The commercial banking and payments industry is undergoing a powerful metamorphosis. The onset of new technology has drastically altered corporate and consumer expectations. With so much flux, businesses are constantly working to stay competitive, mitigate risks, and set themselves up for the next wave of transformation.
In his new report, Movements in Global Commercial Payments and Banking: 2024 Edition, Albert Bodine, Director of Commercial and Enterprise Payments at Javelin Strategy & Research examines the seismic shifts in banking trends, including instant payments, ePayables, and cross-border payments. He also points to aspects of the traditional banking system that will be left behind.
The Impact of Instant Payments
Although instant payments may represent the future of banking, their impact is already being felt across the banking landscape. FedNow, launched in July 2023, has seen significant growth, with the number of participating banks increasing from 300 by the end of the year to 400 in early 2024. Bodine expects that positive trend to continue.
The demand for instant payments extends beyond the borders of the U.S.—it’s a global phenomenon. India’s UPI and Brazil’s Pix have led the global instant payments charge, collectively facilitating over 100 billion transactions in 2022.
“We’re seeing the dramatic use of instant payments in India, Brazil, and Asia, and it’s picking up steam in the European Union,” Bodine said. “The real tipping point is going to be when we see the cross-continent and cross-ocean payments influx, and I don’t think we’re too far away from that happening.”
As the instant payments movement gains momentum, certain traditional banking practices are likely to be phased out, with paper checks leading the pack.
“It boggles my mind how paper checks are still around and how prevalent they are,” Bodine said. “I think we’re going to see intentional movements away from checks, perhaps driven by governments or large corporations or banks, where they will look to eradicate paper checks by any means possible. There could even be tax incentives or financial rewards to get consumers to stop using and receiving paper checks.”
Non-Systemically Important Banks
Checks may not be the only fixture of traditional banking facing obsolescence. Bodine believes the tough conditions in the industry, forced by persisting high interest rates, will continue to put enormous pressure on small-to-midsize banks.
The pressure may lead to an increase in bank failures, with no safety net available for institutions deemed non-systemically important.
According to the U.S. Department of the Treasury, a systemically important bank is defined as one whose failure or disruption could pose a substantial risk to the stability of the U.S. financial system by potentially causing liquidity or credit problems to spread among financial institutions or markets.
Given the growing public aversion to government bank bailouts, Bodine sees issues ahead for non-systemically important banks. If they falter under the weight of high interest rates, governments aren’t as likely to step in and save them anymore.
“The salient point being, if you’re a company, especially a large company with deposits concentrated in a non-systemically important bank, you better be darn sure that bank is on solid footing,” he said. “If you’re not, then I hate to say it, but you should be not with that bank.”
Vehicles of Disruption
The transformation of the banking landscape isn’t over, as technology is changing exponentially. Bodine expects to see the continued rise of Automated Clearing House (ACH), which has been on the steepest trajectory of any payment type.
He also expects to see the continued adoption of ePayables, which are based on credit card lines, even though no physical card is used. EPayables are a strong alternative to wire transfers for sending large amounts, as these transactions often cost less. They could also be a vehicle for cross-border payments, a segment that has seen surging demand.
Even though the use of wire transfers and correspondent banking has continued to be strong, Bodine sees faster, more secure, and more efficient methods displacing them.
“Vehicles of disruption are going to be instant payments and ePayables,” Bodine said. “Cross-continent and cross-ocean payments are likely to be driven by credit card companies. They already have this massive highway built, and they’re in every bank in every country in the world. They just seem to be the obvious choice to do cross-border payments.”