Clear Potential for Global Payments
The present situation and future aspirations of the global payments industry were under the microscope at a BNY Mellon press conference held at the London Capital Club earlier this month. While the main purpose of the event was to officially launch the Bank’s new global payments infrastructure, it also provided the opportunity for a wide-ranging panel discussion among invited industry experts on how the payments sector is changing and where it could be heading.
Indeed, in his introduction, Alan Verschoyle-King, global head of sales and client management, treasury services at BNY Mellon, announced that we are living in a new era for global payments. Verschoyle-King cited that in 2011 there were 300 billion payments worldwide, while in 2012 and 2013 this total grew by approximately 8-9% year-on-year.
In terms of the reasons for this growth, panel moderator Dominic Broom, head of sales and relationship management in Europe, the Middle East and Africa (EMEA), treasury services at BNY Mellon, pointed out that there is a business shift with transactions are spreading around the world. “There are two main drivers to the spread of global liquidity,” said Broom. “The first is the growth of trade globally. The second is you need to consider that the payments space is bigger than the US hotel and airline businesses combined. This is forecast to double in size in 10 years.”
The growth of the payments industry is creating challenges for banks and financial institutions, according to Wim Raymaekers, head of banking and treasury markets at financial messaging provider SWIFT. Standardisation is one challenge, with the single euro payments area (SEPA) providing a timely example of this. “Regional integration is driving global standardisation,” said Raymaekers. “Clearing, on a market infrastructure basis, is also changing, as is correspondent banking. Banks are rationalising their correspondent bank networks by 15-20% in Europe. The only place where new correspondent banking relationships are being made is in Asia Pacific, where the banks are following their customers as new markets grow.”
There is also a greater need for standards in intra-day liquidity reporting. “You need to have a world-class infrastructure to manage intra-day liquidity,” said Raymaekers. “What we see on a global basis is that only 19% of payments are reported on an intra-day basis. Previously banks may have switched off intra-day reporting as the receiving bank had to pay for it. Basel III changes all this as, effective of January 2015, banks have to report their liquidity exposure on an intra-day basis.”
Another challenge is provided by the growing importance of China’s renminbi (RMB) in international trade. The RMB has overtaken 22 other currencies in the past three years in terms of the number and volume of payments it is used for, according to SWIFT. “The RMB is now the eighth-biggest currency in the world in terms of payments, the ninth biggest in foreign exchange (FX) and in value it is the second biggest currency for documentary credits,” said Raymaekers. “This is of massive importance to large institutions where US dollar (USD) clearing is a big business. It is essential for the future that they have a multi-currency option in their processing platforms.”
To respond to the challenges that growth in the payments industry is creating, banks need to use the technology available to them in an optimal manner. “All banks are on a journey and the architecture is key, particularly for future demands,” said Peter Hazou, head of market management in EMEA, treasury services at BNY Mellon.
There is a user expectation of global consistency of services from banks, but issues such as different jurisdictions and standards can create a challenge. “Something that we often hear from corporate treasurers is that as the system they are using domestically works OK, why can’t they just directly transfer it to use in other markets?” says Hazou. “That is part of the challenge we face.”
Technology has also altered our expectations due to what we can do in our daily lives. People’s consumer experience is increasingly blurring into what we can expect as a corporate treasurer. “It is a legitimate question to ask, if you can Skype someone on the other side of the world and send them an instant message for free, why does it cost so much and take so long to move a transaction from point A to point B?” said Gareth Lodge, senior analyst, payments at research and advisory firm Celent.
“On the corporate side, cross-border processing is more difficult because not everyone is using a next generation architecture, or using and adhering to the same standards or service levels that are available,” commented Doug Gross, general manager with Clear2Pay Americas. “The challenge here isn’t the technology, but rather with the people and the process.”
The ability to correspond with other countries has created a breakdown of barriers in people’s personal interaction with the world, and this is a concept that is spreading in the financial world too. Taking the SEPA example, this is about a concept of ‘no border banking’ to allow Europe to compete and trade with other regions. There are other examples of SEPA-like structures being implemented across the world. “The Southern African Development Community (SADC) in the southern African countries is a similar concept to SEPA,” said Lodge. “They are joining their payments infrastructures together to use common standards and to create greater inter-country flow. Much of that trade, to do with minerals and oils for example, is trade back to China. It is all about looking at the global market place.”
In a cross-border world, however, problems still exist where the reality is less than the expectation. “I made a payment from Belgium to the UK the other day and it just goes into a black hole,” said Raymaekers. “You do not know exactly when the payment will be made. It is only when you receive your statement that you see that your bank deducted charges, the other bank deducted charges, and you know how long it took.”
It is this space that new market entrants are looking to target. PayPal is already operating here, while Amazon has stated that it is going to look at business-to-business (B2B) payments. “The one that I am watching next is Apple with iTunes,” said Raymaekers. “We already trust iTunes with our payments as they have 550m credit card profiles on their network. Yes, at the moment this is business-to-consumer (B2C), but tomorrow within that network of 550m customers they could easily do B2B payments.”
In contrast, the banking industry is really struggling when the focus moves to cross-border payments. “In the UK there are solutions such as VocaLink, Zapp and Barclays Pingit, but then when you try to go cross-border you are back to the dark ages,” said Raymaekers. “When these new market entrants start to move up into B2B space they will get to customer segments that some large transaction banks are servicing today with great value propositions. However, I think the new entrants will just come in and go up the value chain.”
The Future Starts Today
Networks for B2B payments are already operating today, including companies such as Receivables Exchange, US Dataworks, GT Nexus and Hubwoo. Dozens of such vendors are processing hundreds of millions of dollars worth of business today between them.
Looking at where this market may develop next, Celent’s Lodge pointed to the work that SAP is doing with its Financial Services Network (FSN). “They hate me describing it as this, but I see it as their version of Apple’s App Store,” said Lodge. “What they are proposing to do is to bring networks, corporates and banks into one place. They provide the infrastructure and safeguards, and are offering functions such as trade finance or reporting as a service you can use, along with the analytics in their network. They bought Ariba as the core of this for US$4.5bn about 18 months ago. Between Ariba’s supply chain business that has been running for years, and SAP’s equivalent, they have over 1.5 million corporates already. Some large banks are already signed up to be co-innovators around this, already running pilots with a number of large corporates.”
This transformation happened elsewhere as well. Visa, which has just joined FSN, is doing a similar thing with its Syncada product, while local solutions are also appearing. “There are many local versions taking place in Africa, for example one of the Kenyan banks announced this month that they are allowing M-Pesa for B2B payments now,” said Lodge. “Equally, if you look at MasterCard’s stated key markets, these are Asia and Africa both in terms of consumer and business.”
Banks need to ensure that they have the infrastructure in place that will enable them to compete with the new and more established vendors in the B2B payments sector. “The nature of open architecture means you don’t need to think about the end point,” said Verschoyle-King. “This is constant evolution.”