The global financial crisis was a stark reminder for many corporations to be more mindful of their working capital management and to reduce counterparty risk. In this light, many large corporations embarked on large-scale transformation initiatives to streamline their internal processes and banking relationships in preparation for future crises. Small and medium-sized organisations also took a second look at their liquidity and cash management protocols.
The typical transformation initiatives included re-examining their:
- Financial management value chain, to improve internal liquidity via better control and transparency of their cash positions.
- Supply chain strategy, to establish stronger, reliable and symbiotic supplier relationships, as well as improve on the receivables management process.
- Risk, compliance and governance protocols, to develop and execute more robust and comprehensive treasury policies such as investment practices and higher credit rated banking relationships.
- Information management systems, focusing on transparency for transactions, with the ability to track and trace transactions in progress and access information about the underlying transaction.
In addition, many companies are also looking into availability in all locations and countries where they have operations, adequate information on transactions and integration with their back office enterprise resource planning (ERP) system or accounting packages.
These initiatives herald a demand for more speed, visibility and information. Coupled with more businesses moving into the mobile channel, the current landscape has created significant business opportunities for banks and third-party payment providers.
As such, many financial institutions are now asking what role payment institutions can play here. How can banks and other payment service providers (PSPs) leverage these opportunities?
Back to Basics
Before the global financial crisis, many banks viewed payment services as a lacklustre younger brother when compared to their investment banking and corporate banking services. Innovation was king and new products were seen as essential to retaining customers and attracting new business.
This, however, has changed. After the crisis, banks are now moving back to basics. They are re-focusing their business on payment services, such as cash and transaction management. These services have contributed a growing and sustainable revenue portion to banks during the crisis.
Payment services are volume-driven and traditionally favour large banks. To be competitive within this space, it is important to focus on value-added services such as assisting corporations in their transformation initiatives.
This includes covering risk management, efficient processing, seamless integration of technology and transparent data. Bundling these valued-added services with payments and operating them in a multi-currency and multi-location context will help boost bank revenues.
In addition, banks must be able to demonstrate the ability to assist corporate to drive profitability, create competitive edge and survive in critical economic conditions. Bundling these attributes effectively and efficiently into their cash management services will mean that they will have a sharper edge over those who only provide ‘plain vanilla’ services without bundling.
For PSPs, such as PayPal and other localised providers, bundling has also assisted them in expanding their revenue streams. A part of the value-added services are developed with the advent of new technologies where they allow the providers to embed payment in other products and services.
However, with this trend, the battleground for payments has stiffened, with more non-bank players participating in the market. Telecommunication and utilities companies, with their vast networks, are promoting mobile commerce and mass-billing respectively.
The social media entities such as Facebook, Twitter and LinkedIn are also leveraging on their large customer base to develop inter-membership payments models. All these non-bank players are attempting to override the banks and other PSPs, such as Paypal and Alipay in specific, niche areas.
In addition, large global corporates, traditionally the most valuable customers for any payment bank, are increasingly bypassing banks and clearing and settlement infrastructure. Direct corporate access (DCA) is already available via SWIFT.
Asia-Pacific: Localise not Standardise
For many global corporations, national borders are merely an inconvenience. The lens they often view the world is in currency, specifically the dollar, yen and euro. Some of the largest players are able to form their own clusters and perform netting and clearing within that cluster. Many have in-house banking specialists.
The services they therefore require are much more closely related to cash management functions. These require close co-operation with the provider to deliver the correct set of services with integrity, transparency, accuracy and speed.
This is important, given that Asia-Pacific is still a collection of national markets rather than a regional market. Although there have recently been some moves to co-ordinate regulation, the Asia-Pacific market is still fragmented. This is despite several PSPs having set up links with their peers in other countries. On this basis, large corporates in Asia-Pacific are more likely to retain some local characteristics and to work with local providers than in other parts of the world.
It is apparent that the global financial crisis has forced corporates, both large and small, to re-evaluate their risk management and sustainability agenda. In particular, they are now looking at ways to simplify their internal processes and relationships with suppliers, customers and banks.
Payment institutions, both banks and non-banks, can capitalise on this, by adopting an approach that is aligned to the mindset of their corporate customers. They have to continuously improve the value they bring to their corporate customers and continually provide innovative bundled value-added cash management services with payment services.
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