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Treasury Technology

The Future of Fintech: Implications For Banks, Startups And Corporate Treasury

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March 29, 2018

A look at fintech trends and how institutions like Deutsche Bank are interacting with fintech providers to bring new solutions to banking clients—including treasurers—to harness data, process payments and better meet the needs of customers in the digital age. 

Fintech Facts and Trends

Search Merriam-Webster online for "fintech" and you're told the word isn't in the dictionary. But a recent Google search for the word yielded about 35 million results in less than a second. Between those two outcomes lies a technology field that may be hard for some observers to define, but one that is reshaping the worlds of treasury, finance and banking in the new digital age.

Despite assumptions to the contrary, banks on the cutting edge of the digital revolution don't view fintech innovators as competitors but as clients and partners. "The recent developments in the fintech space entail immense opportunities for us and our clients," says David Watson, head of cash management Americas and global head of digital cash products at Deutsche Bank. "Besides the collaboration and investment opportunities, we also see increased demand from fintech providers for specific payment capabilities—which make fintech companies an increasingly important client segment for us."

Consider these numbers for quantifiable evidence of the market power and allure of fintech: Fintech firms racked up nearly $3.5 trillion in global transaction value in 2017 and that's expected to reach about $8 trillion by 2022, growing at a compound annual rate of 18%, according to Statista's "2017 FinTech Report." No wonder, then, that venture capital fintech deals and financing reached a record $16.6 billion last year, more than four times the 2013 level, as outlined in CB Insights' "Fintech Trends to Watch in 2018."

Driving much of that investment are technologies that have become buzzwords many people recognize but may not completely understand. They range from blockchain/distributed ledger technology to open banking leveraging the cloud and APIs (application programming interfaces) to robotics, AI (artificial intelligence) and machine learning to the internet of things (IoT). And while many of the standout applications of fintech's early phases involved business-to-consumer tools for retail payments and lending, the pendulum is swinging to business-to-business uses, including real-time and cross-border payments, regulatory compliance (regtech) and data analytics.

Against this backdrop, NeuGroup peer group meetings and research attest to the pressure many treasuries face to modernize, digitize and automate with the help of fintech. A recent cross-group survey found 85% of treasury transformation projects involve changes to treasury systems infrastructure, including treasury management systems (TMS). That's significant, given that more than two-thirds of responding members have completed a recent treasury transformation project, have one currently underway or plan to begin one in 2018.

The rapid pace of fintech innovation, though, has left some treasurers scrambling to keep up. In the first half of 2017, NeuGroup asked members of treasurer and assistant treasurer groups about their grasp of fintech. Only 5% of survey respondents said they had a strong understanding of fintech trends and technology, and only 26% said they understood the basics, leaving the door open for a lot of homework and "nonspecific anxiety," as one member put it.

2017 Was a Record Year for VC-Backed Fintech 

Fintech and Treasurers

Treasurers of course, are not wading into fintech waters by themselves or relying solely on their own knowledge about which fintech solutions offer the most opportunity to improve cross-border payments, compliance reporting, trade finance and other areas. In addition to internal IT departments, corporates are turning to their banks to help them navigate and tap into the best tools fintech has to offer. "For clients the key challenge will be how to even start interacting with such an exponentially growing landscape of potential service providers. Our clients predominantly want to learn what new solutions are out there and how we can connect them to the right partners—be it indirectly or directly. In order to do this, we foster a co-innovation culture with our clients and regularly introduce new fintechs to them," says Deutsche Bank's Mr. Watson.

Deutsche Bank is among those institutions driving change by leveraging fintech partnerships to create new corporate treasury solutions. One example of such a collaborative approach is the bank's partnering with a fintech to enhance its payment products with real-time risk surveillance capabilities. In another project, Deutsche Bank has partnered with a fintech provider to run a proof of concept (POC) to disburse payments into e-wallets using APIs.

Banks and Fintech Partners

Collaboration between banks and fintechs represents a shift from early days, when many established financial institutions considered fintech providers primarily as competitors with an intent to disrupt traditional banking. These days, Deutsche Bank and others are far more inclined to enter into strategic partnerships where both the bank and the fintech play to their strengths and serve the interests of the end customer. Mr. Watson says this is the model for the future of fintech. "It comes down to one thing: Understanding how both parties can bring new innovative solutions to the market. Fintechs equipped with these solutions and creative ideas need the expertise, global network and stabilizing foundation of an existing, well-governed infrastructure for financing, risk management, regulatory and compliance requirements," he says.

Deutsche Bank isn't alone: PwC's "2017 Global FinTech Report" indicates that 82% of financial services "incumbents" (including banks) surveyed globally expect to increase fintech partnerships in the next three to five years. The report also states, "FinTech startups don't just need capital, they need customers. At the same time, incumbents need new approaches to drive change and deliver innovation."

Deutsche Bank, Mr. Watson explains, is taking a "portfolio approach" to its relationship with fintechs that supports a variety of partnerships, some that involve taking a minority stake in a fintech, others where the bank wants to own and control the fintech to keep its technology proprietary, and some cases where it partners with a fintech that's also working with other banks.

"In the past when we saw a fintech that we thought could help solve our clients' problems, we would try to buy them, paint them blue, and call them Deutsche Bank," Mr. Watson says. "Now we are perfectly happy to sit in front of a client and say, 'We are Deutsche Bank and we can solve 80% of your problem, and this is Julie from a fintech and she can solve the other 20% of your problem.' This way we can work bilaterally or trilaterally to solve our clients' problems."

To help find fintechs that have the answers to client problems, the bank has to date opened four global innovation labs that serve as its "eyes and ears" into the fintech innovation ecosystem and that provide an environment for startups to collaborate with Deutsche Bank on solutions. In addition to the Deutsche Bank labs, the bank is active in industry consortia, including the blockchain consortia around R3 and the Utility Settlement Coin project. These groups reflect Deutsche Bank's belief that a community-based approach to solving client problems with fintech—requiring some cultural changes at banks—is key to collaborative innovation. "True innovation will be born out of co-creation; this is only possible by bringing together banks, clients, fintechs and other industry partners," Mr. Watson says.

When it comes to new emerging technology, Deutsche Bank is testing everywhere in the fintech tool box, including blockchain, open APIs and cloud computing. Applications include using blockchain to improve payments or issue a bond (once there's a viable contract); using APIs to link to technology that helps clients move beyond legacy systems for back- and middle-office systems; APIs that connect clients to compliance solutions and others that allow them to sift through enormous data sets.

As for the intersection of some of these technologies, Mr. Watson says, "We can visualize how AI, predictive analytics, and IoT can intersect in many different use cases. The question is not when and where this can work but at which point do the systems and processes needed reach a level of cost and complexity that is low enough that they become sustainably viable. Additionally, financial services companies will have to navigate evolving standards, regulations and risk dynamics— particularly regarding data insights, algorithmic accountability and cybersecurity."

Fintechs as Bank Clients

Deutsche Bank is also promoting the progress of fintech—and its own growth—by providing cash management services to fintechs, including those enabling cross-border collections and payments for overseas merchants that sell on e-commerce platforms, for freelancers and for companies with a large global network of independent sales people, or to facilitate international tuition or health care payments.

Fintechs like Payoneer and Hyperwallet saw a huge opportunity to drastically lower the high fees these local merchants or beneficiaries often pay to have foreign currency collections sent to them and have it converted into their local currency. The transactions often involved multiple banks and took a week to ten days to clear. Fintechs offered to cut that time in half or more and reduce fees by offering to make the collections for the merchants and pay them in local currencies, in part by having the fintech set up local bank accounts in its own name to collect and pay on behalf of the beneficiary.

Deutsche Bank and other incumbents, facing the loss of both transaction and FX trading revenue, saw an opportunity to make this into a win-win situation by helping fintechs, says Alex Verbaeten, director and sales manager for cash management services to the tech/fintech industry at Deutsche Bank. "We said, what if we at least worked with these fintech companies by delivering our global footprint and in-country capabilities to them," he says. "This way they don't have to reach out to a very large number of local banks to try and find a partner to make the payment to the beneficiary."

In addition to its big global footprint, fintechs turn to Deutsche Bank for its proven capabilities in foreign exchange and the settlement of collections and payments. These factors and Deutsche Bank's speed are reasons Payoneer has used the bank for cross-border payments for years, says Keren Levy, chief operating officer of Payoneer. "Our customer base of millions of businesses throughout the world required us to find a partner in Deutsche Bank that was able to move quickly as we grew rapidly and expanded into even more countries. The bank was knowledgeable about these new markets because, like us, they're on the ground. Deutsche Bank understands our processes, requirements and how we work, providing the capabilities that a global brand like ours depends on. All that is very beneficial, because as we continue our growth, the bank can go with us," she says.

The bank's commitment to the fintech space is one reason Hyperwallet highly values its relationship with Deutsche Bank, says Derrick Walton, the fintech's executive vice president of global financial networks. "One of the things I've been impressed with is that Deutsche Bank has a fintech group that is watching what's going on in this market," he says. That on-the-ground market knowledge, he says, helps the bank stand out by making it more nimble. "When an issue came up and we wanted to do something fast, they moved fast. They truly understand the ask. They got done in one month something that can take three to six months or worst case a year."

Fintechs that turn to Deutsche Bank for cash management and FX also benefit from integration with the bank's technology and systems, Mr. Verbaeten says. "Our advanced reporting solutions mean that our clients don't have to make expensive changes in their back-end processes," he says. "And they can leverage more advanced technology like APIs and real-time connectivity to our systems. Or it could be an insight the fintech company can have into our back-end systems." The bank's robust compliance processes also help fintechs navigate the myriad regulatory hurdles they face, including KYC and local licensing requirements, he adds.

Deutsche Bank's technological strength—and emphasis on data—holds the promise of helping fintechs in this space gain a critical advantage by increasing the speed of payments. "If we can make it easier for Payoneer and Hyperwallet to see what incoming payment has been collected for which beneficiary, how much it was and what the underlying invoice data are, to have that granular data will help them to make faster payouts," Mr. Verbaeten explains.

Finally, fintechs whose names are not known yet across the globe place a high value on a bank whose name opens doors. "Deutsche Bank has a very good name and a reputation for infrastructure reliability we can tout," says Hyperwallet's Mr. Walton, who says his company has "a great symbiotic relationship with Deutsche Bank. We want to be a lasting player and they've been here for more than a century. So we use their technology, their name, their bank licenses. Deutsche Bank has a big bag of tools."

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