At the start of a new decade, it’s customary to look back on the accomplishments, events and occurrences of the previous 10 years. If you direct your attention to payment transactions – particularly within Europe – the question arises as to what innovations the preceding decade saw. If one distinguishes between business-to-business (B2B) and business-to-consumer (B2C) in payment transactions, only B2C brought significant innovations relating to payment transactions.
The developments in micropayments have gone substantially in the consumers’ favour in recent years. Due to the growing importance of ebay, PayPal has become quite common and provides payers with considerable advantages in their financial transactions. Detached from matters of format and technical obstacles, etc, payment transactions can be triggered in an easy and simple manner, all over the world. Recipients are informed of in-payments by e-mail and can keep track of the payment flows in their accounts. By now, companies also have recognised the advantages of this system, relying more and more on this possibility to effect payment. In Germany, over 20,000 traders1 are already offering this payment option, but this is mostly B2C, while B2B is neglected. While corporates nevertheless use PayPal, unfortunately there is no automated and standardised posting option in their respective enterprise resource planning (ERP) systems.
With the rapid speed in the development of smartphone functionalities, the option for mobile payments is becoming more common all the time. Cinema tickets, subway tickets, car-parking tickets and so on – in the eyes of the product managers, the opportunities for use are practically limitless. However, once again, its use is limited mostly to B2C.
What About Corporates?
The result of looking back on B2B developments is somewhat sobering. Innovations in payment transactions for corporates were fairly modest in nature. If you look at the transfer options between bank and corporate, virtually no innovation can be detected. In Germany, the BCS/FTAM standard was the law for many years, and yet the market was only set in motion by EBICS towards the end of the past decade. Finally, corporates have a standardised option to handle payment transactions quickly and cost-effectively – and in a manner which is more or less integrated with existing financial systems.
Another innovation was the introduction of the single euro payments area (SEPA). However, is this really an innovation? To many, it was rather a directive triggered by the European Union (EU) and imposed by the European Payments Council (EPC), which resulted from EC Regulation 2560/2001.
For companies with cross-border payment transactions, the advantages of SEPA are certainly plain to see. For many corporates, however, there is no impact whatsoever (97% of all payment flows within Europe are effected on the national level, only 3% are cross-border payments2). So where is the innovation here? Is it the technical foundation, which originates from ISO 20022? Not so much for SEPA; its scope is limited to the pan-European area, i.e. the eurozone.
Globally speaking, however, ISO 20022 can be identified as an ‘innovation’. The desire and necessity to be able to handle payment transactions with all countries worldwide through a single format is at the top of many a financial manager’s wishlist. ISO 20022 now creates the opportunity for corporates to exchange data through globally uniform formats. The way there, however, will be long and arduous. Many banks are as yet unable to create the necessary technical prerequisites to handle these requirements or formats. For example, if you look at SEPA’s slow introduction – especially SEPA Direct Debit (SDD) – the breakthrough is still a long way away.
Global formats, however, do not yet mean global availability. Through the opening of SWIFTNet, SWIFT considerably eased the situation over the past decade. The access to this global network, however, is limited to just a few companies. The way towards SWIFT will open increasingly more for SMEs in the next few years. For instance, UniCredit Group offers a fairly simple way into the interesting SWIFTNet with their product ‘New eBanking’. With ‘Alliance Light’, SWIFT itself is exploring new options for connecting smaller customers. In addition, numerous companies are now offering a connector framework to establish a link to various banking systems.
By launching SAP Bank Communication Management in 2007, SAP managed to close the gap between the enterprise resource planning (ERP) system and banks. Financial processes could thus be integrated and accelerated, which was a great relief to many who had to integrate and maintain many interfaces in daily transfers from and to banks.
Where are Innovations Needed?
One statement still holds true: “We are more or less just managing what’s there.” Where and why are further innovations in payment transactions necessary? The process of an in-payment or an out-payment is just a small cog in the order-to-cash (O2C) or purchase-to-pay (P2P) machine. Against the backdrop of the global financial crisis, however, these have proved to be an effective instrument. For many companies, safeguarding liquidity was and is their top priority. While a company can optimise the key ratio ‘days in payable’ (DIP), for example by negotiating periods of payment skilfully, the key figure ‘days sales outstanding’ (DSO) is a more difficult story.
In order to ensure that competition does not take its toll, an optimised and fast process chain is necessary in revenue management. Posting in-payments quickly and correctly often forms the basis of customer strategy and order handling. Over the past few years, the major software suppliers have made available numerous tools to the corporates, ranging from dispute management via collection and credit management up to in-house cash. Instruments providing in-payment or prompt information on in-payments, however, are in short supply. One of the keywords that crops up more and more frequently in this context is ‘real-time’. In the past, payments took too long to get from customers to suppliers. If you take into account problems in posting or clarification issues, weeks may go by until the posting of outstanding receivables is completed.
As a result of the SEPA guidelines, realtime takes on a different meaning. In the future, payments will have to make it to the recipient much faster. What remains for the corporate customers? They can now process advised payments through SWIFT MT942 in their ERP systems. If the recipients have current accounts at a bank that offers near-time posting, they even have the privilege of an early, during-the-day SWIFT MT940 bank statement.
Over the past decade, the world has become aware of the imperfections in flows of finance and has managed to improve them considerably. Compared with the physical movement of goods, however, they are still lagging behind. RFID made its entrance in logistics – it thus became a lot easier to hand over goods from manufacturer to recipient. The options for use in this area are far from exhausted. Numerous forwarding agents offer shipment tracking as an extra service, meaning that every customer can check the delivery status of their goods at any given time.
In this case, there are a multitude of possibilities for checking the status of one’s order. For outstanding accounts receivable (A/R), however, the picture is a lot bleaker. Beyond the supplier’s agreed payment period, recipients have little information on the status of their A/R is. The recipient will have no information on differences that may be deducted upon payment or whether the invoices will be settled within the cash discount period. Tentative attempts at e-invoicing – combined with access via supplier portals – gradually seem to be meeting with more interest among companies. However, organisational and technical obstacles are still far too great for mass application and for a standard to establish itself over the next few years.
Payment Tracking as a Standard
For many companies, however, insight into customers’ accounts will probably remain blocked. So what else could the future in payment transactions hold? How can information on the amount, purpose and execution get to recipients even before the payment has actually gone out?
To quote Victor Hugo: “Nothing is more powerful than an idea whose time has come.” Applying this to payment transactions, it is time to think about efficient payment tracking models. These models could, for example, arrange for invoice numbers and execution dates to be transmitted to recipients already in a payment proposal run. The amount and content of the payment would therefore be available in the information cycle long before the actual execution. The recipients, in turn, can draw conclusions regarding the imminent in-payment, adapting their subsequent processes in the O2C cycle.
As in many innovations, success or failure will be determined by the application’s complexity. How complex could such an application be? In particular, who would feel responsible for taking the first steps in this direction? Ultimately, ERP suppliers and banks will not be able to generate any recognisable added value in their business model. Or, at the end of the day, might it be very different stakeholders who discover this model for themselves? A trivial idea might involve Twitter, the micro-blogging network, which would be a simple foundation for quickly and easily exchanging brief information. As it supports 140 characters, just like SEPA Credit Transfer, the models are almost perfectly compatible. Twitter’s use to the private economy as a marketing and product platform certainly has not been exhausted yet.
An additional innovative approach for monitoring payments would be the further integration of PayPal and the ERP suppliers. PayPal and its services are well-established. The application’s complexity is low. Only a comprehensive or automated integration into the most common finance accounting systems would be needed.
There are plenty of innovations out there. However, they must develop beyond their current status. Ultimately, it is all a matter of priorities.
1 Source: PayPal.
2 Source: European Commission, Impact 2005.
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