European regulation becomes a catalyst for fintech investment in the U.S.
New European standards require greater data sharing to accommodate faster transaction processing, mobile payments and other digital efforts — a trend that is also inspiring new collaborations across the pond.
PSD2, or the Payment Services Directive, requires banks to more openly share information with third parties in Europe. With U.S. institutions under the same pressure to respond to market forces, companies such as KeyBank are directly approaching technology companies with capital to fuel innovation.
"PSD2 in Europe is coming more from a regulatory perspective. What you have seen in the U.S. is more of a market-based approach, but you have players that are committing to advancing the ball more toward real-time systems," said Matt Miller, co-head of product and innovation for enterprise commercial payments at KeyBank, which has recently added to its investments in emerging payments technology.
There's a strategic necessity for banks to deepen their involvement as third party companies innovate around the actual payment, according to Miller.
"A lot of banks have historically focused on payment execution, how to move money from point A to Point B," he said. "But during that time the clients got interested in the added features that came before or after the payment. The fintechs figured that out before the banks."
Key's investments include a stake in AvidXchange, a SaaS-based accounts receivable company that integrates with more than 100 accounting systems powering a direct connection between the payment and back office at businesses. It has also invested in InstaMed, a company that develops omnichannel technology for the health care industry. Most recently, Key took a stake in Billtrust in an effort to combine business payments with other business services such as travel and procurement.
"Our clients are warming to this notion of banking services that help them to be more operationally efficient," Miller said. "The payment itself may help accomplish that, but we're also looking to add value behind that payment."
Other companies are also making investments. IBM, for example, is investing in advanced application programming interfaces that allow programmers to build payment systems that comply with PSD2's new specifications.
While PSD2 is a European-focused standard, IBM is targeting banks globally with the new payment API, promoting its tools to aid digital payment initiatives and integrations between technology companies and banks to move data faster to power real-time processing.
Other technology companies such as Modulr are addressing the connections that will automate payments between businesses, removing paper-based processes; while ACI Worldwide is among those addressing the security upgrades that faster processing will require. In Canada, government agencies and private companies are working together to update the national payment system to support a more automated, and less paper-based future.
"Faster payments is certainly unlocking a great deal of change and innovation in the payments space. I would, however, suggest that it is not just the introduction of faster payments that will be driving the U.S. market to a more open banking market, but also the faster growing adoption of APIs," said Linda Coven, a senior analyst at Aite, adding The Clearing House has been clear as it rolls out its new real-time payment rails that it will allow connectivity to more non-bank processors to encourage ubiquity. "In addition, to get to the unbanked, a more open 'banking' model will be needed."