The Evolving Payments Landscape: Changes on the Horizon
There has been some discussion of late, as to whether payments – both single- and cross- currency – have developed into a full, or even post-mature set of capabilities. Further examination leads to the conclusion that not only is this not the case, but that a new landscape – driven by technology, refined approaches to management of funds flows and globalization imperatives – is beginning to manifest itself. Evolving market requirements around these and other value dimensions are driving a paradigm shift, which the major providers of payments services must take into consideration.
Clearly, as one considers the current product life cycle of the domestic, cross-border and cross-currency payments, elements of commodity behavior are more common. Referencing the Current Payments Landscape illustration below, these products are clearly positioned on the right half of the curve (X marks the spot) and they are exhibiting, to one degree or another in various market segments, the following related characteristics:
Generally, at this point in the product life cycle, market conditions emerge that require both users and providers to coalesce around new attributes, which evolve from or replace existing ones. This is a trend we are clearly beginning to see in the payments space. Of course, some attributes will remain key to the payments value proposition such as transaction access channels, quality of service, clearing and settlement access and capabilities and reputation of the provider. However, based upon the trajectory of both the corporate and financial institutions market segments, there are some attributes that will change significantly or even fall away completely in the years to come.
In the payments area, some of these attribute shifts are becoming apparent. Looking forward, some key changes are emerging and are outlined in the table below.
|Exisiting Attributes||Emerging Attributes|
|Short-term Credit Facilities||Liquidity and Credit
Linked to Payments
|Cash management/ Working Capital
Linkages with FX
currency Account Functionality
|Repetitive and Stored Formats||Conditional Payments|
|Competitive Cut-off Times||Multiiple Clearing and Settlement Options
Across Regions for Major Currencies
|Confirmation and Reconciliation Data||Real-time Confirmation and Reconciliation
Data Along with Actionable Analytics
As corporate treasurers in particular seek to maximize efficiencies in their working capital management infrastructure, buying criteria will increasingly be around attributes that drive these efficiencies such as the Emerging Attributes” listed. The technologies that now drive payment and foreign exchange systems, as well as settlement and clearing systems, have achieved such levels of efficiency that many of the standard criteria for the value propositions in these areas are less primary drivers than in the past.
Among the emerging attributes, each significantly extends the value proposition offered by providers. With the advent of instantaneous information and transaction/account position feeds, the action horizon for credit management now is not only intra-day, but also real-time. This real-time position monitoring combined with looping a broader range of bank generated analytics into the corporate forecasting process allows users to achieve unprecedented precision in managing intra-day and overnight credit utilization. It also allows them to anticipate and stage payments to achieve lower costs and maximum efficiencies. Serious discussions are underway about the real benefits of pursuing a single global account option. Such an account would allow the user to pay or accept any of the primary currencies with certainty of exchange rates (within defined time-frames) and support cross-currency netting, pooling and investment capabilities. It would target feature functionality equivalent to that offered by the discrete account structures that are commonly used now. Conditional payments prompted by drivers such as time of day, account position and incoming credits – of a certain dollar amount or specific counter-party – are already available from some providers and the array of conditions” continues to expand.
As the payments provider community reacts to these emerging opportunities and invests to provide the required functionality, both providers and users need to begin to consider that the price points for single- and cross-currency transactions will increasingly have to align with the relevant product and service attributes. The nature of these emerging attributes is fundamentally transforming the provider/user value proposition and as market needs evolve and buying criteria change, the value recognition as reflected by pricing will have to transform as well.
Current price points tend to reflect the access channel used, market practice in the venues of the payer and payee, straight-through format compliance, as well as clearing and settlement channels. As new attributes prevail, price points will increasingly reflect the value of the liquidity and credit utilization benefits that accrue to the user as well as the extent to which the banks, as providers, must leverage their own balance sheets and capital in support of the user payment flows.
The technology behind the payments and commercial foreign exchange activity handled by the provider community has progressed to the point where the industry is beginning to attain true visibility and transparency to factors such as these – both in terms of the benefits realized by the users and the costs incurred by the providers. As the treasury action horizon has compacted to real-time, the ability to achieve demonstrable efficiencies has improved in concert with the available tools. It has also made the leap from data to information to analytics a mandatory one for both providers and users with a correlated recognition of the value of such information and analytics.
The CLS model has started to break through some of the traditional barriers to a more value-driven pricing approach in the FX/payments arena. The combination of implementation, transaction and liquidity/intra-day credit pricing is indicative of one direction in which the mainstream payments business may be moving. On other dimensions, provider selection and pricing might also eventually have to factor in the liquidity and capital positions of the providers as explicit considerations in the selection process.
Looking even further ahead on the liquidity horizon, we are beginning to hear discussions of intra-day liquidity markets” where a provider brokers available liquidity between long and short users – with the appropriate information and management tools bundled and delivered on the basis of an entirely different set of pricing vectors.
Another approach that is gaining momentum in some segments is to present single- and cross-currency payments as part of a bundle of financial services supporting corporate working capital objectives. Other components of such bundles can include netting, pooling, short-term investments (passive and active), electronic invoice presentment, receivables management tools and short-term/asset-based financing. While these bundles are increasingly becoming a standard approach to the corporate segments, they have generally been priced on a component-by-component basis. An alternate approach which is being considered more frequently is to explicitly tie pricing for these bundles to the value realized by the user against an agreed upon benchmark.
As one considers the current trajectory of the approaches taken by both corporates and financial institutions in managing local, regional and global funds flows, it is apparent that rather than settling into commodity posture, the payments component of the business process is on the threshold of significant enhancements to the prevailing value proposition (see Future Payments Landscape illustration above). While transition to this enhanced proposition presents many challenges to both the users and providers, the achievable benefits are sufficiently compelling that movement in this direction is no longer confined to the usual early adapters.” Competitively, neither the user nor the provider community can afford not to recognize this trajectory and embrace it fully – along with the associated implications around provider selection and pricing.