New payments environment
“E-Pay Me, Please!”
Payment methods are changing with our habits and technological advances. The digital revolution is putting our businesses at risk, and forces us to reconsider the B2C approach. This will have an impact on our dealings with our customers but may perhaps also give us significant competitive advantage, enabling us to access a different set of customers.
It is a challenge for the whole banking industry which will forever have an impact on corporates. Is also provides us with an opportunity to revisit our payment procedures, to speed them up and, most of all, to make them even more secure.
The electronic payments system has expanded considerably over the last few years because of the increasing use of the internet and online shopping. Together with unprecedented advances in technology, today we have access to forms of payment using machines – different to what they used to be – but which still guarantee efficiency and security. This is at the expense of cash and cheque transactions (even though cheques are holding their own in the USA, a real paradox since it is from there that most of the new technology comes). One of the most popular forms was undoubtedly the credit or debit card. Alongside them, there are alternatives, such as bank transfers in various forms, which are steadily reinventing themselves with most notably SWIFT GPI, electronic wallets, smartcards, or even the much hyped crypto-currencies. You immediately realise that this is a vast landscape, and that digitalisation and paperless transactions, together with portability, have resulted in a profusion of quick and cheap payment methods. We need to incorporate them into our procedures and automate them, just as for any other traditional bank transfer. The issue arises of collecting funds from customers who are ever more demanding in terms of payment methods, and of dealing with suppliers who may themselves want to be paid differently. Faced with this radical transformation of the payments industry, it would seem to be a good idea to redefine the boundaries and consider what the future may hold.
"Today, worldwide, > 35% of consumers currently shop on sites based outside their home country and it keeps growing year on year… "
-François Masquelier, Chairman, ATEL
A complete transformation is underway (and has been for some time) in the world of payments. However, change is not happening as quickly as we might think because of high technical barriers, ingrained habits and the complete lack of standardisation. There is a whole series of technical, technological, legal and local/regional challenges that leave the payments landscape in a state of complete flux. The advent of the millennials and of “customer experience” – which they harp on about ad nauseam – is affecting the whole value chain and everyone involved in financial transactions, whether through banks or not, worldwide or local. Whether we like it or not, we need to adapt to this new ecosystem and to what the market wants. There will be ever greater deregulation, disintermediation and self-reinvention, and this is already happening. One thing is for sure: nothing will ever be the same again when it comes to payments. Another thing is that the range will broaden and become more diverse, at least initially, for as long as it takes for the market participants to standardise and consolidate. We therefore need to be ready to accept multi-product, multi-supplier and bank agnostic solutions. The hardware will become ever more moveable, as with smartphones and tablets, and users will want everything, everywhere, on any device and at any moment in time. This is the set of requirements we have to meet to win ourselves a place in the sun in the mass payments market.
Market trends and revolution in progress
Payments are going to increase in number and change in size (always smaller and more repetitive) and also in execution time. As with “instant payment”, people want to pay immediately and be credited instantaneously. Generation Y and the millennials want everything NOW! The use of cash is falling and governments want to abolish it, as in Sweden and Israel, particularly for tax reasons. The number of payments has grown phenomenally over the last few years. «Contactless» has become an absolute must for some users. People want less hassle with their payments (frictionless payments) and greater speed, although without jeopardising security. Unfortunately, technological development goes hand-in-hand with fraud. Paradoxically, people are showing acceptance of non-financial companies – FinTech companies – while at the same time as the number of restrictive regulations is being increased. Being a bank today is far from being a sinecure. The GDPR comes into force in May 2018 with all the technical requirements it will bring with it. The PSD2 and MiFID2 recently created a tsunami within financial institutions. On the other hand the “real economy” is working ever more in “B2C” mode. Crypto-currencies (I leave it up to you to decide whether they are currencies at all) are on the rise. Costs are under pressure everywhere. Interoperability would ideally be a requisite, but it is failing to gain ground in the face of the complete absence of standards. The pace of change has also speeded up and makes it hard for the people involved to adapt. Things are moving a bit too fast, in the view of the more conservative treasurers. The complexity of IT and ERP systems make it hard to achieve secure interfaces and connectivity, which are nevertheless necessary. The fragmentation of the market is both its strength and also its weakness, with its bewildering profusion of tools and solutions. This makes many people think that standards will become embedded or be imposed. This is also a paradox for this dispersed revolution, perhaps a bit too dispersed in the final analysis.
"Payments were the basis and
the private preserve of the banks. If they were to lose them or see them wither away, their very role itself would be changed, impaired and diminished, reducing them to vast back offices."
-François Masquelier, Chairman, ATEL
Challenges facing industry
This brings a number of challenges for industry as a whole. Absolutely anyone can become a competitor, that is the very principle of the digital revolution. It will be necessary to redefine payment methods and reach a better decision on where we want to go, rather than suffer technological chaos and the breakneck competition that we are seeing now. New entrants are achieving disruption and changing users’ habits. AMAZON and UBER, to mention but two, have changed the payments environment by the new business generated and the means of making payment. The world is changing and even SWIFT is forging ahead at great speed with the GPI “Global Payment Innovation” initiative and with SWIFT instant. It is obvious that everything is bustling, and that trains are leaving in all directions, threatening to leave behind on the platform those who have not seen the danger coming. Moreover, the ecosystem abounds with players coming out of nowhere and setting themselves up as best they can. It is a real jungle, and very difficult to find your way around. We should also note that the EU has seen fit to add its tuppence-worth by issuing the PSD2, a sort of absolute revolution, an Open Sesame for penetrating the banks’ systems and opening them up to everyone. You may perhaps wonder if they might not have gone a bit too far! A bridge too far that fans the flames of the digital revolution in the world of payments. One thing is absolutely clear, this will involve a complete reshuffle of the deck and at the end of the day perhaps completely change the payments environment. The FANGs seem to be insatiable and ready to do whatever it takes to grab the holy grail of payments. Payments were the basis and the private preserve of the banks. If they were to lose them or see them wither away, their very role itself would be changed, impaired and diminished, reducing them to vast back offices. The profitability of banks, already harmed by digitalisation and fewer retail banking branches, could once again suffer from this loss of income. Because payments are a customer point of entry. Without payments, customers no longer have any reason to deal with banks and the close bond that binds them together will gradually disappear. This will do nothing for the banks’ business.
In this environment, certain fintechs have managed to rise. They are succeeding in changing user behaviour and user expectations. The speed and pace of innovation and the direction in which they are going are beginning to become clearer. Sadly, others fail. The wish on the part of users to change their behaviour has been overestimated, and they strive to create a new infrastructure and new financial services in a reshaped ecosystem. They might potentially generate a disruption, but sometimes they do not succeed. There are many failures. A great many are called, but very few are chosen. In the future, these technologies will have an impact on cash management, with artificial intelligence and machine learning, and will reduce costs and increase efficiency. More than payments, it is the data (the big data) behind them that interest the fintechs. That is where the challenge and the long-term value lies. Derivatives of blockchain technology will improve transparency, cost, efficiency and data analysis. Having everything mobile and portable will be everyone’s watchword. Finally, biometrics and its derivatives will put the finishing touches to it, making it yet more secure and rendering fraud almost impossible. So we can see that there are radical changes afoot.
"When it comes to payments, it would seem that the in-word “globalisation” does not count for as much as it does in other things. People talk about a global world without boundaries, but with payments it would seem that regional culture and specifics can act as a brake to standardisation."
-François Masquelier, Chairman, ATEL
Payments are still the cultural exception
The paradox of the local cultural exception. When it comes to payments, it would seem that the in-word “globalisation” does not count for as much as it does in other things. People talk about a global world without boundaries, but with payments it would seem that regional culture and specifics can act as a brake to standardisation. It is a matter of adapting to your environment. If you want to sell online in China, ALIPAY looks to be indispensable in the same way as PAYPAL is in the USA. In North America, cheques are still favoured, even though they may seem old-fashioned and obsolete. Whether we like it or not, we have to take local specifics into account, because nothing is global in terms of payment practices between regions and continents. This exception is all the more surprising since the number of small payments is rising continuously – up 20% over the last three years. The new market entrants and sales over the internet (of which Amazon, Ali Baba, Uber, AirB&B, etc. are examples) have changed buyers’ behaviour and habits.
An example of an innovative solution that could revolutionise payments while still safeguarding the role of the banks
Bank of America Merrill Lynch announced the launch of “Enhanced Virtual Payables” in the USA at the start of 2018. The bank has launched a system of virtual cards able to use APIs (Application Programming Interfaces) to allow customers to make purchases or commercial transactions easily by connecting directly to their own system. This “BofA Virtual Payables” solution also enhances their ability to set up single use accounts in real time. By using an API, the customer can initiate a payment by delivering a “batch file” from its ERP. This solution will simplify and streamline the payment process for both buyers and sellers. Each transaction bears a unique card number linked to it, to be used for easier reconciliation by both parties. There is no need to store the card number, since the card and payment details information is supplied by e-mail and secure URL. Security and control must go hand-in-hand with ease of use and automation. We risk seeing an “API-zation” at industry level and even the advent of new techniques such as facial recognition, digital fingerprinting (even though it is out of date), or biometrics to verify a person’s identity and authorise payment. One example is KFC in China, where you can pay simply by facial scanning.
Everything to lose!
The area where the banks have everything to lose is in B2B transactions where they dominate parts of the market and benefit in terms of income volumes. By contrast, C2C and B2C or even C2B are slipping through their fingers inexorably. The banks face many challenges, revolving around (1) costs that need to be lowered, (2) new sales channels whose requirements need to be met, (3) instantaneous payments, a real revolution; (4) standardisation of formats and processes, (5) interoperability, often difficult to achieve and deliver, (6) the advent of new entrants – NFIs and fintechs, (7) too many national clearing platforms and systems, (8) market fragmentation as a result of these new entrants and new solutions, and finally (9) the phenomenal increase in the rate of change makes everything happen more quickly and needs greater agility than ever before. You can see that the life of Cash Management bankers no longer looks like a winding, lazy river, but more like an out-of-control geyser. The challenge may be summarised into the difficulty of reconciling with each other (A) the need to keep a step ahead of what consumers want and expect, and to stay innovative and competitive; (B) the need to be compliant and maintain security in a world in which IT fraud has never been as fierce or rampant, and (C) the determination to improve operational procedures at the same time as applying international standards. The challenge also hinges on SWIFT, which some months ago launched a number of initiatives including SWIFT GPI for cross-border payments and perhaps even for domestic payments in time, and SCT Instant for instantaneous payments (initiated by the “EPC’s SCT inst”, its latest SEPA Instant Credit Transfer). Everyone needs to keep their own house in order just to stay where they are in an environment where everything is called into question, including your very existence itself. A millennial will not be bothered about seeing an Italian bank of incredible antiquity possibly disappear. The new users do not think the same way as older generations, and it is here that the break point is gathering pace. We may therefore fear or hope, depending on our views, for a consolidation in the banking industry, in market infrastructure services, and in the fintech companies themselves in the future.
Banks therefore have a splendid role to play as the perfect focal point for bringing together the various payment methods and applications, using their technology, their good standing and the trust that their customers place in them. Perhaps they could allow their corporate customers to pay their “C” type suppliers via different channels and receive payments from customers who can each choose their preferred channel when making payment (for example Alipay, card, Ripple, Payconiq, prepaid credit card, etc.). The idea would be to become the single gateway for incoming and outgoing transactions. The connection/interface with the payment method would be simplified because it would be done by the bank and made secure by sending encrypted files. And in the outgoing direction, the bank would make available to its customers a simple bank-branded app to pay by the channel of their choice. Banks that offer solutions of this type will there and then find they have the means to win the loyalty of their customers and hold on to their customers’ transactions and business.
In the final analysis, nobody can say what the payments environment and e-payments hold in store for us in the short term. But it is certain that the ecosystem will undergo yet another radical change for the better and perhaps also for the worse for those who have been unable to adapt. Doing nothing is no longer an option. However, it is difficult to find the right countermeasure. It is obvious that everyone involved is on a mission and that everything is buzzing. In my view, the upshot will initially be a proliferation of new payment methods provided by a whole host of operators, not necessarily banks. That is why I think that the banks that provide a platform hosting several payment and collection methods will be the winners in this internecine conflict. Banks can offer trust and good standing. They are regulated by a market authority and supervisors, and comply with many regulations, which guarantee their survival. Who better to provide access to multiple solutions? The ideal would seem to be the ability to use your smartphone to choose your payment method or to adapt to your supplier’s payment method. Being able to receive your payments by different methods into the same bank account is the perfect solution. Obviously, methods that do not use bank accounts will emerge, or methods involving alternative currencies. The problem facing treasurers is that of dovetailing their automation and security requirements with the new payment methods, thus satisfying their operational colleagues.