How Digital Is Disrupting Payments

To say the payments industry is going through diruption is certainly not a hyperbole these days. The Fundamental shifts in how commerce gets done have begun to impact the way payments have been done all these years. On the one side,the payment industry has seen the entry of diverse fintech players, in addition to the start-ups that are presenting increased competition for banks and corporations. On the other, the threat from fintech is being further fulled by rapidly evolving customer expectations, which continue to push the boundaries for the industry as a whole. It is increasingly apparent that the payments marketplace will look fundamentally different a decade from now. There will be new form factors, real-time infrastructure, greater levels of integration with social media and e-commerce, to name a few of the changes. In effect, the revolution that has completely disrupted the consumer payments industry over the last decade or so is finally coming to take into its fold the corporate payments industry, too.

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Trends That Are Likely To Shake Up The Payment Industry Ecosystem

  1. Direct-to-consumer models: As firms across industries move to direct engagement with their customers, it is becoming increasingly necessary to deliver them the same level of digital experiences as the consumer payments industry does.

  2. Global payment flows: Cross-border payments now make up over 10 per cent of all corporate payments, and they are growing.11 These flows are almost always digital in nature, with the added complexity of regulatory compliance and risk management.

  3. Data monetization: Bank treasury services have had the advantage of managing and servicing fund flows between their corporate clients. And as these fund flows become increasingly digital, they have enabled banks to build a data goldmine. Banks are now actively looking to leverage this data to deepen their service offerings.

Making Digital Transformation Happen

As digital transformation initiatives in payments pick up steam, there are four main areas of focus, each of which is important to ensure not just a solid foundation for a digital payments ecosystem, but also to ensure the groundwork for unlocking the revenue potential from treasury and payment operations. This is something yet to be tapped in most organizations

  • Enabling of digital channels: Buoyed by the consumer payments industry, there is a rapidly growing array of digital payment channels that need to be integrated into the digital payments service offerings.

  • Process automation: Payment processes typically span across entities (bank-corporation-consumer), and integration across disparate systems will make for a critical foundation to enable scalable implementations.

  • Payment analytics: Payment processes have always been data rich, and even more so when digital channels continue to grow. Effective use of the data to make better decisions (e.g., manage risk, prevent fraud) and, furthermore, explore data monetization opportunities, are becoming important.

  • Adoption of standards: For any multi-entity ecosystem with entities across the globe to scale with technology, it is essential to establish standards. Adoption of open banking standards is essential for digital payments to succeed - and we are at an inflection point, given the increasing adoption of these standards.

Digital channels

The ubiquitous cheque has been the staple in corporate payments for years now. Despite being the most expensive payment instrument, the cheque has dominated the corporate payment world for decades. It is not just the processing cost of the paper cheque that makes it a burden for banks. It is also a security headache. It is well known that paper cheques are the largest vehicle of payment fraud. All that is changing. And, as it usually happens, this started with the consumer payments business. As the direct-to-consumer models continue to evolve, the B2C payments business is growing rapidly (annual growth rate of 15 per cent led by digital e-commerce)". And the digital payment technologies that are coming out of the consumer payments industry (Zelle, Paypal, digital wallets, et al) offer a rich choice for banks and corporates to offer digital experiences to their customers:

  • Disbursement of funds: Transfer volumes of Medicare/ Medicaid funds by healthcare providers to their members continue to rise and should, by and large, be digital.

  • Refund management: In direct-to-consumer world, a corporations need to manage refunds to customers from excess payments and product returns. Customers used to instant digital payments from the e-commerce world are expecting a similar experience everywhere.

  • Loyalty/reward disbursements: As corporations build deep relationships with their customers, they continue to adopt customer engagement strategies from e-commerce retailers. These include cash-back payments and encashing of loyalty points, which need to be executed through digital channels.

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Disbursement of fund

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Loyalty

A similar revolution is around the corner in B2B payments, with the expansion of consumer-like payment rails, such as digital wallets, in addition to the existing ones like ACH, Wire, virtual cards, etc. We believe the convenience of digital payments is only a starting point. There is so much more to it by way of benefits:

"Streamlining of payment processes has a direct impact on working capital management. Trade finance is key to enabling global supply chains, and fintechs are coming up with specific solutions. Cross-border payments to suppliers and subsidiaries need to stand up to heavy regulatory requirements in addition to managing the risk of fraud. Digital payments are increasingly the safest alternative. In addition to enforcing compliance, digital channels can ensure transparency of global fund flows"

Automation

70 per cent of corporate treasury and payments professionals list manual and inefficient processes among their top challenges. In addition to their high costs, manual processes are also error-prone, difficult to scale in response to variable volumes, and increasingly susceptible to fraud. Process simplification and automation opportunities extend across the value chain-from establishing the payment exchange with suppliers (B2B) and consumers (B2C) to creating a variety of services around three-way (PO, invoice and receipt) matching, and all the way to the disbursement of funds through different digital payment channels. Several fintechs see this as a big area of opportunity and are building to this end auxiliary platforms that can integrate with corporate systems and automate the end-to-end processes. Bank treasury services offer a slew of products and services - from cheque processing to ACH/Wire - to their corporate clients. For instance, a large bank helps one of the largest healthcare providers in the US process over 4 million transactions on an annual basis, covering their entire value chain, from providers - corporate hospitals (B2B) and individual doctors (B2C) - to pharmaceuticals (B2B).

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Published by
Matthew Anderson

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