process.
Regulators also are cautious to no longer strangle this industry with over-regulation. After all, if a brand new payment Fintech had to comply with the whole suite of rules (or even only a sturdy AML framework), it's possibly that none of them will get off the floor.
Thus, the regulators are additionally conscious that since the Fintechs do not but pose a systemic danger (in contrast to the banking sector), they does not want to stifle innovation too early, yet simply step in when the dangers develop too huge.
Many payment offerings are also supplied as an 'add-on' service, to supplement and reduce the friction of the core business that a Fintech in reality conducts.
Payments Didn't Start Out in Isolation
Another intent why the payments ecosystem can thrive in the banks' shadow is simply because there is typically another enterprise that supports it.
For example, Alipay and Wechat pay did not simply get born simply because a person desired to do payments. They were born to enrich different wildly successful corporations, particularly Alibaba's e-commerce shop and Wechat's excellent-app.
From a Singaporean context, GrabPay didn't just start out looking to do payments both. It was born to help the current GrabCar enterprise, and merely from there did they grow GrabPay.
But needless to say, there are firms like PayPal and Stripe. But just consider that PayPal was spun off from eBay, and Stripe supports many big tech firms (e. g. Uber) that don't have payments embedded in their model.
So, such firms also grow because they provide the support to other tech gamers in the ecosystem, not that they set out to simply be a 'payments enterprise' out of nothing.
Well, what position does the bank play in all of this?
It is in fact nonetheless a key one—it is the source of budget, i. e. , the deposits. The ecosystem was capable of grow in the shadow of the banks because the banks provided the deposit infrastructure and handled the deposit regulations (which is largely a banking licence).
Today, some BigTech companies have grown so robust that they do not want a bank to preserve the deposits anymore (suppose Alibaba/Ant Financial), but that was after years of prospering in the banks' shadow.
Due to this increase, the huge shadow that is solid by the banks is no longer enough to comprise them. Regulators have began to take note, with a notable act being passed by the MAS (the Payment Services Act).
To Round It Off, I Cannot Forget to Mention Bitcoin
Just bear in mind the fashioned wording of the white paper. Remember that the original cause behind Bitcoin was a peer-to-peer check system!
A only peer-to-peer model of digital money could permit on-line payments to be sent directly from one party to another with out going thru a economic organization.
— Satoshi Nakamoto
The complete point of Bitcoin was to grow a separate ecosystem the place individuals did not have to place confidence in banks to process payments.
Of path, Bitcoin, Ethereum, and the entire cryptocurrency and blockchain equipment has grown method beyond the fashioned white paper that Satoshi wrote.
Now, not in simple terms are personal companies jumping into the fray with Libra, Central Banks are also taking part with Central Bank Digital Currencies (which I nonetheless have my reservations of as shared in my earlier article).
But again, those mechanisms adhere to the founding standards of Bitcoin—to create an ecosystem where you can make payments while not having to go through the banks.
With Bitcoin, it kind of grew out of the shadows of the banks as it really enables individuals to bypass the complete banking and fiat device completely, and to rely entirely on computing energy and consider in the set of rules.
This is why some people criticise it has having no intrinsic price, but without a doubt, no fiat has any intrinsic value either, other than faith in the executive (given that there is not any longer the gold popular). Of course, the federal government itself gives legitimacy to the forex, but not all governments are same, and that's one reason why cryptocurrency is more effortlessly prevalent in areas with susceptible or no government presence.
Of course, regulators try to deliver crypto into the fold by making use of regulations to the 'points of access' (e. g. Exchanges) and the ICOs, but except they control to close off the internet, Bitcoin mining can still go on (if there have been no ASIC miners, Bitcoin is certainly an unstoppable pressure).
The Banks Take Notice
Now, when the banks appearance over their shoulders, they see the thriving ecosystem growing in their shadow. The banks have taken notice. Whether it's too late, only time will tell.
It is a provoking notion for the banks that now when they begin to move, the 'payments shadow' that they forged no longer move with them. Sometimes, the shadow even strikes beforehand of them.
It is an interesting yet upsetting time—there's a lot obtainable to study and explore.
And for sure, the banks now have to observe their backs—not just from other banks, but from their very own shadow.
Join the conversation