New Services in the SME Payments Market
To date, relatively few corporates have taken advantage of direct access to SWIFT. In July 2010, an article in gtnews reported that there were ‘just over 600 corporates with direct access to SWIFT. Although this represents a steady increase from 108 in 2005, the tipping point for corporate adoption is far off’.
Companies that prefer to avoid the internal infrastructure challenges and associated costs of direct access can connect to SWIFT on an outsourced basis via a SWIFT service bureau. At its best, SWIFT can offer corporates an efficient, cost-effective and secure means of communicating with multiple banks. Developments such as the Standardised Corporate Environment (SCORE) and Alliance Lite have made membership of, and access to, the SWIFT network much easier for corporates.
But while the emergence of SWIFT bureaus has lowered barriers to entry, the integration and operational costs are still beyond the reach of many medium and smaller corporates. And while SWIFT access improves processing efficiency, it doesn’t necessarily deliver greater choice or competition between services.
SEPA has so far delivered little to make life easier for the majority of companies trading across borders. This view was echoed widely in a recently published survey1 from the Financial Services Club:
“A year after the transposition of the [Payment Services Directive] PSD and implementation of SEPA, European payments professionals are overwhelmingly disappointed with the progress, or lack of it, in harmonising and regulating an integrated European payments market. Meanwhile, new competitors are registering rapidly as new payments institutions [PIs] and are creating major challenges for traditional banks.”
Respondents cited resistance to the single euro payments area (SEPA) from corporates as well as a perceived lack of benefits. In truth, the former probably results from the latter – with indifference among corporate finance professionals stemming from an absence of visible reasons to believe. As the survey found, however, payments services providers (PSPs) are finding innovative ways of delivering change in the payments landscape and corporate clients may be some of the main beneficiaries.
In Europe, there are 20 million business enterprises, 99% of which are small and medium-sized enterprises (SMEs)2 However, just a quarter of those SMEs have exported in the last three years, according to data released in July 2010. Exports are highest in the areas of mining, manufacturing, wholesale trade, research and motor vehicle sales. Only 13% of SMEs that export are active in markets outside the European Union (EU).
US market data shows that many US-based SMEs could sharply boost exports by entering new markets. In 2008, 59% of all SME exporters posted sales to only one foreign market. On the other hand, more than half (55%) of large firms that exported recorded sales to five or more foreign markets in 2008. A total of 281,668 SMEs exported from the US in 2008, accounting for 97.5% of all US exporters. The known export revenue of US SMEs rose to US$359.7bn in 2008, up 14.5% from 2007. Non-manufacturing companies dominate exporting by SMEs. In 2008, wholesalers and other non-manufacturing firms made up 72% of all SME exporters and generated 67% percent of total SME exports.
Lack of simple to use, cost effective international payments and collections services is a significant inhibitor to SMEs.
A typical SME stated their requirements in the following terms:
And after going live with a PSP, the benefits:
The two most widely used cross border payments and collections mechanisms, correspondent banking and plastic card, have significant weaknesses, especially when applied to transactions in the €500 – €5000 range. Correspondent banking services fees are unpredictable – which may not matter much for a high value treasury transfer, but presents issues when the payment is part of a wider process, for example, paying an invoice. Credit cards, when used for online (cardholder-not-present) transactions, result in the seller carrying the not inconsiderable risk of repudiation, with negative impact on working capital as well as profitability. Other models for making payments are well-established. For example, corporates, typically those with large centralised treasuries, have for years operated a model in which they net positions across accounts held at (usually) different banks – thereby getting the benefit of ‘local’ payments in each of the countries in which they hold accounts.
A few firms have combined the benefits of the established corporate model with the global reach of SWIFT to provide payments services to others. Through leveraging the standardisation and efficiency of domestic payments schemes coupled with netting of balances, such models typically have high straight-through processing (STP) rates and hence low per-transaction charges. They are therefore very suited to low-value transactions.
Although these services have been operating for many years, the advent of the Payment Services Directive (PSD) brought in a regulatory regime covering these ‘non-bank’ payments providers, imposing conduct of business guidelines, capital adequacy and other requirements on top of already-mandatory anti-money laundering (AML) and sanctions compliance. The PSD therefore gives a further level of assurance to potential users of these services – which have characteristics and benefits of particular value to SMEs.
PSPs typically offer a range of access services, including browser-based access. In some cases no upfront nor term commercial commitment is required, thus removing one of the key inhibitors to adoption. The ability to transact on demand is appealing to an SME, as is the ability to make and receive payments in a number of currencies without needing to hold its own bank accounts in each jurisdiction and wrestle with a wide range of local know your customer (KYC) and money transfer requirements.
A treasurer will typically hold accounts in each of the major currencies, the cost of establishing and maintaining an account in other countries may be prohibitive. PSPs serve a broad market, and will typically have a wider network of accounts than a small business can realistically operate.
Although fraud as a result of repudiated card transactions has started to fall in some countries, it is still a factor of about five times greater than the cost of fraud in online banking. Data from the UK Cards Association for the first half of 2010 showed that card-not-present fraud fell 12% to £118.2m. Meanwhile, online banking fraud losses in 1H10 plummeted 36% compared to the same period the previous year to £24.9 million. Not only is online fraud smaller, the cost of managing it is concentrated on the banks.
For corporates collecting a considerable proportion of their income over credit card, such as online retailers, airlines and travel firms, the impact of fraud coupled with the per transaction costs of card is considerable. For some firms, many tens of days of working capital may be withheld by their card acquirer – who may change the amount withheld at very short notice. Furthermore, funds withheld in this way may not be ‘safe’, as (unlike PSPs operating under the PSD) the firms involved in the process may not be regulated.
Some PSPs offer international collection based on credit transfers. In most countries a credit transfer is non-repudiable, thereby eliminating the potential for fraud. Furthermore these services are typically offered on a flat fee basis – which is more cost effective than card, which is typically charged on a percentage basis, for higher value transactions such as airlines tickets.
Reconciling receivables with invoices is one of the largest back office costs to corporates worldwide. Correspondent banking, with the challenges that come with it, such as message reformatting and truncation, and lifting charges, has struggled to deliver an efficient solution to this requirement. The ‘local payments’ model means that PSPs can guarantee the amount of funds which a beneficiary will receive; and also incorporate a biller-defined reference into the transaction.
At Sibos in 2004, in the opening plenary, Heidi Miller, J.P. Morgan Treasury Services, asked some challenging questions:
Six years later, as the Financial Services Club survey shows, it is still the non-bank providers that are delivering new payments and collections services:
“Most innovation in payments created by either non-bank PIs (35 percent of vote) or regulators and policymakers (27 percent of vote). Less than nine percent of the respondents believe that banks create innovation.”
By reassembling components of the banking system, including SWIFT, online corporate access, and established payments scheme rules, within the same compliance regime as applied to banks, a new category of regulated service provider has emerged, offering more choice to the market. Though typically referred to as ‘non-banks’, such providers mostly operate through the banking system, with banks ‘owning’ the client relationships, and benefitting from ancillary income streams including liquidity and foreign exchange.
Who knows what might have happened had the global financial crisis not left banks severely restricted in their ability to apply investment funds to new initiatives? With several of them now largely in public ownership – a condition that historically has been crippling rather than conducive to innovation – we can only speculate on what might have been. For the foreseeable future, thanks to the PSD, non-bank providers have come to the forefront. And, recognising the benefits, banks are increasingly adopting them.
1 https://thefinanser.co.uk/fsclub/2010/10/psd-and-sepa-research-results-2010.html
2 Source: European Commission on Trade, SME Performance Review.