With the lines between different financial services processes becoming blurred, banks and specialist payment providers are looking at how they can integrate more into the corporate procure-to-pay (P2P) process. Traditionally, chief financial officers (CFOs) have had a very fragmented view of financial operations. However, they are now seeking a more holistic view of their global operations. In this respect, cash management and liquidity are key, while risk management, both from an operational and a financial perspective, are driving decisions. Applying these strong management techniques to an organisation’s funding and credit lines will result in general efficiencies being achieved though these processes.
Prior to the recent global economic recession, there was steady growth in both the volumes and revenues of foreign exchange (FX) and international payments. The overall market for international payments is still growing, despite the decline in the past year, and that is likely to continue as more and more companies source goods and services from overseas.
The credit crisis contributed to a lack of investment in payment processing technology. But now there is an increasing amount of innovation going on in this space. Banks are starting to wake up to the fact that payment processing can be an important and profitable revenue stream for them, as opposed to the sideline business it was previously seen as. Financial services organisations that are investing in technology innovation will be in the best possible position to capitalise on the growing payments processing market once the global recession is over; however many banks are unwilling to invest in developing their own payment technology, preferring instead to partner with technology innovators.
Specialist Payments Providers
The main advantage that specialist payment providers have over banks is that the providers are nimbler, they are bank-independent and focused on payments. They are therefore able to bring products to market more quickly and drive innovation. Payment providers’ more flexible infrastructure and applications allows them to turn changes around faster, responding to customer and market demands such as beneficiary self-management and fully-automated file processing capability.
There are also coverage benefits to choosing specialists providers that operate worldwide, and several of them have global operations with local offices staffed by payment experts, whereas a very small number of banks are truly global. A provider’s global platform can execute many payment types and from many different bank accounts, wherever they are in the world, from within a single application, providing a holistic view of cash and currency risk at a global level.
Banks are carefully examining what specialist payment services firms are doing and, in some cases, are looking to license the technology from them or partner for certain services – such as FX payments and beneficiary self-management. Demand for the latest P2P technology capabilities is also high. The message to banks in this space is to make sure they make the most of their advantage while they have it. In this regard, multinational payment firms in both the UK and the US are starting to put these web services-enabled systems into place, offering a ‘pick and mix’ of services and applications that can integrate into corporate and banking systems. Some payment services firms have already started to corner the market in the SME space, particularly in the UK and Australia, and the new technology is also enabling some to tap into the Fortune 500 market.
While the banks may have lost focus on core banking services and taken their eye off the ball in the payments space, post-crisis they are now returning to focus on this area. Payments are still fundamental to the operation of a bank, and remain an area where banks can add a significant amount to their bottom line.
This competition is good for everyone. New technology can now combine remittance delivery solutions with the new standards coming into that space, which will benefit the marketplace and make it even easier for corporates to deal with their suppliers. Larger corporates can also have direct access into the SWIFT network, so they can bypass the bank payment system almost entirely.
Focusing on simple ways to improve efficiency is a key part of the P2P process. Even within large corporates, whether in the UK or the US, the whole payment process is still very manual, particularly when it comes to international payments. Invoices are still faxed or emailed, and instructions are manually keyed into bank platforms. As much of that as possible needs to be automated, cutting out the potential for human error, and fraud, and utilising the labour in accounts payable (A/P) more efficiently.
Another challenge, particularly in the US, is the large number of cheques that are being used. Even large corporates are still paying a majority of their suppliers by writing cheques. Corporates want to try and move away from that. However, until recently there hasn’t been the incentive or an easily integrated technology in the marketplace to enable them to convert to electronic payments. Thankfully, with new innovations in cheque-conversion technology, more and more corporates are finding it easier to migrate from sending and receiving cheques to being paid by an automated clearing house (ACH) payment or a SWIFT wire. Advanced integration with ERP systems is also making it easier for corporates to manage multiple types of payments from within their accounting systems.
One particular challenge the industry is currently grappling with is having the ability to send rich remittance (the data about the payment instruction). This may well be a problem that the payment sector itself and the banking networks won’t be able to solve, given the lack of any standards in this arena – and the fact that none of the world’s major payment networks can deliver anything more then 2 x 35 character lines of reference information with the payment.
A structured remittance capability keeps data, such as a purchase order, invoice, or official documentation completing the process, with the payment. It provides a holistic view of what has been purchased, how much has been paid, and the full finance documentation that goes to the supplier enabling them to reconcile exactly what they have been paid.
As mentioned earlier, a major limitation of the current payment networks is the lack of reference information that can actually travel with the payment. If you are a buyer of goods or services from a supplier in another part of the world, the amount of information arriving with your payment in the supplier’s bank account is very limited. This leaves the supplier with a reconciliation problem, trying to work out what they’ve actually been paid for, creating challenges when the supplier has a large number of payments coming into their bank account, or if multiple invoices are being paid for within a single payment.
This problem of reconciliation is a major driver behind the industry building a remittance capability outside of the payment networks. Both parties will know exactly what’s being paid and the supplier can reconcile at their end what they’ve actually received funds for. There are payment specialist providers that are beginning to offer technology solutions, such as Travelex, which offers extended structured remittance records enabling automated reconciliation into the suppliers’ accounts receivable (A/R) system.
Currently, there are no universally agreed standards governing remittance best practice around the world, thereby making it difficult for payment providers to standardise offerings.
Getting a Standard in Place
In the US, Fedwire, the real time gross settlement (RTGS) funds transfer system, which runs the high value network, and NACHA, which runs the low value network, are talking about expanding their message formats to provide remittance delivery within the payment message. This could happen by the end of 2010. Because the Fedwire and NACHA networks do not extend beyond the boundaries of the US, while this will be useful for US domestic payments, it doesn’t help people in the US needing to pay someone overseas. The UK has a similar initiative, looking at bank account clearing systems (BACS) and clearing house automated payment system (CHAPS). Europe is considering how best to implement the Payment Services Directive (PSD) in the wake of the single euro payments area (SEPA). But the challenges are global – it is unlikely that consensus will be achieved on industry standards. This is why banks and payment providers have to build capability outside of the actual payment networks.
Developing beneficiary self-management is another trend relating to the wider drive in the industry to develop more of a community-corporate-banking relationship. Traditionally, this has been a one-to-one environment, but with the advent of technology, payees can now elect to be paid by a variety of payers through one system.
Corporate organisations typically hold payment information or beneficiary information and data in their ERP systems, such as Oracle or SAP. However, in a smaller organisation, it’s possible that this information will be on paper or in a spreadsheet somewhere. So making many payments to many beneficiaries, keeping track of beneficiaries’ information, and particularly banking details and similar information, can be very time-consuming.
This is also a compliance issue – as an organisation needs to be able to show that they have an audit trail around changing the details of who the payments are being made to. It is a significant issue for corporates, and is one that is inherently tied to the P2P process right from the very start, when a new vendor record is created.
Specialist payment providers are now just starting to provide solutions that directly speak to these once common complaints and enquiries that plague A/P managers. These new technology platforms can now offer A/P managers the combined advantage of an electronic payment enrollment system, vendor information management tool and payment platform, all within a simple web-based application. Moving the corporate payment landscape away from manual cheque-based systems will eventually empower both corporates and their vendors by having them manage and update their own information, such as their banking details, through a secure self-service environment, track progress of their payments, including payments in transit, and review the remittance associated with the payments.
In terms of potential future developments, there are many emerging payments providers developing new technology, particularly in the B2C market, such as PayPal, Billmelater and mobile payments. Most banks have some internet banking capability that can be accessed from an iPhone or Blackberry but, interestingly, no-one has yet proven the business case for corporate mobile payments. But it should not be underestimated – this is certainly the direction that the market is moving and if consumer adoption is any indicator, it will be interesting to see who, if anyone, successfully develops a business mobile payment application.
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