Challenges to Online Payment Uptake
While electronic payments have become the norm, corporate treasurers are yet to embrace forms such as online payment services. gtnews’ Payments Survey 2011 has found that of the more than 300 corporates who responded, 87% use wire transfers but only 15% use online service providers such as PayPal. Within this latter group, treasurers in Asia-Pacific are the most enthusiastic users – 24% regularly initiating online payments, whereas in North America only 15% use the services regularly.
Companies with revenues of less than US$10m are most likely to use automated clearing house (ACH) credits and online payment services providers because these organisations tend to have lower negotiation power to collect payments compared with their larger counterparts. For companies with revenues greater than US$1bn, cheques and ACH credits are almost equal in proportion of usage (around 63%).
One issue that may be holding back increased adoption of online payment services is risk – the survey suggests that respondents expected a low acceptance rate of such services in the near future (22%). On the other hand, payment methods such as cheques, which are well-established, are perceived as safe and they continue to be a popular form of payment. This is despite the fact that other payment methods are more efficient in terms of transaction management. The risk associated with online payments services is high because of their novelty, according to the survey report.
The risk may not be a problem for corporate treasurers, however. Ricky Thirion, vice-president, treasury at Etihad Airways, the flag carrier for the United Arab Emirates (UAE), says: “Customer attitudes to online payments play a big role. A Dubai-based market research group, Real Opinions, recently reported that a survey of internet users in the Middle East found that 43% were deterred from shopping online because they didn’t trust online payment systems. More than one in three said they avoided internet commerce because they regarded the payment options offered as unsuitable and 27% cited the limited number of local online retailers.”
Despite the reluctance of consumers in the home market, Etihad does value online payments as “an important part of our direct sales channels such as the web and call centre”, he adds. Moreover, Etihad’s strategy to increase direct and especially web sales as a proportion of overall sales will lead to a greater percentage of payments being made via online payment services providers.
Thirion identifies regional differences in the use of online payments: “These are mainly related to acquirer services and technology offered and card scheme rule differences. Customer attitudes towards online payment again play a big role.” He believes these local issues could be solved through better partnerships with local issuers and acquirers and card schemes. In doing this, greater use of online payment services by corporates and consumers would be encouraged.
When it comes to online payments adoption, there are no hard and fast rules. Paul Stheeman, an independent treasury consultant based in Germany, relates his experience last year in setting up PayPal in the treasuries of two subsidiaries of the one company: “Interestingly, the two subsidiaries had completely opposite opinions of PayPal. One had an extremely good experience and did not suffer any hitches at all. The other didn’t have a very good relationship and felt PayPal had not been clear on how funds were collected or would be transferred. There was a high element of mistrust and misunderstanding, although in reality PayPal was doing a good job.”
Stheeman says online services such as PayPal are growing in popularity, particularly in countries such as Germany, where credit cards do not have a big hold. “Most online payments in Germany are done via direct debits or direct transfers. There are still many people who use paper forms to transfer money from one account to another. Credit cards in the country are more like payment cards; they do not offer a line of credit as in other countries.
For this reason there is a strong possibility that online payment services like PayPal will increase in use because they will be attractive to people who want to make fast and simple payments.” PayPal says it has more than 20,000 traders in Germany that offer its service, with most of these operating in the business-to-consumer (B2C) space.
Adoption of online payment services will vary, depending on the size of the corporation and the industry in which it operates. Simon Bailey, director of payments at Logica, says for many of the company’s corporate clients, online services just don’t figure. “This could be because many of the corporates we have as clients are not in the B2C space.”
Another reason for the slow pace of adoption is a state of some confusion regarding online services. “Treasurers are struggling to understand the difference between services, be they B2C or B2B [business-to-business],” says Bailey. “The boundaries are becoming blurred between merchant acquiring services, cash management and payment services. The services provided by the likes of PayPal may well overlap with some B2B services or other forms of transactions that come from tills and e-commerce applications that are card-based.”
If it is a question of the role of electronic channels in creating business, corporate treasurers tend to be quite conservative, he says. Billing directors and marketing directors are more likely to push for mechanisms such as PayPal. “The potential of online payments will come down to a clash between the card world and the electronic world that is not card-based. But I am not sure that when it comes to B2C payments, that the particular payment service that is used figures very high in the minds of corporate treasurers.”
Gareth Lodge, a senior analyst at Celent’s banking group in London, makes a similar point about the confusion regarding online payments. “What constitutes an online payment isn’t particularly clear. Organisations such as PayPal are a way of exchanging money, but at some point they need the funds and that is done by ACH and card models. WorldPay is a payment services provider rather than a payment type – it provides a way of acquiring card transactions online, but those transactions then are processed via the traditional card rails at the back.”
Despite this confusion, Lodge says there is tremendous potential for online payment services in the B2B space. In the US, for example, he says 75% of B2B payments are made via cheques. “There is a huge potential there to automate such payments and put them online, although they won’t necessarily all be done via online payments services.”
Another important question is how a transaction is defined. Lodge says he can make a PayPal payment on a web page using his mobile phone – but will that payment be defined as online, PayPal, card-based or a mobile payment?
Corporate treasurers require clarity on three elements of payments:
Lodge says there are niche areas where online payment services could be a good fit, such as purchasing cards and foreign exchange (FX) transactions for making payments to small suppliers overseas. Some companies may also use online payments services to avoid the expensive FX charges applied by banks.
For larger organisations to adopt services such as PayPal, he says, integration into existing treasury systems is needed to deliver the transparency required. “The trend towards electronic bank account management [eBAM] is driven by a desire for visibility of funds. I would say some of the online payment types are not unattractive to corporate treasurers, but there is no way for them to integrate these into their day-to-day workflow and that will hinder the uptake of such services.”
Integration is an area that has been identified by enterprise resource planning (ERP) vendors such as SAP and PayPal itself. PayPal’s Payflow services, combined with Paymetric’s XiPay application, integrate online payment processing into SAP without the burden of developing, implementing and managing the integration in-house.
Treasurers can integrate payment information directly into their SAP enterprise, connect to multiple financial processing networks, perform real-time authorisation and settlement, and accept, process and manage multiple payment types from a single, unified platform. This integration is aimed at encouraging greater adoption of PayPal for B2B use.
Another inhibitor to adoption of online payment services could be a balance sheet consideration, says Chris Skinner, chief executive officer (CEO) of consultancy Balatro. “Automation makes everything too fast in terms of recognising debt on the books. That is why many corporate treasurers are reverting to letters of credit (L/Cs), and why there was such resistance to the phasing out of cheques in the UK. SMEs [small and medium-sized enterprises] are going out of their way to resist or slow down the automation of payment and finance.”
This is a negative view, he says, because automation will also increase the speed of credit on the books as well, but in practice, most organisations will delay payment until the final day of settlement.
Celent’s Lodge says online payments are definitely growing, and there may be more traction for such payments if they are tied into electronic invoicing (e-invoicing) applications. “If you can link the two, factoring could be offered for small businesses. These online payment services could offer a one-stop-shop that provides similar services that the large corporations currently enjoy,” he says.
Lodge identifies two market forces that could provide a boost to the use of online payment services providers. First, SWIFT is aiming to have 5000 corporates on its network within the next few years. “We are seeing many bureaus as payment factories. This is not necessarily online, but many of the bureaus are connecting to other payment networks. The result could be some alternative rails to the payments process; if you believe a payment is a payment, as long as the payment gets to the desired location, they can be routed in alternative ways, some of which are online providers.”
The other nascent force, Lodge says, is the moves being made by MasterCard and Visa. MasterCard is making inroads into the payment services provider space, having bought UK online payment services provider Data Cash last year.
“Data Cash has an e-invoicing and ERP platform and could help MasterCard break into the B2B market. At the same time, Visa has developed its IP network, which potentially can provide an alternative payment network for e- and m-commerce,” he says.
Given the connection the card companies have to banks and to merchants, as well as settlement mechanisms, they could be well equipped to break out of the merchant oriented space and move into B2B as well.
In its submission to the 2011 Review of the UK Payments Council’s National Payments Plan, the Association of Corporate Treasurers (ACT) said the growth in online, mobile and telephone transactions relative to other forms of retail payment were likely to continue. It pointed out that there was significant cross-over between the parties involved in card and non-card payments, and therefore a more ‘joined up’ approach should be taken.
The ACT urged a global best practice review for current and emerging payment methodologies. Asked about services that allow online merchants to include a payment option on their checkout page that redirects users to a specially adapted version of their bank’s internet banking site, the ACT said it had mixed reactions to it.
While corporations that received copious amounts of low-value card payments online each month were positive about such services, they did stress that the cost of these transactions would be critical to its success.
Others were not as positive and stressed that clarification was needed on who has the liability to the customer and noted that it lacked the consumer protection that is currently provided by credit card payments. The ACT ended its submission with a suggestion that new account providers such as PayPal were included in the remit of the National Payment Plan.
Setting up services such as PayPal in a corporate treasury is straightforward, says Stheeman. “PayPal has a lot of experience and provides everything that is required to set up operations. From initiation of the paperwork through to live operation took about three months.”
While there is a strong possibility that the adoption of online payment services such as PayPal will be consumer driven, Stheeman says there are many advantages for suppliers and buyers in such services. “I think online payments will continue to grow and sit alongside more traditional payments types. At some stage there may be too many suppliers of these services and there will be consolidation, which is fairly typical in such areas.”