The payments world is vast and expanding rapidly. While much of the visible progress can only be found in the retail space, banks and other providers are now working increasingly hard on developing creative solutions to bring similar innovations into the corporate banking space. Can treasurers catch up with consumers on the innovation curve?
Almost every treasury department will have at least one. They are those tech-savvy, early adopters; paying for their morning cappuccino using an app on their smartwatch, purchasing flights with Bitcoin and making credit transfers from their personal accounts with a few swipes of their state-of-the-art mobile tablet device.
Imagine, then, the disappointment when, every morning, these same treasurers arrive at their desks for work only to find themselves using the very same clapped-out, antiquated technology that they were using five or even ten years ago.
Yes, the global payments market is evolving rapidly. New providers, platforms and tools with the ability to transform the payments experience are coming to the market on a near daily basis now. But while payments may be the ‘bread and butter’ of the treasurer, the vast majority of mobile and other innovations we have seen in recent years have been for the benefit, not of corporate banking customers, but consumers in the retail space.
Does it have to be like this? Matthew Leavenworth, Director of Product Innovation and Disbursement at Bank of America Merrill Lynch (BofA Merrill), is certain it does not. “The consumer innovations that are happening have no cognitive separation in a treasurer’s mind from their work when they go into the office every day,” says Leavenworth. “What we have to be aware of is that we cannot say that, despite these dynamic new entrants we are seeing on the consumer payments side, we are still going to move blocks of gold because that is what worked for the Rothschilds 300 years ago.”
An example of how recent innovations in retail payments are now, gradually, beginning to permeate the corporate banking sector can be found in the Digital Disbursements solution BofA Merrill launched in late 2014. It is a novel solution to a seemingly age-old problem. When circumstances arise in which companies need to make payments to their customers (for rebates, refunds and claims payments, for example) the most common way of doing so has long been to write and send a cheque. But delivering funds this way is slow, complex and, above all, expensive (in the UK, cheques can cost up to £1 each to process and in the US, processing a single cheque costs on average $4).
What is really interesting about the solution BofA Merrill developed to address this issue is that the inspiration came from the growing success of the peer-to-peer (P2P) online technology that is now allowing individuals to transfer funds to one another’s bank accounts via the internet or a mobile phone. The solution works by directly routing the payment to the bank account of the individual payee’s choosing to use either a mobile phone number or email address as the identifier. Leavenworth recalls the ‘Eureka’ moment. “We thought, ‘why are there still companies sending these one-off cheques to one another?’ So we developed a tool to allow them to use P2P transfers.”
P2P payments are already proving popular in the consumer space. A study conducted last year by Forrester Research expects P2P payments in the US to grow to $17bn by 2019, from $5.2bn in 2014. In Western Europe, meanwhile, the research group forecasts P2P payments to rise at almost 24% CAGR over the same time frame. Can Digital Disbursements enjoy the same rapid take-up as its counterpart in the consumer space is currently seeing?
With the benefits the solution offers, BofA Merrill are confident it will. In addition to aligning its payments solutions for corporate clients with evolving trends in mobile technology, the Digital Disbursements solution can bring about an estimated reduction of in end-to-end disbursement costs by as much as 75% when compared to a physical cheque.
Finally, Digital Disbursements also eliminate the need to obtain and store sensitive bank account information, the problem preventing companies from simply making such payments directly into their customers’ bank accounts. A study performed by the Federal Reserve found that 85% of consumers and 81% of businesses prefer not to provide bank account information to the payee when making a payment. “We brought P2P technology over to the corporate side – it’s been a big success and we were the first to do it,” Leavenworth adds.
The pace of change in consumer payments of late has been truly remarkable. In just the past few years we have seen new payments providers emerge, new wallets and new form factors – most notably mobile and wearable technologies – and even new, digital currencies like Bitcoin gain increasing traction in markets across different regions.
Treasurers might be big beneficiaries of these developments, with richer and more accessible business data, faster and cheaper transactions and more efficient reconciliation processes. Naturally, though, changes on this scale will also present significant challenges to the treasury community.
Foremost, there is the matter of working out the best way to integrate all of these new payment methods into the corporates cash management systems and processes whilst ensuring they maintain control over the company’s data, Phillip McHugh, CEO, Barclaycard Business Solutions explains.
“The biggest challenge for the treasurer these days is dealing with the increasing biodiversity in the payment space,” he says. Treasurers now need to accept that consumers today want to have more options for payment and that this will inevitably impact the reconciliation process, in some form or another.
Finding the right solution to this issue will be challenging, but the issue can be overcome with the right support. “Integration is going to be key for the treasurer, and because of that it is important for them to be working with providers who can help bring all of those new payment form factors and channels together into a single account or process and avoid unnecessarily complex reconciliations,” he says.
“In an arena where new payments models are continuing to change and evolve, one new payment method doesn’t replace another. The most important matter is to offer customers choice by helping make their everyday lives easier. This is a key business principle regardless of the size or the sector your organisation operates within.”
Guarding against fraud
Security should always be at the forefront of the treasurer’s mind when dealing with new payments innovations. This may not be such a huge issue with respect to the new consumer payment solutions pioneered by large, well-established technology companies (as a matter of fact, one of the reasons purported for Apple Pay’s success is the attention given to the authorisation authentication layer). But it could well be an issue with some of the smaller, more dynamic solutions providers who have been entering the payments space in droves of late.
As Phil Huggins, Vice President of Security Science at Stroz Friedberg, an investigations, intelligence and risk management firm explains, some of these firms may not be as well-resourced on the security side. “Most start-ups are focused on building something that works, something people like, and delivering it quickly,” he says. “Writing secure code is, by its very nature, very hard. And start-ups simply don’t have the time and resources to focus on security as much in the beginning and so they end up taking on what, in development terms, is called technical debt or security debt, which will need to be paid down at some point.”
Besides treating new entrants with a healthy degree of caution is there anything else treasurers can do to minimise the security risks associated with integrating new payments innovations? Huggins recommends ensuring that the new entrants have completed a threat modelling exercise. “It means they need to understand the solution they are building, in terms of the people, the processes, and the technology. Considering what it is that the bad guys are likely to want, why they would want them, and then go through a process of working out the various ways they might attempt to acquire them and how the solution prevents that. Treasurers also need to work with procurement and cyber professionals to complete a cyber supply chain risk assessment, which considers both the secure software development practices of a new entrant, as well as their operational security practices.”
Learning from Bitcoin
There are many other cases where we see innovations in consumer payments beginning to spill over into the corporate banking space. Blockchain, the distributed database behind the popular new digital payment method Bitcoin, is another example. In early 2015, it was announced that three of Australia’s biggest lenders, ANZ, Westpac and the Commonwealth Bank of Australia (CBA) are working, or are at least having conversations, with US-based payment technology platform Ripple.
Billed as the world’s ‘first open-standard, Internet Protocol (IP)-based technology for banks to clear and settle transactions in real-time via a distributed network,’ Ripple has the potential to allow banks to make faster payments – in more currencies and into more markets – with lower cost and risk than is possible today. Ripple claims that it can do this because, unlike traditional financial infrastructure, the platform is not tied to governments or third-party intermediaries such as clearing houses.
Instead, Ripple has adopted a similar model to the blockchain (eg a distributed public ledger that is backed and secured by mathematical algorithms) but with a key difference. Unlike the Bitcoin blockchain which relies on mining to create value (a Bitcoin), the Ripple network is powered by participating users agreeing on changes to its ledger every few seconds. As such, banks are able to clear transactions on its network 24/7, 365 days a year in real-time and (by avoiding third parties) without the same level of cost.
Although it is primarily banks that will plug in and use the Ripple network, the speed and low cost that it offers can potentially have a big impact on the service that corporates receive. “Making payments across borders takes time for the bank and incurs costs and – which are ultimately passed onto to the banks’ clients,” says Dilip Rao, Managing Director Asia Pacific at Ripple. “If a bank uses Ripple, the transaction will cost a lot less and also happens on a near real-time basis, so the cost and efficiency benefits can be passed onto the corporate client.”
Engaging on T&E
More evidence that new consumer payments technologies are increasingly disrupting corporate programmes is offered by a recent White Paper commissioned by American Express in partnership with PhoCusWright. ‘The Path to Innovation: Insights on the New Frequent Traveller’, found that corporate travellers, particularly the tech savvy millennial generation, are increasingly aligning their business and leisure expectations.
“This has led to the gamification of corporate expense programmes, with companies seeing incentives, such as allowing employees to retain points earned for business travel, as a way to cultivate programme loyalty,” says Piotr T Pogorzelski, Vice President, Global & Multinational Client Group Europe, American Express. “Furthermore, business travellers who are seeing apps and mobile payments replace traditional plastic cards in their personal lives, are beginning to expect the same high tech, hassle free ways to pay when it comes to business travel.”
Some might question whether travel expenses are less of a treasury concern and more of a human resources issue. But that is misguided. A study carried out in 2014 by Concur reveals that businesses in the UK spend an estimated £8.2bn a year on T&E. Moreover, in some companies, T&E may constitute one of the largest categories of expenditure; for treasurers then, little to no visibility over T&E spend until a claim form is submitted is far from ideal.
The smartphone – a device which PhoCusWright estimates 92% of business travellers own – might just offer a solution to this problem, while also making the management of T&E more convenient for business travellers as well. Corporate professionals on the road can simply upload and attach hotel invoices or train tickets as and when they need to, making them less likely to lose the documentation or make inaccurate claims.
Managers, then, will have the ability to approve an expenses claim (or reject should it not comply with policy) instantaneously while the accounts payable clerk can more accurately tally the submitted and approved claims. Ultimately, this means that the treasurers and CFOs overseeing it all gain increased visibility of T&E payments and, therefore, have more confidence in the process.
Treasury catching up
Over recent years, consumers have sped ahead on the innovation curve to embrace the new providers, form factors and other services now revolutionising the retail payments space.
These same innovations are now gradually beginning to permeate the commercial payments space, however. Treasurers may be characterised from time-to-time as a conservative and cautious bunch with respect to ‘new-fangled technologies’, but now using such innovations increasingly in their everyday lives as consumers. And the more they do, the more impatient they are becoming to use similar tools in their professional lives too.
Now that the demand is there, banks, treasury technology firms and other payments providers are working increasingly hard, and coming up with some highly creative solutions to meet it. There may still be some way to go yet, but if the above examples are anything to go by, it won’t be too long before those tech-savvy, early adopters in the treasury department notice little difference between the technologies they use as consumers and those that they interact with during office hours.