Emerging Payments: Solutions for the Digital Age
The world of commerce is undergoing a digital transformation. As the advance of technology continues to open up new possibilities in the realms of accessibility, device capability and monetisation within social media, the internet and mobile channels, the business world is experiencing a revolution in the way enterprises and customers interact. Treasurers should be able to benefit by improving business performance and straight-through processing (STP), while cutting the cost of payments and collections.
So-called ‘smart’ devices – be they smartphones or tablets – are becoming the consumer platform of choice for paying online for goods and services, anytime and anywhere. An increasing amount of business is being conducted via such devices, and companies are responding by developing innovative applications – or “apps” as they are commonly known – to boost the user experience and increase customer loyalty.
Payment methods have struggled to keep pace with this trend. Customers can browse and select products online, but the virtual check-out’s available options – such as credit card payment, automated clearing house (ACH) payment, or cash on delivery – have hardly changed from the pre-digital era, and often fail to meet the specific requirements of digital commerce.
In response, new payment instruments are emerging – and they bring with them the potential to enhance the consumer experience, substantially reduce risk, and enable new business models to be adopted. Such developments will transform the way payments are made, and managed, for both business-to-consumer (B2C) and business-to-business (B2B) transactions.
Corporate treasurers will be at the centre of this transformation. By realising the potential of emerging payments and integrating them with existing payment infrastructure, treasurers will be able to enhance business performance via a reduction in the cost of payment and collection processes across both digital and traditional sales channels. The opportunities exist for both B2C and B2B commerce.
B2C: Changing Needs in Commerce
For consumers, the digital transformation of commerce has the potential to change the world into a virtual shopping centre, open 24-hours a day, seven days a week, and providing unlimited choice. Indeed, figures show that the online commerce market is growing fast. The total value of e-commerce sales in the US in 2011 came to USD 194.3 billion – an increase of 16.1 % from the preceding year 1. As impressive as this figure is, it still equates to only 5 % of total retail sales in the USA – meaning there is enormous potential for growth. Indeed, double-digit growth is expected for the coming years.
Such growth will be fuelled by the increasing popularity and market penetration of smart devices, which enable users to search for offers, compare prices and purchase products both online and in store. In 2011, online retailer Amazon’s global volume of sales conducted over smartphones doubled to US$2bn. And In the US, 47 % 2 of smartphone owners made use of smart phone-enabled shopping apps.
In what is a highly competitive environment, retailers seeking to differentiate themselves need to offer their customers a superior end-to-end experience, from advertisement to check-out.
Advanced payment solutions will be integral to this – not least because customers expect straightforward, easy and user friendly payment processes, such as Amazon’s ‘1-click’ method, known for its simplicity, and Apple’s iTunes payment, which enables immediate delivery.
Emerging payment solutions can also help to increase customer loyalty. The ability to save and redeem points acquired through customer loyalty schemes should be integrated with the payment experience, for both online and offline payments.
Indeed, the progression of technology not only advances e-commerce, but also enables the convergence of the online and offline spheres. Customers can browse online and buy offline, and vice versa. Furthermore, buying online is not limited to purchasing goods from online retailers, but extends to paying for goods in actual shops, where the smart devices of both the consumer and merchant can be linked to complete a transaction ‘in the cloud’.
A further area for expansion can be found in the growing demand for digital money – that is, the integration of payments into a game or app, which enables users to make a payment without leaving or interrupting the game or app. Certainly, the belief is that the convenience such functionality provides within a game or app – coupled with the interoperability of digital money across the full range of an online game platform or retailer’s apps – would facilitate and encourage greater consumer spending.
An alternative to digital money (real currencies, used online) is the use of virtual currencies (currencies that don’t exist offline, but can be used for online payment). Consumers can use their bank account or card details to make one payment via the online platform – a payment used to buy or fund ‘credits’. Customers can then make many, lesser-value payments within the game conveniently, cheaply and in real-time. These benefits are of value to both the customer and producer, and as high-profile entities such as the social network Facebook introduce their own virtual currencies, other online entities are sure to follow. It is in some ways the next step on from the Linden dollars that were popular a few years ago on the virtual ‘Second Life’ website.
Is Cash Still King or is it Square?
Although the attraction and increasing implementation of emerging payment solutions are clear, cash remains king in many business environments. In an attempt to persuade cash-carrying customers to use alternative payment methods, and thereby reduce the cost and risk inherent in cash transactions, merchants are becoming increasingly involved in payment innovation. Starbucks, for example, have successfully introduced a mobile app that allows customers to pay via their smart phones, and have encouraged their use by integrating the payment solution into their existing loyalty scheme.
Merchants can also use their own smart devices as a Point-of-Sale (PoS) payment device. Companies such as Square, PayPal, and iZettle offer a module that converts the merchant’s smart device into a cheap-to-operate card-accepting payment terminal – tapping into the huge market of small or mobile merchants, who have previously been limited to cash-only transactions.
The need for innovative solutions to cater to the cash-reliant segment of society is all the more apparent in emerging markets, where billions of people operate without bank accounts. But the penetration of mobile phones is high in such regions, and has been successfully leveraged to create new payment schemes. M-Pesa in Kenya, for example, enables customers to ‘top up’, via a cash deposit, a mobile money account, from which they can then make payments or withdraw money electronically. The popularity of such services shows that technologically-advanced solutions have the power to transform commerce in all corners of the world. For instance, M-Pesa is now used by 70% of Kenya’s population and 25% of the country’s gross national product (GNP) flows through it.3
Emerging payment formats differ according to the customer need, but the same aim lies behind all such innovation in commerce: companies wish to offer a superior payment experience – one that is convenient, fast and secure – over their full range of sales channels.
In addition to this core aim are a number of other considerations. Value added services such as loyalty schemes, for example, should be integrated into payment solutions. Just as payments are convenient for customers, so too should they be for merchants, offering cost efficiency and easy integration into existing PoS and enterprise resource planning (ERP) systems. Payment guarantees are also desirable, allowing immediate delivery to clients and eliminating credit risk, which is a key concern for treasurers.
Achieving such aims will require sector collaboration. Indeed, banks and other payment service providers are working with their corporate clients to address the latest requirements in the realm of emerging payments. In this regard, Deutsche Bank already supports its clients by enabling online merchants to accept most legacy payment methods through both online and mobile channels, via a fully secure platform.
The Digital Wallet and Mobility
Looking further forward, the market will focus on the digital wallet and this will eventually replace its physical equivalent. The digital wallet will consist of a smart payment app that can be integrated with the merchant’s online platform and marketing tools, including loyalty schemes. The app will provide access to a customer’s bank account, credit or debit card, or allow top-up by cash or cheque deposit. Technology vendors like Google, banks as well as credit card providers are all launching such wallets, sometimes allied with mobile network operators (MNOs) as in the case of Orange and Barclaycard’s UK QuickTap scheme.
Such technology will be of benefit to both consumers and merchants. Consumers will have the convenience of being able to make payments online or in store, transferring money and withdrawing cash. Merchants, on the other hand, will be able to receive payments in real-time and in ‘good funds’. Furthermore, once funded, all payments between digital wallets will take place on the books of the relevant bank, minimising both the cost and risk for the merchant.
In developing and delivering this digital wallet, providers such as Deutsche Bank can hope to leverage both their global network and links to local clearing positions in order to provide interoperability and a seamless experience between the digital wallet and legacy payment solutions. Banks will need to carve out a position for themselves underpinning these solutions and provide value-add reporting, account payables (A/P) and receivables (A/R) services to corporate clients.
B2B: Cashless Collections and Disbursements
For B2B commerce, paper-based payments using cash or cheque payments are still the most popular means of payment in many regions around the world, although this does come at a cost. When corporations and public sector institutions process such paper-based payments through their collection and disbursement systems, they are subject to a number of inefficiencies that increase costs, hinder flexibility and heighten the potential for error.
The scale of this issue, and subsequent need for payment innovation, is significant. Companies across the globe make disbursements to their employees, via cash or other payment methods, on a regular basis. These include reimbursements or allowances for business travel, generic corporate expenses and petty cash, as well as payroll disbursements. Indeed, 35-40% of the overall global work force has yet to take advantage of direct deposits for payroll payments.
Such paper-based disbursements are both inefficient and expensive to process. Companies not only incur the additional costs of increased paperwork, manual processing and reconciliation, but also face the expense of exception handling and fraud-risk mitigation. Furthermore, paper-based disbursements have the potential to inhibit control and transparency – factors that are vital to a company’s efforts in tracking expenditure.
Emerging payment solutions, however, can address these issues. And one promising solution is already available – namely, the use of prepaid cards. Once issued by a bank, such cards can be ‘loaded’ centrally and then managed remotely by the company representing each beneficiary. From the user’s perspective, these cards work in a similar fashion to regular debit cards, allowing PoS payment and the ability to withdraw cash from ATMs. Beneficiaries do not even need to possess a bank account. Such functionality can also be migrated to the mobile channel.
On the corporate side, prepaid cards (whatever their end point delivery mechanism) are efficient, inexpensive and easier to manage than cash as they do not require physical transport. They also provide a clear audit trail for expense tracking and monitoring. Furthermore, they provide a greater amount of control over company expenditure via the ability to remotely impose limits and place restrictions on where a prepaid card can be used.
This solution has also benefited from recent technological advancements, in that cards can be issued either offline (i.e. plastic cards) or digitally, allowing the access and use of funds via smartphones, for example. As card companies, such as MasterCard and Visa, roll out infrastructure to enable contactless payments at the PoS using plastic or a mobile device via near field communication (NFC)-enabled readers, cardholders will also be able to make their payment by waving their smart device at the merchant’s terminal. MasterCard has its PayPass technology for contactless payments, while Visa uses the payWave brand.
These prepaid, cash-free tools can be incorporated into existing disbursement processes – Deutsche Bank, for example, offers prepaid cards as part of its standard cash management product portfolio – and the solution is already gaining traction among corporates. In fact, the value of payments made via prepaid cards is expected to grow at an annual rate of 22%, reaching £2.4 trillion in 2017.4
The costs associated with the use of cash-in-transit, such as transport security, fraud management, manual processing and exception handling, are no less of an issue in corporate collection processes. Furthermore, it can take several days until cash funds are credited to corporate accounts and matched against receivables, increasing the days sales outstanding (DSO) and hindering the flow of working capital.
A large distributor of consumer products, such as beverages for example, will have corporate sales staff taking orders and delivering products to tens of thousands of small retail stores across the country. These goods will be paid for in cash or by cheque – paper money that then needs to be counted, physically transported back to the central sales office, recounted and deposited at a retail bank. This process is not only inefficient, prone to errors and carries a number of risks, but also can take several days to complete, particularly if the corporate’s retail customers are in remote areas.
Emerging payments are transforming this area of cash management. Certainly, corporates are increasingly looking to digital solutions to overcome the costs associated with risk and optimise their collection processes.
In this endeavour, mobile payments can be leveraged to introduce advanced tools and cash management methods. An example of this can be found in Deutsche Bank’s ‘cashless collections’ solution – a service that other banks don’t offer and enables corporates to present their invoices to their retail customers electronically, over a mobile communication channel such as SMS, enabling clients to inspect and approve invoices online, anytime and anywhere. This also means payment can be settled immediately, via direct debit collection, card payment or other legacy payment instruments.
Figure 1: Cashless Collection Workflow Schematic.
Source: Deutsche Bank.
The Way Forward
The benefits of emerging payment solutions are clear. Continually advancing technology – and its use to create value-added solutions in the account payables and receivables procedures of corporates – is revolutionising the way enterprises and indeed public sector institutions can interact with their clients, be they consumers or businesses.
Innovations such as the digital wallet hold the promise of providing customers with a superior and effortless payment experience, making digital payments accessible to all sectors of business and society (thereby increasing sales), and radically improving corporate efficiency, cost-management and risk mitigation. Disbursement and collection processes at corporates can be much improved.
Furthermore, emerging payment systems will allow companies to centralise the management of end-to-end payment processes, seamlessly providing all the data necessary to achieve automatic reconciliation in an ERP system, lightening the load on company resources and improving working capital management; a key benefit for treasury and operational employees.
To fully benefit from the opportunities and solutions that emerging payments provide the onus will be on corporate treasurers to rethink the way in which they conduct business across all levels of their global supply chain. Treasurers will need to work closely with their providers if they are to develop and execute a successful forward-looking strategy – and for this, they need to ensure their bank provider possesses the capabilities necessary to meet evolving requirements, and is demonstrably committed to technological advancement and its use in developing the solutions of the future.
1 US Commerce Department.
2 Nielsen Data.
4 a study commissioned by MasterCard.