This month’s question

“What are the drivers of change in the payments landscape? There is a lot of talk about innovation, but what does it mean for corporate treasury?”

Financial institutions today are feeling increasingly under pressure, trying to deal with multiple regulations and financial crime compliance obligations while needing to ensure that their technology and operations are optimised for efficiency. This leaves little remaining budget for innovation, and yet without innovating, firms will lose out to new, faster entrants that are riding the wave of the new consumer demand for near real-time, transparent and seamless applications.

In this rapidly evolving environment, corporate customers require more from their cross-border payments experience. Today, when a corporate treasurer sends a request for a cross-border transaction to his bank, he typically has no sight on what actually happens with that demand, often creating a source of potential discussion and frustration between seller and supplier with respect to effective payment reception and related costs.

Recognising this situation, SWIFT has united nearly 60 of the world’s largest transaction banks to work on an innovative solution – the global payments innovation initiative.

The initiative will allow corporate treasurers to benefit from the same day use of funds, track payments from start to finish in real time, have full transparency of fees, as well as significantly improving reconciliation between payments and invoices through richer and unaltered payment information. All using the same platform they have in place today, allowing them to grow their international business, improve supplier relationships, and achieve greater treasury efficiencies.

The banks involved in the initiative have already agreed on a first service level agreement (SLA) that will enable corporates to enjoy cross-border payments with greater speed, transparency and predictability – a service that is being piloted this year and will go live in 2017.

In the longer term, the initiative is building a vision for the future of cross-border payments in conjunction with its member banks. As part of this, SWIFT is devoting significant resources to instigate the opportunities and challenges of deploying blockchain, and distributed ledger technologies more broadly, on our platform. While the initiative aims to first make improvements based on the existing infrastructures, in parallel, we are also building a roadmap on the adoption of new technologies in order to ensure corporate customers receive the best possible payments experience in the near future.

Innovation is not only about creating a revolutionary new technology or business process, it is also about driving adoption to make real world change. SWIFT is ideally placed to support the community in working more effectively together to find common solutions that meet business expectations and satisfy regulatory realities.

For decades, the way in which cross-border payments are made has barely changed, yet over recent years, there has been a wave of innovations across the payments landscape. We see three key drivers: globalisation, changing user needs and increased competition.

Globalisation is boosting the number of consumers with buying power. This increases global commerce and therefore cross-border payments, which in turn creates a demand for faster, less expensive and more reliable cross-currency payment options. Between 2010 and 2013, annual cross-border payments increased by 14%; yet between 2008 and 2013, the average value of cross border payments dropped by 25%¹. As the world becomes increasingly interconnected, this is a trend we expect to continue.

User needs are changing, particularly amongst the millennial generation, who, it is predicted, will comprise 75% of the global workforce by 2025. This generation has grown up with mobile devices and a willingness to try new technologies. They are also an ‘immediate’ group, demanding that things be arranged instantly and at a reasonable cost. This is directly driving the adoption of new technologies such as blockchain and creating a demand for greater transparency of cross-border payments.

Lastly, the rise of fintechs has led to increased competition in the payments space, and today we see banks under pressure to invest in new technologies and partner in innovative ways to remain competitive. Yet while technology is developing faster today than at any time in history, we’re still not seeing rapid adoption by the corporate world, despite the many benefits, including those listed below, on offer:

• As payments continue to migrate to instant schemes, corporates gain more flexibility and better optimisation of their working capital.
• Payments which currently go from bank account to bank account, will be able to use e- or mobile wallets, and this creates further opportunities to reach new customers.
• New payment mechanisms such as blockchain and XML have the ability to carry more data which will improve reconciliation.

With today’s rapid pace of technological change, none of this is far away – but to get there, much work still has to be done by the wider industry to ensure that the changing needs of corporate treasury can be achieved. That is where most of the conversation is now taking place. There’s no doubt that we are in exciting times, and one thing is certain – the next five years will bring with it more capabilities than we have seen in the past decade.

Footnote

1. Source: Aite Report – Cross-Border Payments: Challenges and Trends; BCG Global Payments 2014 Report

From SEPA Instant Payments to the potential benefits of blockchain technology, today’s payments landscape is arguably more dynamic than ever before. Many of these developments will have direct relevance for corporate treasurers.

In terms of the drivers, regulation is a key force behind innovation, not least in Europe. Take the Payment Services Directive 2 (PSD2), for example. Although it is still a work in progress, PSD2 could potentially enable all of a corporate’s bank accounts to be linked up via an application programming interface (API). For treasurers, this could mean being able to easily see a complete picture of the company’s cash positions in one place, which could significantly reduce the operational challenges of being multi-banked.

Another example of regulation driving innovation is the SEPA Instant Credit Transfer Scheme (SCT Inst), which stands to introduce real-time payments across Europe. Whereas SEPA Credit Transfers (SCTs) are currently processed in batches, SCT Inst will be processed at a transaction level, and funds will be available in the beneficiary’s account within ten seconds. SCT Inst will go live in November 2017, with an initial value limit of €15,000, and treasurers will be able to process payments 24/7, 365 days a year.

Alongside innovation, the payments industry is also experiencing enormous disruption. The barriers to entry have been lowered by regulatory initiatives (including PSD2) aimed at increasing competition in the sector. This has made room for non-bank entrants, such as established technology vendors, mobile phone companies and fintech start-ups. While this is both an opportunity and a challenge for incumbent banks, greater competition should ultimately result in cheaper, faster and more efficient payments – which can only be good news for treasurers.

Interestingly, this disruption is also driving greater collaboration within the banking industry. A good example of this is the R3 consortium of over 40 leading financial institutions, including ING, which calls for members to work together to unlock the potential of blockchain technology. Within the payments sector, blockchain could significantly enhance transparency, efficiency, speed of settlement, trust and security, as well as reducing costs. And although blockchain remains at the ‘proof of concept’ stage, it is certainly a development for treasurers to watch closely.

It is also worth remembering that many payments innovations will have an impact on collections. This is not just a question of upgrading point of sale (POS) terminals to accept mobile payments. Real-time payments, for instance, mean that companies must be prepared to recognise incoming payments at any time, any day of the week. As a result, treasurers will need to consider how to improve their collections processes in line with payments innovations, with the aim of achieving 100% straight through reconciliation.

The good news is that banks are helping treasurers respond to this need through product innovation. Virtual bank accounts (VBAs), for example, are proving to be an increasingly popular tool among treasurers looking for more streamlined and efficient collections.

Leveraging digital advances, virtual cash management (VCM) solutions enable treasurers to rationalise bank accounts, centralise multi-entity cash, and improve cash visibility. It also facilitates the set-up of ‘on behalf of’ structures –another important development in both the payments and collections spheres – which offer treasurers the possibility to reap significant efficiency gains.

In summary, innovation in the world of payments is being driven by a confluence of regulatory, digital and disruptive forces. And while there are exciting developments such as blockchain in the pipeline, there are also many innovations and solutions, like payments on behalf of (POBO), that treasurers can take advantage of today.

While much of the payment innovation hitting the headlines largely focuses on intermediating consumer flows and transforming end user experience, corporate treasurers face a balancing act to capitalise on the opportunities arising from the changing landscape and emerging technologies, whilst managing counterparty risk, productivity and scalability.

1. New commerce and trading models – The exponential growth in e-commerce requires digitally native and traditional companies alike to scale up rapidly to access new customers in new markets and support payments and collections in more currencies and in more countries. Consequently, treasurers need to assess their cash management models (account structures, collection instruments etc.) and their robustness to continually deliver on the business’ growth agenda and effectively manage changes in the organisation’s FX risk profile.Procurement practices are evolving with the uptake in dynamic discounting platforms providing opportunities to optimise supplier financing programs, creating new avenues for corporates to effectively deploy excess liquidity.
2. Payments – faster, simpler, interconnected – The advent of real-time payments is enabling treasurers to make greater use of cash balances and accelerate cash conversion cycles with just-in-time payments.Furthermore, as banks and fintechs explore the potential of blockchain and other distributed ledger protocols to enhance payments, trade and other financial services, there will be downstream benefits for corporate treasurers to manage payments and exchange currencies more efficiently and cost effectively over traditional banking models.
3. Smarter data, smarter decisions – As payment offerings become increasingly standardised, treasurers have realised that, just as critical as the payment itself, is the data that accompanies these flows. Innovations in data management and API tools are allowing treasurers to effectively accept, consume and interpret data about their cash and working capital flows. This drives treasury efficiency, smarter decision making and creates deeper and more insightful analytics that have a direct positive impact on the business.PSD2 and the advent of API-enabled controlled access to accounts by third-party service providers can improve visibility of liquidity positions and cash exposures and better leverage data to drive effective liquidity deployment and cash forecasting.Meanwhile, the internet of things (IoT) has increasing potential to connect and revolutionise supply and distribution ecosystems which, in turn, should enable more effective working capital allocation globally.
4. Optimise liquidity, mobilise working capital – Industry initiatives and regulations such as SEPA, combined with the market adoption of ISO XML 20022, are enabling treasurers to further centralise treasury and operating models, mobilise working capital and create the business case for in-house bank (IHB) type structures as a natural evolution towards enhanced liquidity and risk management – combining centralisation of funding, liquidity, settlement and payment processes. The advent of virtual account ledgers and pay or receive on behalf of models is enabling the centralisation of liquidity with intercompany liquidity being managed internally within the IHB.
5. Managing payment risk and digital security – As the rapid pace of digitisation continues and the volume of online payments continues to increase, corporates find themselves exposed to a changing risk profile where cyber security and fraud prevention is now high on the corporate treasury agenda. To implement effective programs, treasurers must address the full spectrum of internal training, communication and leveraging emerging fraud prevention technology.

On the retail side, an all-out war on cash has been declared as the payments industry witnesses the traditional wallet being replaced by the mobile device. The financial services industry is now focusing on getting digital wallet share driven by app usage and integrated client experience. The ease, speed, and convenience of consumer electronic payments is driving the change for similar experiences across all payment and transaction infrastructures, including treasury. In fact, the ease of use on the retail side is highlighting the inefficiencies and stagnation that have been accepted for decades in the corporate payment space. And as corporate practitioners grow accustomed to easy and fast payments in their personal lives, they demand the same in the workplace.

From the business perspective, corporate treasurers are managing the day-to-day tasks of the department, and it can be a ‘multi-portal’ experience to get the job done. They typically aren’t as concerned about innovation as with being able to get the job done as quickly and efficiently as possible. When a corporate treasurer handles the full payments lifecycle, including reconciliation, the payment process becomes much more complicated compared to what the average consumer experiences with the digital wallet.

But innovation on the corporate treasury side is starting to address the needs and demands of corporate treasurers. With the ubiquity of digital transactions, treasurers have to have the proper mechanisms in place to account for and manage added volume and various types of transactions. In the last few years, we have gone from ACH, cheque, and cash, to fully integrating card and digital payments into the mix. At the same time, the security mechanisms need to be in place to validate the transactions and integrate them into the corporate’s treasury management system. Cross-border payments are an increasing reality for corporate treasurers, and they need the best mechanisms with which to cross those borders.

Financial institutions are struggling to keep up with corporate treasurers’ increasing and rapidly evolving needs. Banks face competition from new market entrants, and revenues for banks are decreasing as the cost of payments transactions goes down. Smaller merchants and even consumers can now accept payments and not incur the hefty costs associated with merchant terminals. Market behaviours are breaking down the traditional silos and lines of business in financial institutions. To succeed in the new era of corporate treasury, financial institutions will need to achieve transparency from consumer-initiated payments to integrated reconcilement on the corporate’s books with ease, security, and accuracy. The appetite for corporates to take on a large-scale migration to a new treasury management system is waning. Corporates are looking for the same aggregated user experience consumers are receiving with the same ease of implementation and use consumers get from cloud-based applications.

More than ever, it will be true that banks should look to their retail customers’ demands to know what trends lay ahead for corporates. As millennials begin taking on senior roles within corporates, the demand for leading-edge payments technology will be expected.