Connecting islands of commercial payment innovation to the payment mainland
New technologies and regulatory change are reinvigorating commercial payments, sparking increasing collaboration between fintechs and traditional financial institutions. But significant challenges remain in this diverse and complex sector, despite the opportunities.
Every part of our lives has been touched by the digital revolution. From ordering take-away food to searching for a partner, almost everything we do has been impacted by the internet. Commercial payments – how companies pay each other for goods and services – are no exception, with mobile wallets, virtual cards, among other products, making it easier for companies to pay and get paid.
Despite the breadth of consumer innovation stimulated by the rise of the digital economy however, the pattern of development of commercial banking solutions – typically, a one size fits all landmass that later splintered into islands of innovation to address a specific need – has left finance and treasury teams with a cumbersome patchwork of payment services and isolated pools of transaction data.
Unfortunately, despite an urgent need, there’s no magic wand that can magically re-unite these disparate islands with the payment mainland, yet. The challenge is compounded further by concerns among corporate customers of the potential risks for greater payment automation in their treasury function, fears over relinquishing control of the authorisation process, and perceived risks of working with unproven fintech innovators, which have slowed adoption and in some cases stifled innovation.
As a result, asking corporate customers to change established practices is a significant obstacle, but other factors – not least the rapidly-shifting regulatory environment, and the advent of new competitors – are driving change for both financial institutions and their clients.
With the help of the regulator’s guiding hand however, change may be at hand. From 2018, the EU’s second Payment Services Directive (PSD2) will compel financial institutions to share customer account information and open their application programming infrastructures (APIs) to third parties. This will enable non-banking firms to build financial services products on top of a bank’s databases and programming infrastructures. In other words, the likelihood of a credit card from Google, or insurance by Facebook is truly a step closer. PSD2 will also mandate new security measures, adding to a bank’s cost base. Additional regulatory pressure will come from the Basel III regulations that aim to improve bank resilience by increasing capital reserves, and which are now placing further strains on banks’ capacity to invest in new product and services.
According to industry leaders, these regulatory changes are forcing banks to embrace new technologies to reduce costs and deliver more client benefit. This is especially true in commercial payments, where some industry leaders perceive significant market inefficiencies at present. Alex Mifsud, CEO of Ixaris, a provider of on-line commercial and travel payments solutions, notes that “there are a range of structural inefficiencies in current payment technologies which are currently being addressed by retailers, but given less attention in the commercial sector.”
Mifsud crystallises these inefficiencies with three words: cost, control and convenience. Many businesses, he argues, face unreasonable costs for accessing payment networks – especially in the context of business travel and currency exchange. Furthermore, the traditional system of reconciling an envelope stuffed with receipts after a business trip with lines on a credit card statement could be improved, potentially saving businesses millions in accounting and control costs. The final area Mifsud identifies as inefficient is what he labels “convenience” – in his words, “the introduction of machine to machine interfaces that show you how credit card payments are linked to e-receipts and invoices: there are huge opportunities to save businesses costs and time in these areas.”
According to Stephen Lemon, Co-Founder of commercial forex transaction platform CurrencyCloud, the current environment has “never been so easy for collaboration” – especially for a company with technology created using open APIs such as CurrencyCloud. Lemon’s firm has already struck deals with Travelex and Standard Bank to outsource their foreign exchange transactions businesses – deals that reduce costs for the two established high-street names while allowing CurrencyCloud to grow its business internationally. As Lemon puts it, “Lots of big corporates are now on a mission to find out more about what’s going on in fintech – and this is born from necessity, as they face both regulatory and capital management challenges.”
In the future, Lemon sees the benefits of collaboration extending from the payments sector into the associated disciplines of cash management and cash flow. Indeed, the capacity to manage both payments and cash flows on-line is attractive for both financial institutions and their clients: for banks, account management costs are reduced and client services streamlined, while clients have the convenience of being able to confirm their cash positions and payment inflows and outflows in real time. This approach, known as “Virtual Account Management” might be described as “the Uber of financial services” – the capacity to access many services (payment management, cash management, cash flows) over one platform more efficiently and at lower cost than using current arrangements. In the future, some analysts predict that blockchain technologies will be especially useful in treasury functions such as cash management, as they create a unique and fully traceable record for each transaction no matter how many parties are involved.
So much promise, so much innovation – but to what extent are commercial payments changing in reality? Alan Hawkins, Head of Commercial Cards at ING, says the sector is booming – and that new technologies are the main drivers of growth. “If our overall business is growing at 20% per year, then virtual cards for corporates – the capacity to pay safely on-line without using a physical card – is growing at 50% a year.” For Hawkins, corporate travel departments have led the way in using virtual cards, and banks and their clients are now turning to associated vertical sectors, such as hotels, restaurants, meetings and event spaces. The client benefits are clear: pay anywhere, any time and over any kind of device, whilst being able to reconcile payments and receipts on-line.
For all the positivity, obstacles remain. Hawkins describes the back-end processing arrangements adopted by some merchant sectors as “a real mess – there are faxes, manual processing and other inefficiencies” and financial institutions may find clients reluctant to part from their existing payments infrastructures. Persuading clients to quit the systems they developed in-house can take some work: the key is to know a client’s requirements and demonstrate the value of moving to new payment architectures. According to James Sykes, Head of Commercial Cards at Lloyds Banking Group, “Knowing your customer is vital to understanding their requirements. You need support from a senior level sponsor, and due diligence to find out what payments solution will work best for them.”
With the threat of demand-driven change on the horizon for financial institutions, together with a changing regulatory landscape and ongoing pressure on capital reserves, many banks would do well to heed these words as the race to connect those islands of innovation to the payment mainland heats up.