Cash & Liquidity Management

Picking your payment battles

Published: Jul 2023

Corporates have never had more choice when it comes to payment methods, but banks and fintechs alike are wary of pushing every solution at their disposal for reasons of cost and offering options that customers don’t actually need.

Research published by Coalition Greenwich in April found that reduced cost remains the most important factor when awarding business to payment providers, and businesses are increasingly comfortable working with so-called alternative service providers. Just over three quarters of the corporates surveyed were using non-bank or fintech providers for payments, while 60% of the remainder said they would consider using non-traditional providers in the future. Within five years these firms estimated that such providers would be handling 42% of all payments.

A popular response to the question of whether it is cost effective for businesses to accept funds from a wider range of payment methods is that it is not a case of whether it is cost effective, but rather whether it maximises the chances of concluding a sale and receiving the money in the most efficient manner.

Toine van Beusekom, Strategy Director at Icon Solutions, says the focus should be on creating the optimal customer experience. “While innovation can result in more choice, selecting and implementing solutions that address specific customer payments pain points – rather than create more problems – has never been more vital,” he adds.

If customer experience is at the top of corporates’ strategic priorities, accepting multiple payment methods are becoming the table stakes for enabling customer adoption and retention. However, this approach may outweigh the unit economics of opting into each individual payment method.

“Therefore, it is equally important for businesses to periodically analyse and review customer adoption in order to rationalise payment methods,” says Sara Castelhano, EMEA Co-Head of Payments and Commerce Solutions at J.P. Morgan.

Customers want to pay how they feel most comfortable, so failing to support popular alternative payment methods may lead to abandoned baskets, lost sales and diminished market share. But Castelhano reckons customers can be influenced in a particular direction.

“There is an opportunity for businesses to incentivise consumers to adopt cheaper payment methods,” she says. “For example, offering a percentage discount if they pay by bank account and/or putting the option at the top of the checkout screen could change buying preference and drive down costs for the business.”

Making it easier for clients to pay helps generate sales, but Nancy Pierce, Managing Director Payment, Global Payments Solutions at HSBC acknowledges that this has to be balanced against the cost of investment.

“Businesses should assess which vehicles provide the most reach and acceptance for their particular client segments,” she suggests. “Businesses as well as banks will have to ‘pick their bets’ on emerging payment methods.”

Earlier this year, Oman Air introduced a new international payments process designed to increase efficiency and security. The global disbursement solution developed by HSBC delivers simultaneous multiple currency payments and an improved track and trace function for every transaction via a centralised treasury hub in Oman. The service enables Oman Air to process foreign currency payments through a single bank account, using HSBC’s global network and FX rates. The airline says this reduces its dependency on other third-party banks and lowers the cost of processing these payment types, as well as the time taken to do so.

The solution is expected to affect a significant reduction in the working hours spent on payment creation and reconciliation, as it enables Oman Air to process multiple currency payments at the same time, provides detailed status reports and allows for tracking and tracing of every transaction.

“It provides us with simplicity, expediency and security,” says Abdulaziz Al Raisi, Oman Air Chief Executive Officer. “We are confident that it will enable us to achieve a more streamlined international payments procedure.”

Although modern payment solutions are generally cost effective, accepting every possible payment method is unlikely to be economic for most businesses, says Steven Anderson, Head of Product Management, Enterprise Payments for Fiserv in EMEA. The key is to establish the right mix of payment methods to meet customer preferences and expand market reach. A recent example is a project Fiserv completed for Salt River Project (SRP), a community-based, not-for-profit organisation providing affordable water and power.

For over 20 years SRP offered customer a cash bill payment option through company-managed kiosks at 69 locations across central Arizona. However, it realised it needed a more cost effective and accessible alternative.

The Fiserv service validates billing accounts and notifies SRP of payments in real time across more than 600 locations in its coverage area. This enabled SRP to retire its kiosk network, which was not equipped to provide change or accept large amounts of cash.

“It has been a game changer for our business,” says William Patchett, Manager of Revenue Accounting at SRP. “It has allowed us to streamline our operations, reduce costs and expand our reach.”

The service is already processing and depositing between US$4m and US$5m worth of in-person payments per month and that figure is expected to continue to grow. Of course, different payment systems will have different fee structures and utilising multiple payment methods can lead to higher reconciliation costs. Businesses need to factor in these fees when determining their payment acceptance mix.

“In the near future, we envisage the emergence of ‘umbrella schemes’ encompassing more than one payment method and including ‘all in one’ fees, which could streamline payment acceptance for many businesses,” says Anderson.

Bob Stark, Vice President of Strategy at Kyriba, describes the G20’s focus on improving the cost and efficiency of cross-border payments as a welcome development for CFOs and treasurers.

“Our corporate clients are optimistic that continued progress can be made to ensure that at least 75% of cross-border payments can be settled in one hour by 2027 to meet the G20’s primary target,” he says.

The G20 has also targeted a global average cost of payment of no more than 1% by the end of 2027. But Nicolas Cailly, Head of Payments and Cash Management at Societe Generale Global Transaction and Payment Services, observes that payment processing is not a trivial matter and that banks must invest significant resources to make it work efficiently. He suggests that by leveraging technology and revolutionising the world of correspondent banking with initiatives such as SwiftGo or Immediate Cross-Border Payments (IXB) – a joint project between EBA CLEARING, The Clearing House (TCH) and SWIFT – banks will be able to provide these services and limit the cost of payments.

“But they won’t succeed alone,” says Cailly. “The G20’s ambition will not be reached without the public authorities reinventing the way the financial industry is expected to control every payment. The G20 has 20 different sets of rules in terms of sanctions screening and AML controls with over 30 different screening lists to be compliant with local regulations requiring different rules and reporting when it comes to payments.”

He accepts that ISO 20022 will help streamline and automate some of these processes, but thinks that will not be enough. “To meet the G20 objectives in terms of cost and level of service they will have to agree on simpler, harmonised, compliance expectations,” adds Cailly.

Castelhano also refers to the importance of consistency, suggesting that the goal should be a standardisation of process rather than a sustainable margin.

“If we set targets to address the four key challenges (cost, speed, access and transparency) recognised by the Financial Stability Board, that is only addressing the symptoms at the surface,” she says. “While this is a good starting point, the real focus should be on the cause of these symptoms, which is the lack of visibility over existing practices and access to robust payments data.”

According to Castelhano, the higher cost of cross-border payments can be largely attributed to the variability in regulatory requirements (such as exchange controls of different countries) and business practices at the beneficiary’s location leading to longer processing times.

“The public and private sector should work together to establish a baseline for all the different payment types and customer expectations to set metrics that would bring clarity and act as an anchor against which revised targets can be set,” she adds. “A baseline of current costs – particularly in relation to the different payment types in the retail segment – should be established as an anchor for any future targets.”

When thinking about this from an account-to-account perspective, if mandated, a global average cost of payment of no more than 1% by the end of 2027 could be achieved because of its speed-to-market and real-time functionality observes van Beusekom. “However, businesses will only succeed if they first transform their payments estates because they will have a higher volume of transactions to deal with,” he says.

From the perspective of total payment volume, Ecommpay’s Chief Revenue Officer, Moshe Winegarten suggests the average cost of payment is likely well below 1%. “This is because the top 10-20% of businesses are merchants posting 80% of the volume of payments and they are able to buy it at a massively economical rate,” he says. An obvious talking point in any discussion of competition in this area is whether we have reached peak collaboration between banks and non-banks in the payment services space.

“As the digital economy is only in the foothills of development, there are going to be many more opportunities for traditional players and fintechs to collaborate,” says Amit Agarwal, Global Co-Head of Payments and Receivables at Citi TTS. “Entirely new digital business models will be created, perhaps in the metaverses or web3 and the internet of things. The market for payment services in the digital world is likely to grow quickly and there will be niches for all players to explore.”

While there is still fragmentation across regions, we are likely to see more collaboration as new entrants look to build greater scale and respond to regulatory scrutiny. That is the view of Rijuta Jain, Payments Management Executive, Corporate Liquidity at FIS, who suggests there is an opportunity for banks to respond to consumer demand and modernise in a managed way.

“Banks already work with non-banks as customers, suppliers, aggregators and ecosystems in which to distribute their products more efficiently and there are probably even more ways to partner to leverage each other’s strengths,” agrees Pierce.

Combining the strengths and expertise of banks and non-banks can create impactful propositions, suggests Annelinda Koldewe, Global Head of Wholesale Banking Payments at ING. “As the payment industry continues to evolve, it is likely that the need for collaboration and partnerships between banks and non-banks will continue,” she says.

Open finance is still in its early stages and the market requires further innovation and investment in AI and machine learning, for instance, to provide more integrated products for enhanced and more secure customer experiences, says Indranil Bhattacharya, Principal Consultant at Capco. “The implementation of common digital identities for use between banks and non-banks for various products, including payments, is one good example,” he adds.

As revenues fall for the payment transaction, the need to ‘squeeze the pips’ on every piece of the value chain will be apparent. “Non-bank providers will enable costs to be eliminated via services such as PaaS and data analytics,” concludes Anderson.“Even a 1% improvement in straight through processing stats will provide significant improvement to the bottom lines of banks and non-banks alike.”

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