If you take a quick look around you, it is likely that a smartphone or tablet computer won’t be far away. The evolving habits of today’s consumers and corporates mean that expectations for mobile applications to be available anytime and anywhere are increasingly commonplace. So, how is this shift impacting the treasury function?
In the previous Section of this Handbook, we looked at the way in which portal technology is transforming everything from FX dealing to day-to-day cash management. Another digital development that is having an increasingly significant impact on treasury operations is mobile technology. Not only is it transforming the way that payments can be approved and from where, but it is changing the way customers interact with and pay businesses too as mobile e-commerce, known as m-commerce, grows.
In fact, consumers appear more comfortable than ever using their mobile devices (both smartphones and tablet computers) as a means of spending and transferring money. In 2014, for example, a retail bank customer in the UK used a mobile payment application to put down a deposit on a house in what is thought to be the first transaction of its kind in the world. Now, albeit slowly, this preparedness to accept mobile as a means of payment is filtering down to corporates, with banks increasingly offering mobile services to larger corporate clients that allow them to approve payments, check balances and even initiate payments using their mobile handsets.
Treasurers should speak to their individual relationship bank(s) to discover precisely what mobile services they offer in this regard as these are constantly evolving, and vary greatly between institutions. Some banks, for example, now have mobile treasury dashboards available that offer both transaction and analytics capabilities on-the-go.
Nevertheless, there are several broader shifts in the payments industry – driven by the rise of e- and m-channels – that are certainly worth staying abreast of, not least the drive towards cashless transactions.
The death of cash?
Most payments industry experts admit that the demise of cash will be a long, slow burn. And it is too difficult – or too early – to predict, moreover, which non-cash payments instruments will prevail. However, cash is in the sights of financial institutions and governments as it is deemed to be expensive and vulnerable to criminal usage. Some of the typical reasons cash is being targeted are outlined in the Cashless Lagos Project in Nigeria, for example. Here, the government is supporting a cashless policy as part of a drive to develop and modernise the country’s payments system.
Under the scheme, the Central Bank of Nigeria (CBN) has introduced a cash-handling charge on daily cash withdrawals or deposits, aimed at reducing the amount of physical cash circulating in the economy and to encourage consumers and businesses to switch to electronic payment (e-payments) transaction. Authorities in other countries, including Canada, Sweden and the Netherlands, are also pursuing cash reduction initiatives. For example, Canada’s MintChip, announced by the Royal Canadian Mint in 2012, is a digital currency for digital payment transactions (see Section 7 for more information on digital currencies), based on a secure smart card chip that can connect to computers and mobile devices.
Notwithstanding such initiatives, treasurers must accept that in nearly all markets cash is still very much an integral part of consumer behaviour and full adoption of non-cash payments is still a very long way off. In some developing markets it also remains heavily ingrained in the behaviour of commercial buyers too. For the treasurer this can be problematic, of course, given the costs and the risks associated with handling cash. The Centre for Economics and Business Research, for instance, estimates the cost of cash handling to be 2.8% of total takings by retailers. Transaction banks do offer a range of solutions that can help in this respect, however, including facilities such as terminals for immediate cash deposit after collection from the buyer (removing the need to keep cash on premise).
While cash is still very much around, the global volume of non-cash payments continues to show healthy growth (albeit slightly slower than in previous years), with the largest gain in volumes occurring in developing markets, according to the ‘World Payments Report 2014’ (WPR14). Non-cash transactions grew by 7.7% to reach 3,334.3 billion in 2012.
Within developing markets, China and Ukraine saw non-cash transactions grow by 30%, while in Russia the figure was 26%. That growth far outpaced the modest increase in volumes in developed markets, which were still suffering the effects of the financial and sovereign debt crisis. Even in developed markets, though, the growth in non-cash payments volumes – at 4.5% – outpaced the rate of growth in gross domestic product (GDP), and developed markets still accounted for about 74.5% of all non-cash payments transactions globally.
Debit and credit cards, says the WPR14, are the biggest driver of non-cash payments volumes globally. They accounted for 60.7% of all non-cash payments in 2012, up from 53.4% in 2009 and 35.3% in 2001. Debit cards alone accounted for more than one in three of all payments, partly as the use of cards for smaller-ticket transactions becomes more widespread. WPR14 believes that the growth of online shopping in developed markets will likely mean that the use of debit and credit cards will continue to rise in the years ahead.
Another driver, noted in the report, might come in the form of the new players arriving to challenge the banks in the digital payments space. In recent years, the emergence of new providers and channels, such as mobile commerce and near field communication (NFC) payment methods have presented a challenge to the banks in the person-to-person (P2P) market.
These specialist payment providers have a certain advantage over the banks in that they are focused purely on payments and can also be more flexible. This enables them to drive innovation and respond to consumer demands to bring new products on to the market more quickly. We are also seeing crossover from the consumer space into the commercial arena.
Some of the big names in the P2P market are:
Bought by eBay in 2002, PayPal is a global e-commerce business that enables its users to make payments and money transfers through the internet – and since a revamp in May 2014 it has placed an emphasis on its multi-channel approach, particularly its mobile offering.
Bill Me Later.
Acquired by eBay in 2008, Bill Me Later is a PayPal service that allows users to make payments on credit. It also offers deferred billing options with terms such as no payments for 90 days and no interest for six months.
Starting life as a foreign exchange (FX) operator, Travelex has evolved into a leading strategic payments provider, processing payments to one million beneficiaries per year through its global network. Travelex’s offering GlobalPay provides a single online system for the processing of incoming and outgoing, domestic and international payments that can be integrated into an ERP system. In December 2010, MasterCard purchased Travelex’s prepaid card programme management (CPM) operations. More recently, in November 2011, Western Union acquired the global business-payments division of Travelex.
Founded in 1851, Western Union has long provided global money transfer services, first offering electronic money transfers in 1871. In 2009 Western Union acquired Custom House, a global B2B payments provider offering extensive international online payments solutions across a worldwide network.
These so-called ‘new entrants’ to the payments sphere may never truly compete with the banks. But they have proven to be competitive in certain areas, and are contributors to an evolving ecosystem in which banks and other providers use an increasing number of partner products and networks to meet client requirements.
On the banking side, this healthy competition has driven a spate of digital payment solution releases in recent years. Noteworthy banking payments solutions include:
Launched in the UK in 2014, this service has the capability to link nearly every current account in the UK using only mobile numbers, with no account numbers or sort codes required.
This initiative from the European Banking Association Clearing House (EBA) will enable online consumers to authorise payment transactions via the online banking portal of their own bank on either a domestic or pan-European basis. The first MyBank test transaction was successfully sent at EBAday 2012 in Edinburgh.
A collaborative venture between Bank of America (BofA), Wells Fargo and J.P. Morgan, this platform is intended to provide a competitive deterrent to PayPal and other vendor-led programmes such as Fiserv’s Popmoney from encroaching on the banks’ core payments territory.
Originally released as a retail P2P payment mechanism, allowing customers to send payments to each other. In 2012, UK Bank Barclays updated the app to allow consumers to pay the bank’s corporate client base, using the same application.
Near field communication
NFC is a set of standards for smartphones and similar devices that enables two devices to connect and communicate via a short-range wireless protocol when placed in close proximity to one another, typically within four centimetres. It improves the way devices interact with one another, speeding up connections and the sharing of information.
NFC-enabled mobile phones with contactless payment features incorporated into them can act as a payment method by placing or waving the phone over an NFC-enabled POS terminal allowing the devices to communicate the transaction details. In addition, an NFC connection is compatible with other wireless technologies including Wi-Fi and Bluetooth.
As an alternative to devices with NFC-embedded technology, new developments are enabling NFC functionality to be extended to mobile handsets with MicroSD slots by means of an NFC chip that can be inserted into the slot.
Global variation in digital payments
As the above lists indicate, the UK and US are often seen as pioneers and leaders in the world of digital payments and digital commerce. Yet, other countries and regions are also giving rise to interesting digital and mobile payments developments – and indeed boast far greater usage of mobile payments. Africa, for instance, is particularly ripe for the growth of mobile payment platforms, with its combination of a large unbanked population and widespread mobile phone usage. In 2010, management consultants McKinsey estimated that 326 million people – 80% of the adult population – in Sub-Saharan Africa were financially unserved. Meanwhile, GSMA, the body that represents the world’s mobile operators, has forecast that there will be 346 million mobile users in the region by 2017.
Mobile can play a key role in getting access to the massive population in Africa that is currently unbanked, or underbanked, and wholly dependent upon physical cash as a means of payment. M-Pesa, the Kenyan money transfer system supported by mobile phone operators Safaricom and Vodacom is a prime example of this. Roughly $19bn, equivalent to around 25% of the country’s GNP, is now transferred through the medium. Other applications, such as SnapScan, which allows users to scan codes in retail stores before paying electronically, are also proving popular.
As is the case in other regions, mobile payment proliferation for retail customers is driving demand for corporate solutions. Mobile payment solutions also present opportunities to development and charitable organisations as a safer and more efficient way of remitting funds. The potential benefits of the new channel to individuals, corporates and development organisations alike in Africa are clear. Where companies and organisations previously had to ship large quantities of physical cash to remote rural locations, this can be done in real time through a mobile service – with greatly reduced risk.
Meanwhile, in the Middle East, where the payments infrastructure is still being modernised, the fact that cards do not have a significant penetration rate opens up an enormous opportunity for mobile. The Dubai government has been quick to realise the potential of mobile. In fact, Dubai Smart Government’s mPay app for mobile payments through smartphones (for government-related transactions) saw over Dh163m collected in 2014, resulting in a 418% increase in collections from the previous year. The take-up of mobile payments across the region is only expected to increase going forward.
Asia is another promising region – after all, it accounts for over half of the world’s mobile devices. There is also a significant move towards m-commerce in APAC, with over 50% of all Asia-based online transactions in 2015 set to be made by mobile, according to Criteo. Yet, as we frequently see in the region, there is great disparity between individual nations. This is not only as a result of varying levels of smartphone penetration, but also because of payment infrastructure challenges in rapidly growing markets, as well as certain cultural barriers.
Japan and South Korea are widely recognised as advanced markets for mobile shopping, with Criteo (a company that works with online retailers) reporting that over 45% of online retail transactions are made via mobile devices. In fact, Japanese e-commerce sites have mobile conversion rates that double those seen in the US. Australia is another mobile leader in the region, with impressive uptake of contactless payments.
Meanwhile, countries such as Singapore, Hong Kong and China – although possessing an infrastructure that is more than capable of supporting mobile payments – have yet to encourage widespread adoption. Others, such as Malaysia, remain largely cash-based societies and this will likely remain the case for years to come.
Impact of mobile on treasury
Treasurers are always looking at ways to optimise their payments and collections processes and mobile technology is becoming more established – and useful – in this regard. Moreover, in a world where companies are increasingly looking to embrace the move towards multi-and omni-channel delivery in order to better engage with their business partners and customers, mobile is fast becoming a watchword rather than a mere buzzword.
Mobile is a channel that has the potential to challenge existing business models and ways of managing cash. It can make treasury processes much more efficient and lean – allowing treasurers to transact on-the-move. It can also improve cash handling, and help right down to the working capital level, as money collected through mobile channels often comes in before it would through more traditional methods. Treasury functions that collect payments in mobile form could also benefit from mining consumer behaviour data, previously lost through cash transactions.
Elsewhere, mobile could also transform the way some corporates invoice customers. As an alternative to Direct Debits (DD), invoices with a Quick Response (QR) Code allow mobile payments that are almost instantaneous. Furthermore, these payments have a token embedded in them containing information about the customer and the bill, thus saving the corporate on administration costs, as well as making it easier for the customer to pay. This form of payment could bring particular benefits to regulated utilities in billing customers who are either unable or unwilling to pay by DD.
Outlook on mobile solutions
At present, many companies feel (often wrongly) that the security risks posed by mobile technologies are too great to justify (see Section 9 for more information on cybersecurity and a checklist on mobile security). Yet, as corporates become more familiar with and trusting of mobile, the adoption of mobile solutions will grow and the use of mobile payments across the supply chain will become more widespread. At that point, the mobile channel will have a profound effect on the treasury function and begin to have a material impact on corporates’ working capital.
For now, those treasurers not yet leveraging mobile should take the time to consider how the channel might provide growth and efficiency opportunities for their business. Mobile is not just for banking on-the-go, or a smart solution for merchants to improve consumer interaction; it can ultimately assist in improving key treasury metrics, including cash visibility and days sales outstanding. So, in an ever-competitive market, mobile is on the up.