E-commerce is underpinning growth for many companies around the world. As consumers become more technology savvy, and information flows more freely across borders, e-commerce is transforming business-to-consumer (B2C), business-to-business (B2B) and peer-to-peer (P2P) marketplaces. In this interview, Citi and Google discuss how leading companies are seeking growth within the expanding e-commerce space.
Asia Pacific Technology, Media and Telecom Sector Head, Treasury and Trade Solutions
What are the key trends driving e-commerce and how are companies capturing opportunities for growth?
The three major trends driving e-commerce are digitisation, globalisation and deregulation.
Digitisation enables companies to reach buyers in more markets, more quickly, to sell goods and services. We are seeing emerging market players take successful domestic e-commerce platforms cross-border, creating payment gateways that connect offshore buyers to onshore marketplaces. Leading multi-nationals continue to globalise into new markets using digitisation to offer more convenience to their customers, merchants and developers that improves the user experience and helps to increase sales.
Deregulation is promoting digital trade as these easily downloaded services are less encumbered by the tax, customs and logistical requirements associated with the shipping of physical goods.
Globalising technology companies tend to enter a new market initially through a cross-border model, offering credit cards as the primary form of payment which is supported by regional invoicing hubs. In Asia, historically Singapore has been the most popular regional hub for the technology industry due to e-commerce incentives. Other countries including Hong Kong, Malaysia, Thailand and China are also looking to incentivise e-commerce companies to set up regional hubs.
Once e-commerce business activity reaches a certain size, the cost of acquiring customer transactions and paying developers cross-border compresses margins and the company may transition to an onshore non-resident account model, using the regional invoicing entity where regulations allow. The company may scale this non-resident model to include payments and receivables ‘on behalf of’ to help reduce the number of onshore bank accounts and to centralise flows.
Creating an onshore presence means a company can offer flexible payment options in-country beyond credit cards that improve the buyer’s shopping experience, reduce the company’s cost of doing cross-border business, and may increase sales. They can also open up B2C sales to consumers who may not qualify for a credit card, or in some countries, may not have a bank account but they do increasingly have a smartphone and can make purchases online through an e-wallet.
What do treasurers need to do differently to effectively manage their companies’ e-commerce flows?
Business Development teams are constantly searching for new opportunities. This creates challenges for treasurers as local payables market practices can range from cutting-edge mobile banking solutions through to simple ATM cash deposits. Working with a bank that has in-country presence facilitates a rationalised bank structure and connectivity to help a treasurer quickly establish policies, control and visibility whilst ensuring that global treasury, operational and technology standards are implemented.
Cash forecasting, funding and investments can be challenging depending on the type of customer making the payment. Terms customers that are invoiced monthly have more predictable flows, whilst pre-paid customers may not use a service every month and payments can therefore be more difficult to forecast. Online store shoppers generate high volumes of small value, one off transactions to reconcile. These payments may be made directly to a company’s bank account or consolidated through a partner such as an aggregator or network provider which can have varying settlement cycles.
Further complicating treasury processes within e-commerce are customer refunds. Guaranteed refunds offered in the service terms and conditions can range from a few days for a digital service through to several months for physical goods to accommodate shipping time.
Developers often prefer payments in their home currencies to provide a natural hedge against local supply chain costs. If treasury controls the foreign exchange (FX), then the FX margins taken by the developer’s retail bank can be mitigated. Cross-border multi-currency payments require treasurers to efficiently manage funding and foreign exchange processes whilst understanding lifting fees so that developer payment costs can be controlled.
Diverse regulatory environments can mean that intercompany movements between local residents and regional invoicing hubs require payment supporting documentation and central bank reporting. These requirements can pose unique challenges for e-commerce companies that have minimal finance or accounting resources in-country that treasury can call on to help. In Asia, working with a bank that can offer robust online submission capabilities is important to help centralised treasury and operations teams handle sometimes onerous documentation processes.
What are some of the innovative solutions that companies are using to optimise e-commerce growth?
Automated solutions such as virtual accounts are popular in Asia where one-off B2B and B2C transactions can occur through online stores. When a customer is offered the flexibility to make ‘push’ payments to a company’s account then human error can occur, creating a mismatch in the company’s cash application process that requires manual intervention and slows down the credit control and order fulfilment processes.
Virtual accounts can resolve the issue of payer identification as the company can assign a unique account number to a customer used during a particular online transaction. This auto-matching improves cash application, promotes faster credit control, and creates an enhanced user experience, all of which help the company reduce costs and increase sales.
In addition to virtual accounts, we have seen an increase in smart invoicing solutions that can help support reconciliation of e-commerce flows. Sales through distributor channels can mean monthly payments are received for multiple invoices. Smart invoicing provides an outsourced solution that enables the distributor to select the invoices that they are paying. Incoming transactions are matched against the selected invoices to provide automated reconciliation.
Automated FX solutions are popular within e-commerce and help provide cost savings to companies with high volumes of transactions in multiple currencies. Companies are using instant FX solutions to price and acquire transactions in the buyer’s local currency using real-time rates to mitigate FX risk and reduce costs. This can reduce the cross-currency margins taken by intermediaries and provides the opportunity to build in a spread in the price quoted to the customer. Another automated FX solution provided by Citi supports regional invoicing hubs making high-volume, multi-currency payments. These can be settled cross-border in ACH without needing to maintain local accounts. Worldlink helps e-commerce companies quickly handle cross-border payments whilst minimising bank accounts, reducing FX costs, reducing lifting fees and lowering transaction costs. Passing some of these benefits onto merchants, developers and partners improves user experience and grows sales.
Google has a very global business model. How is the company providing a localised buying experience for customers using Google’s e-commerce channels, wherever possible?
Each country has its own unique set of payment characteristics. For example, credit card payments are very popular in the US, but not as popular in Singapore (where electronic funds transfers are used more frequently). This is where the banks and treasury’s experience in payments can really help the business identify attractive (and cost effective) payment alternatives.
We have worked extremely hard to ensure that users of our e-commerce channels, such as Google Play, have access to multiple forms of payment (FOPs). These include electronic transfers, local and international credit cards, carrier billing and gift cards. We do this by working with our local team members who are on the ground in-country and know what FOPs are used for e-commerce transactions in their domestic market(s). If there is a unique payment type in a particular country that has high volume, we will work to add that to our infrastructure.
It’s all about giving customers choice and making it easy for them to transact with us. Ultimately, payment mechanisms are key to the success of the e-commerce space, purely because of the different types of customers. If you have a single form of payment, you will be limiting yourself and your customer base. We also have local invoicing capability, and a bank account structure that allows us to accept over 50 currencies.
Could you give an example of how the company has adapted its FOPs to suit local market practices?
Rolling out Google Play is a perfect example of this. Google Play is an online marketplace for developers all around the world to sell their software and games to buyers across the globe. For this to be successful, the treasury team here at Google works with our product management and engineering teams to give customers a mechanism to pay for the software that they purchase, as well as put in place payment mechanisms to disburse to the developers.
Given the nature of this business, where buyers consume the products they purchase almost instantaneously, not all forms of payment work – cash, for example, is not appropriate. However, some countries are predominantly cash societies. And given the issue about penetration of other forms of payments, such as wire transfers, credit and debit cards and stored value products like Google Wallet or PayPal, we needed to come up with something new and innovative to address that.
Given the usage of GPRS-enabled phones, in some markets even a payment solution on a mobile phone network infrastructure is the best way to reach the majority of the population with a consumer internet product.
How can partners, such as banks, help Google to better understand local market practices when evaluating a particular form of payment?
Banks are key partners when evaluating the various forms of payment that Google might need to support in a particular country or region. They have ‘feet on the ground’ and are up-to-speed on local payments and developments in-country, such as Faster Payments initiatives. Of course there are non-bank partners and solutions available as well, so banks aren’t the only source, but they are certainly a good data reference point.
What other challenges does Google face from the point of view of supporting customer payments? Are there any differences in customer buying behaviour which have an impact on treasury, for example?
One of the biggest challenges Google has in supporting payments is customer composition. Our customers vary from large corporations to small and medium-sized businesses as well as individual/sole proprietors. Each one of these businesses prefers a different type of payment experience. For example, a large customer is most likely using purchase orders (POs), and wants to make an electronic funds transfer (EFT), since this is the lowest cost payment method.
A small to medium-sized business might also want to use EFT, but they also might use a purchasing card (P-card). For individuals, it can be a combination of bank payments and credit cards. Treasury’s preference is obviously to drive cost out of the network and to improve timing certainty.
How then has Google treasury tackled these challenges?
One of Google’s flagship projects in this space has been our virtual accounts solution. This great solution (see the case study opposite for more details) creates a unique bank account number for each customer paying Google. It allows Google to quickly identify the sender of cash and purpose, which then allows us to support our customers more quickly. We first implemented it in Japan, looking to get a timelier and better reconciliation match for inbound customer payments. This involved partnering with both Citi and our internal technology team.
Elsewhere, to further drive efficiency, Google has also standardised its global invoicing process and payment formats.
What benefits has format standardisation delivered to the treasury function?
Standardising payment formats has been a great solution. We do have a global invoicing group that drives consistency in invoice delivery, but the payment formatting was absolutely key as it allows us to match our cash much more quickly.
As most treasurers will understand, the biggest challenge with cash application is missing data. Sometimes this comes from the recipient, but other times it’s due to correspondent banks cutting off data as the payment moves through the banking system. Payment formatting has helped us track the key data needed to identify the sender of the cash, and the purpose of the cash.
Do you have plans to further optimise these solutions or to take digitisation and e-commerce to the next level with more new solutions?
Google’s innovative culture keeps us inspired to always look to improve existing solutions. We are constantly working with our business partners to keep on top of their needs by offering local payment solutions. We take the ‘treasury lens’ of what is happening in the cash space and translate that into potential solutions. So yes, I’m sure there will be plenty of new solutions to talk about going forward.
Finally, for those treasurers wondering about exploring innovative digital or e-commerce solutions, but not yet quite sure, what would your words of encouragement be?
Don’t be afraid to dive in and explore the waters. Your existing knowledge of the payment space, how regulators look at payments and cross-border transactions will help you look at the various alternatives.
As Google expanded the e-commerce arm of its business into new and challenging markets, the company needed a solution to help reconcile the thousands of payments it received daily. Ronni Horrillo explains why virtual accounts were the perfect solution.
As Google extended into new markets and offered multiple payment options to its customers, treasury was presented with a challenge. As Ronni Horrillo, Assistant Treasurer at Google explains: “We were a US company with only a handful of local subsidiaries. It was therefore hard for us to efficiently reconcile all the payments we received, especially because many of these were not in English. We weren’t sure what we needed, or that the virtual account structure even existed.”
Google went away and discussed a solution with a number of its banking partners. After a consulting period, Google decided to partner with Citi since the bank’s virtual account solution best met the cash application challenges that the company faced. “Each customer was given a virtual account number for their payments so that we knew funds coming into the virtual account numbers (VANs) were for a specific purpose. This allowed us to apply cash more quickly, and minimise the administrative burden of collections.”
Google first implemented the solution in Japan around ten years ago because it was one of Google’s largest non-US markets. The project took three months from the initial discussion to implementation, despite the fact that obtaining the VANs was a big challenge. “At the time, you had to acquire the VANs from the Japanese banking authorities, and they only released a set amount each month (or quarter), but we wanted to secure a large number so we could have sequential account numbers,” says Horrillo. “Citi helped a great deal in this respect and were a great partner in the process, working to secure the VANs, managing documentation requests and the physical bank account set-up.”
Once ready to go, the Google treasury explained the solution to their business partners, who quickly saw the benefits and provided the engineering support to successfully launch. “Overall the project was a great success, delivering a much stronger straight through processing hit rate and driving a better customer experience,” adds Horrillo. Since those early days, the Virtual Account solution has since been rolled out in a number of other countries to provide the same cash application efficiencies (even partnering with Citi in a country where the virtual account concept did not exist).