From the rise of mobile banking to the widespread use of artificial intelligence, the past decade has witnessed a remarkable amount of change in the payments industry. Behind many of these changes are fintechs, a term that anyone following the industry has undoubtedly encountered. Fintechs are companies that leverage new technology to offer services that were once exclusively provided by financial institutions, or not provided at all.
At first blush, fintech may seem like a buzzword. However, upon closer inspection, the buzz is justified as fintechs are leaving their mark across the entire payments industry, providing both individuals and businesses with a range of new tools and products.
“The impact of fintechs has far reaching implications for the products and markets that I evaluate in my research practice,” said Sarah Grotta, director of Debit and Alternative Products Advisory Service at Mercator Advisory Group. “I can’t think of a single example that remains untouched by a fintech’s influence.”
She cited the rise of person-to-person (P2P) payment apps as a prominent example of fintech-driven innovation within her research area. “Fintech P2P apps were directly responsible for the launch of the bank and credit union offered Zelle, and other P2P solutions,” she said.
In the corporate banking space, fintechs have also made sizeable contributions. “So much of the impact to date has been in support of cash cycle operational improvements and stronger risk management,” said Steve Murphy, director of Commercial and Enterprise Payments Advisory Service at Mercator Advisory Group.
He explained how many fintechs have been focused on improving the client experience, particularly as it comes to corporate travelers. “This population now has access to mobile applications that reduce the booking and expense reimbursement process to minutes versus the traditional time-eating and stressful paper methods,” said Murphy.
There have also been visible advancements in business lending applications that utilize alternative data and hyper processing speed to support immediate lending decisions during the purchasing process, as well as faster decisions on credit lines and longer term loans.
Fintechs have been incredibly influential for many reasons. One major explanation is down to innovation.
“They bring fresh thought to how payments can operate outside of the legacy infrastructure built over the past 40 years,” said Brian Riley, director of Credit Advisory Services at Mercator. He explained that since fintechs often have less funding than the large, established banks—at least initially—they typically have to build more efficient processes and solutions.
Riley further points out that “fintechs often provide solutions to specific needs – such as expense management or lending – rather than attempting to address the payments ecosystem in its entirety” This approach certainly works to their advantage, because it allows them to re-invent the way the industry thinks, to an extent, and really add value to banks by helping them overcome precise challenges.
Fintechs have been so successful, in fact, that the traditional financial institutions are beginning to collaborate with, invest in, or even acquire them.
Between 2017 and 2018, global funding for payments companies increased from $8 billion to $12 billion, indicating that more investors are taking note of fintechs’ potential. So far this year, major banks in the U.S. have taken part in two dozen fintech equity deals, according to CB Insights. Goldman Sachs and Citigroup are the two most active major banks when it comes to investing in Fintechs, per CNBC.
Banks look to fintechs to help accelerate the development lag, and make processes simpler for end users, said Murphy. Due to compliance obligations and complications involved with delivering products to businesses, corporate banking often lacks innovation, so fintechs play a much needed role as catalysts for innovation.
Fraedom: A case study of a fintech’s impact
Taking a look at the rise of Fraedom, a successful Software-as-a-Service fintech with global reach, helps make clear how fintechs are changing the payments industry.
The company, celebrating its 20th anniversary this year, was founded by Simon Raymer and Shane Bruhns in New Zealand and was originally called “MyPCard.” The pair were inspired while working on an expense management solution for Deloitte Consulting. The inspiration led them to create a scheme agnostic, web-based technology that enables banks to maximize the value of their commercial card programs.
The Fraedom platform enables its end-users to better manage their business expenses by giving them visibility and control over card spend; all whilst helping banks drive card uptake, increase card spend and improve customer retention.
In the ensuing years, the company rebranded twice and witnessed remarkable growth spurred by notable partnerships with major banks, the first being a partnership with the National Australia Bank. More relationships and partnerships followed, and the fintech forged connections with leading financial institutions all around the world, including SunTrust, Lloyds, Bank of Montreal, ING, and UMB.
Fraedom began working with Visa in 2009 and developed an extensive global partnership with the payments giant. Today, Fraedom technology underpins Visa IntelliLink Spend Management, a central platform for the network’s commercial clients. The partnership was such a success that Fraedom became a wholly-owned subsidiary of Visa in 2018.
Presently, the Fraedom platform manages transactions for over 7 million employees worldwide, and the company has offices in the U.K., U.S., Canada, Australia, New Zealand and Singapore.
The impact of Fraedom’s technology is striking. To date, the company’s web-based platform has managed more than 1.5 billion transactions and it supports more than 100 commercial issuing banks worldwide. A total of 600,000 organizations have benefited from Fraedom technology in 178 countries.
While partnerships with banks have been crucial to Fraedom’s success, so too, have partnerships with a range of other businesses. A recent example includes Fraedom’s partnership with Uber for Business in New Zealand and Australia, to simplify business travel. Due to clever integration between the Fraedom platform and Uber’s interface, business travel receipts are now automatically linked to their respective card transactions once the end user reaches their final destination.
Fraedom’s success reflects the key themes identified by the Mercator Advisory Group analysts. The company started by focusing on a specific issue: improving expense management solutions. By leveraging web-based technology, the fintech was able to create a product that added value to both a bank and its end-users.
Financial institutions soon identified Fraedom as a company worth doing business with, and the fintech quickly became a global competitor due to strong partnerships and strategic relationships. Eventually the company was fully acquired by Visa, a world class payments behemoth, and its technology is instrumental in Visa Business Solution’s growth strategy.
The future looks bright for Fraedom, as it seeks to keep innovating and nurturing its existing relationships with issuers around the globe. For fintechs more generally, the future looks just as bright. These companies will keep being catalysts for innovation, creating products and services that continue to redefine the payments industry.