Corporates are increasingly demanding instant treasury solutions with improved analytics and high straight-through-processing ratios. According to surveys conducted by Strategic Treasurer and Tink, treasurers’ top two priorities today are improving the accuracy of cash forecasting and increasing automation of the workflow for API-enabled services. In fact, 40% of treasurers would like real-time / intra-day visibility on their cash positions. Meanwhile, financial institutions’ positive stance towards open banking has increased fourfold.

Eddy Jacqmotte, group treasury manager at Austrian chemical company Borealis AG, sums up why the concept of instant treasury is so important. “We have implemented an API solution with our US bank that flows directly into our ERP system, with a matching program, and basically 90% of our payments are immediately matched. With APIs, corporates are able to change their way of working. We’re moving from a situation where only the bank is providing information to an ‘on-demand’ situation, in which treasurers can access information to perform certain tasks whenever they need it”. According to Jacqmotte, interest in APIs goes well beyond the world of treasury. Company management teams are eager to access the most accurate information possible to base their decisions on. “We dove into the world of APIs three years ago. I am now waiting for all my banks to be ready!”, says Jacqmotte.

What is instant treasury?

But what does instant treasury really mean? To answer that question, Nicolas Cailly, head of payments and cash management at Société Générale, explains that “first we need to differentiate ‘instant’ – in seconds – from ‘real-time’ – batch-processed within the hour – and ask ourselves what is the value of instant or real-time, and in which use cases we need them”.

Christian Mnich, head of solution management treasury and working capital management at SAP, concurs. “It’s not enough to get statements at the end of the day – we need to question whether we really need a real-time view of any transaction”, he says. Jacqmotte considers that an update three or four times per day would be sufficient for treasury operations, acknowledging that “A credit department, for which certainty regarding the payment is essential, might have a different point of view”.

How to achieve instant treasury

There are two competing visions among banks about how to achieve this real-time visibility and operability on a global basis, which is needed by companies operating in multiple countries. One proposes involves building the future on legacy systems, while the other is much more disruptive.

Société Générale’s Cailly judges that “there is no magic wand that will lead to multiple banks agreeing upon one course of action”: achieving real-time visibility requires an overlay of cash concentration services based on the agreements that banks have with one another. As operational activities are based in different countries, the service is going to be different from one bank to another and from one country to another – even within the same bank – because of local regulations. “To address this, the banking industry is looking for global standards, or at least regional standards, such as Swift instant cash reporting solutions. In the absence of such standards, the other possibility is to have a man in the middle, like a software vendor solution, that can aggregate different things and provide treasury departments with a global view and an easy way to operate”, explains Cailly.

Regional differences in instant treasury

The quest for instant treasury is not the same for everyone, and is taking different forms around the world. “If you want to look at real innovation in payments, go to Asia. They’re leading the world and are at least five or six years ahead of Europe and the United States”, according to Victor Penna, global co-head of transaction banking at Mashreq. While cheque payments and lockbox processing are still commonplace in the US, treasury in Asia is heading towards real-time and new-technology-enabled services, following on from the deployment of brand-new real-time payment infrastructures in several countries. “When a firm starts to provide access to real-time payments online using QR codes, it can attract small businesses that don’t need to use a credit card to buy”, says Penna. He cited Singapore as one of the most prominent countries with respect to payment innovations as consumers can pay with the same QR code system using any app developed within the country, as well as with Alipay and WeChat.

No more batches?

“Real-time encourages banks to move away from a batch state of mind and make the transition from legacy infrastructures and processes”, says Lisa Vasic, managing director, transaction banking at ANZ Banking Group. The European market is developing a less disruptive approach than in Asia. Euro Banking Association (EBA) clearing is reportedly planning to accelerate bulk payment procedures to a ‘better than real time’ framework. Instant payments in Europe are designed for cases where absolute certainty about a completed transaction is required before any sale can be concluded. On the other hand, immediacy seems less essential for payments such as salaries and business-to-business invoices. For these, it seems wise to move to settlement in a few minutes.

The EBA has been working on modernizing the bulk payment framework so that it moves towards a continuous gross settlement mode. This settlement mode is linked to each participating bank with pre-funding possibilities via the pan-European Target 2 system, which is operated by the European Central Bank. Alternatively, the bank can wait until it has enough liquidity in its technical account to settle.
The EBA is also seeking to establish service levels that are more harmonized between banks to enable them to offer additional services, such as intra-day reporting.

Instant treasury requires multiple touchpoints

There are already national agreements in place to deliver several settlement cycles within the same day. Finland and Ireland implement an end-settlement function during the night to ensure that payments from bodies such as pension funds or social security systems are in beneficiaries’ accounts by the first hour of the day.

Implementing new settlements requires investments by banks and changes in the way they interact with their customers. The EBA clearing plan to achieve this move from a single settlement to multiple settlements is not mandatory, but is based on consultation between the major European banks.

Leveraging the data

“Talking about the future, there are plenty of opportunities for joint spaces in which we can leverage data as early as possible to unlock new potential. Think about the sales orders that are in ERP systems. If you could share them right at the beginning with your financial partners, that would open up access to new working capital funding”, explains Christian Mnich from SAP. To unlock liquidity from the ERP system, treasurers first need to consolidate and centralize information, then capture bank statements in a single system to get more real-time transparency.

“Corporates need to do their homework if they’re to be able to follow the trend”, concludes Eddy Jacqmotte from Borealis. He also points out that extra resources are required to handle all the connections, such as bank connectivity, ERP, APIs and artificial intelligence tools, to reap the benefits of instant treasury operations.

Banks’ support

The overall situation resumed nicely after the tumultuous covid credit events in the world of commodity trade finance. This is true especially from the perspective of the large traders to whom certain banks have pledged “whatever it takes” type of commitments. The year has brought about peak liquidity requirements first on the metal side, then oil and latest on gas and power whereby substantial additional liquidity was made available in record time from numerous banks and even states.

The large traders’ quest for additional sources of capital seems never-ending. Banks have been accommodating but there are limits. Meanwhile smaller and emerging traders are still struggling to catch banks’ attention and commitment while slowly and diligently building the required track record. There are no quick wins for building trust, just hard work and patience. Everyone anticipates that technical solutions aimed at mitigating, especially fraud risk, and making collateral more secure will help tremendously. And then there is the trade finance gap!

The trade finance gap and alternative liquidity providers

The Asian Development Bank’s global trade finance gap was previously estimated at USD 1.7 trillion. The study confirmed that SMEs involved in trade represent approximately 40% of the rejected trade finance requests. Hopes that direct lenders and trade finance funds can bridge that have been overly optimistic. Such players have hurdles both on finding the flows that will pay the high return requirements demanded by investors and building comfort on the investor side that they are deploying capital towards acceptable risks.

Such “fixed income” investors are not very familiar with trade finance and diligence is required in selling a risk mitigated package of classic trade finance assets (bills of exchange, receivables). For those players that have a good understanding of the risks involved and appetite beyond banks’ often restrictive approach, there is business to be made. What remains to be seen is how the economy will “land” following the unprecedented period of financial tightening we are seeing and impact on trade in general and commodity trade in particular. Furthermore the increased borrowing costs will test traders’ ability to pass it on to suppliers or off-takers in the supply chain. Ultimately there will be a higher bill to pay.

ESG

ESG pushes forward as the new compliance and companies (especially around debt facilities) need to embrace it sooner rather than later. Time is important and action needs to be taken sooner rather than later. Approaches vary a lot with some corporates working towards or having a dedicated rating while others prefer to develop very specific business related KPIs. There will be a forming process and the standard will be further refined but what is critical is that ESG needs to be put in the context of the company’s business model and properly understood by investors and stakeholders. What remains interesting to see is the linkage of syndicated facilities to ESG criteria, while transactional commodity finance lines, which remain the bread and butter of the trade and commodity finance sector seem not aligned.

Fintech

From blockchain to post-trade execution platforms, there are many players on the trade related fin-tech market. The challenge has been to align stakeholders and the risk is to end up with a solution chasing a problem. The return on investment profile and messaging of such solutions needs to be further refined. Legislation will play a critical role and will further enable the digitization of trade and hence bring a contribution to increased transparency and (fraud) risk mitigation. It will all come together, as I believe the digitation of trade is in its infancy. With English law being the main choice for trade and related arbitration, we can only congratulate the UK for the advancements on the Electronic Trade Documents Bill.

Overall, it seems that we are moving from an environment stressed by specific events like supply chain constraints, fraud, absence of physical documents, liquidity requirements to a more overall challenging economic environment with increased operating costs and a new financial regime. Sticking to risk management, disciplined capital allocation and competitive advantages will once more help throughout more difficult times.

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Among those testifying at the hearing, which was held on May 4, 2022, were Laura Karet, CEO of supermarket chain Giant Eagle, Bill Sheedy, a Senior Advisor at Visa, Linda Kirkpatrick, President of North America at MasterCard, Ed Mierzwinksi, Senior Director of the Consumer Program at U.S. PIRG, a consumer advocacy group, Charles Kim, Executive Vice President at Commerce Bancshares, and Doug Kantor, general counsel for the National Association of Convenience Stores.

Opening the hearing, Durbin noted that consumers have paid $794 billion in interchange fees, also known as swipe fees, since the last Senate hearing on the subject in 2006, when the Durbin amendment was passed, which limited retailer fees for debit card processing. Interchange fees, he said, are designed to avoid competitive market pressure. And “they’re a gravy train” for banks and credit card companies. “I strongly support having a disclosure on credit card statements that says how many swipe fees you’ve paid. Consumers don’t know what a swipe fee is, but they would (if there was a disclosure).”

According to Kim, banks and merchants should share in the cost of the system. Banks and credit unions invest billions of dollars into building and securing the payment system. “Merchants contribute by paying a small fee when they use the system to make a sale. That’s interchange,” he said. “Our nation needs to keep up when it comes to technology and security. Interchange fees are an investment in American commerce,” Kim said. This was refuted by Kantor, who noted that “Visa and MasterCard set the terms, which insulates those fees from competitive market pressures to keep them high.” While credit card companies invest some of the revenue in areas like security and fraud protection, they have significant discretion in setting the fees. “We need competition in this market. That’s the bottom line.”

Limit interchange fees

“Other countries limit interchange fees. What lessons can we learn from all of these countries that have decided that interchange fees are too high?” Durbin asked. “Well, those countries know that the credit card system is a market failure,” said Mierzwinksi. “Congress should strengthen the Durbin amendment and expand it to credit cards and lower interchange fees across the board.”

Sen. Chuck Grassley, Republican of Iowa, sought to clarify the relative market power of the major credit card companies. “Do Visa and MasterCard abuse their market power?” he asked. Sheedy responded: “No. Consumers are empowered to shop and merchants benefit.”
Added Kirkpatrick: “The payments system has never been more competitive.” As evidence, she cited the growing number of payment options, including cryptocurrencies, digital wallets and buy now, pay later.

A market system to discipline prices

Kantor countered, “This is not a balancing of the marketplace. There needs to be a market system to discipline prices and we don’t have that here.” Responding to the assertion by the credit card executives that innovation was a key element of interchange fees, he said, “The innovation in technology and payments does not make up for the lack of innovation and the antitrust problem in credit cards.” Karet added, “Every item in our store is individually negotiated. The price is not set unilaterally by the company. MasterCard and Visa are the only vendors we cannot negotiate with. It’s a take it or leave it proposition. I’m not an economist, so I can’t give you the definition of a duopoly, but if it walks like a duck and talks like a duck…”

Sen. Richard Blumenthal, Democrat of Connecticut, asked whether the fees charged by the credit card companies were passed on to consumers. Absolutely responded Kantor. “There’s 100% passthrough in every region of the country, so consumers pay these increases every single day.” Sen. Mike Lee, Republican of Utah, wanted to know if it is anticompetitive for Visa and MasterCard to tell all banks that they’re going to increase interchange fees for merchants. Sheedy said, “Visa sets the interchange fees on its own. We do it with input from the marketplace. The impact of the pandemic on merchants has been important to us. We lowered rates at the beginning of the pandemic. We are not raising rates. The average rate has been flat since 2015.”

The cartel behavior

Sen. Lee continued. “Does it amount to cartel behavior to agree on interchange fees?” he asked. Sheedy responded that “we feel it is highly competitive in that it delivers the same interchange fee to thousands of institutions. We feel the model works very well in a system where you need tens of thousands of institutions.” “For a network effect?” asked Sen. Lee.

“Yes, you need to have a default interchange fee,” Sheedy answered. Sen. Lee wanted to know what would happen to credit card rewards if the system changed. Kim responded that roughly 60% of interchange fees go out in the form of rewards. “And not just to the wealthy. It’s broadly distributed.” “So the banks would still get paid, but get paid less and the rewards programs would be a casualty?” “Yes,” said Kim. Sen. Chris Coons, Democrat of Delaware, noted that the issue isn’t just losing rewards programs, but losing access to credit. “How do issuing banks rely on interchange to offer credit services and what impact would it be if that revenue substantially declined for your bank,” he said.

Said Kim, “I think you’d see smaller banks just go away.” Kantor countered that “we haven’t found the parade of problems around the world that Mr. Kim and his brethren talk about. We haven’t asked for a cap on fee. We think there needs to be competition and market prices.” Sen. Grassley summed up by saying, “There’s a balancing act, and any future action should be carefully considered for (its) possible impact.”

Covid 19 resulted in an increase in online commerce and, for merchants, a significant switch in their card transaction structure from card present to card not present transactions.. However, during the past year, we have observed a slow but steady improvement in volume compared to the challenges we all experienced in 2020 and early to mid-2021. We have identified the major changes made to Visa, MasterCard, Discover and American Express’ rates and fees.

Payment card processing fees are broken down into three categories:

• Interchange
• Assessment
• Fees

Interchange is paid directly to the issuing bank and are associated with a particular interchange category, depending on the criteria of the transaction. Visa and MasterCard publish their interchange rate tables online. American Express does not have interchange per se – they assess ‘discount rates,’ which essentially operate the same way as an interchange fee.

Visa

Visa fees vary based on a wide range of circumstances, such as card type (consumer or commercial), Merchant Category Code (MCC), transaction environment and more.

One of the changes that really stands out is to Visa’s Non-Qualified Consumer Credit interchange, which will increase from 2.70% + $0.10 to 3.15% + $0.10, an increase of 0.45%. Generally, merchant account providers apply Non-Qualified fees because the customer used a commercial card, foreign credit card or certain rewards cards. Additionally, the Non-Qualified rate may be applied to retail merchants that key-enter a transaction or fail to batch out at the end of the business day.

MasterCard

Regarding MasterCard, the highest rate increase we’ve observed is with their Standard interchange, increasing from 2.95% + $0.10 to 3.15% + $0.10, an increase of 0.20%. Standard rates are the highest rates that you can be assessed on a MasterCard transaction. Typically, standard rates are applied when the transaction does not match any of the basic qualifications, including but not limited to missing AVS data (Address Verification Service), not settling sales daily or failing to submit otherwise required data based on your merchant type.

MasterCard Enhanced Standard and World US Standard will also increase from 2.95% + $0.10 to 3.15% + $0.10. Conversely, High Value Standard and World Elite Standard will decrease from 3.25% + $0.10 to 3.15% + $0.10, a decrease of 0.10%.

Discover

Discover is one of the four major credit networks and is unique compared to other card networks. Rather than issuing cards through a third-party bank, Discover issues cards direct to consumers and commercial entities. Their interchange fees are not split between the card network and issuing bank; Discover fills both roles. Discover is therefore paid directly through the merchants credit card processor for each transaction.

The change that really caught our attention is the increase to their Commercial Electronic Prepaid interchange which is increasing from 2.30% + $0.10 to 2.65% + $0.15, an increase of 0.35% +$0.05.

Discover will introduce a new Charity US Consumer Interchange Program, MCC 8398. Both card-present and card-not-present transactions are eligible for this program, and the rates are as follows:

American Express

American Express also issues cards direct to consumers and commercial entities. Unlike Visa or MasterCard, American Express credit card processing is not straightforward. Visa and MasterCard are both open credit card networks, meaning any financial institution can issue these cards. But American Express is a closed network, which gives them much more control over payment card merchant fees.

American Express is introducing a new Debit Card Program, which includes Unregulated and Regulated Consumer and Small Business Debit Products. Unregulated transactions are subject to the OptBlue Assessment, OptBlue Card Not Present, OptBlue App Initiated Tran and OptBlue International Fees. Transactions from these new products will attract the Debit Rates and Transaction Fees, as shown below:

American Express is introducing an OptBlue Acquirer Assessment and Transaction Fee of $0.165% + $0.02, effective 4/22/2022. This fee is applied to all American Express non-debit card charges (credit and prepaid), not credits/refunds, submitted under the Program for all industries in the American Express Program Pricing Signing Guidelines.

Treasury environments are slowly evolving

Depending on the types of deposits your company is making, there may be some space for change, but most of our depository clients are not seeing the same kind of digital revolution we see elsewhere in corporate treasury.

Treasurers around the globe are trying to push for electronic payments because they are faster, cheaper, and easier than cash and card payments. With this new shift, where does that leave retailers who deal with cash and coin deposits, or whose clientele still wants to write checks? While there are some alternatives to branch deposits out there, there is nothing disruptive in the market right now that would allow treasurers to radically change how they accept deposits. When we cannot count on digital disruption to reduce costs, optimization and a clear understanding of the options on the market today are the best way for treasurers to improve their bottom line.

One of the most consistent things Redbridge sees with our international retail clients is a strong reliance on armored couriers and, in nearly equal measure, dissatisfaction with their couriers. While talking with one retail client recently, their Assistant Treasurer told us how a lack of transparency in armored courier fees and a complicated workflow for depositing into their smart safe pushed them to explore other depository providers. Couriers would show up late, stay longer than anticipated, or show up on the wrong day and our client would get hit with the fees on their account analysis statement with no explanation of why the fees varied month to month.

Shifting depository strategies

So where does that leave the retailer with cash and coin to deposit who is in a position to move away from their current armored courier? With banks in the US closing 5% of branches between 2017 and 2020 and the UK shuttering over 4,000 bank and building society branches in the last 6 years, companies around the world are coming to the same conclusion: going back to branch depository will not work.

Thankfully, though, there are some interesting options in the market that we see clients using with great success. For example, the retailer mentioned earlier opted to start making deposits with DTS Connex, a US provider with online cash management tools designed to work with any bank, courier, treasury, or ERP system. They are still storing cash onsite in a safe and waiting for a pickup, but a clear, easy-to-use bank agnostic deposit prep website and straightforward transparent pricing made the switch an easy decision. Another major retail client used DTS’s deposit-by-mail service for stores without a bank branch nearby.

For the retailer that receives a large amount of coins and doesn’t use a cash recycler, some stores have gotten even more creative. After all, it is hard to check out at the grocery store without seeing a box collecting coins for charity. Reduced coin deposits, a tax write-off at the end of the year, and social good? A win-win-win for those who use this strategy.

Globally, armored couriers can sometimes be the best option, especially in smaller or more remote countries. For those clients it may be best to reduce the number of pickups and work to negotiate a more transparent fee model with your courier and try to receive invoices you can review (and possibly challenge) instead of having the charges lumped into your bank fees.

Embracing in digitization

Your depository business is not only cash and coin, and luckily, there are a few more options out there for non-cash, non-electronic payments. For our US clients who rely on lockboxes but who would like to shift to a digital alternative, eLockboxes can use AI and machine learning to reduce the number of exceptions and drive down costs. In the US and EMEA we are seeing a proliferation of apps that enable agents in the field to automatically scan checks or take electronic payments, where they previously would have had to take cash or check. With these apps, as long as cellular data is available, payments can be deposited before the agent leaves the premises. Additionally, as your check scanner ages and needs to be replaced, a smart phone and an app may be a more cost-effective solution. These alternatives have the additional benefit of being a bit greener than traditional methods, allowing treasurers to enhance the services they are using while being able to contribute to a greener, less paper-dependent future.

The biggest trend we are seeing with our clients in the depository space, and the biggest trend we have seen in general, is a shift towards bank-agnostic providers to take over the business that banks are increasingly trying to move away from. While this does shift responsibility back onto clients to source providers and do some of the preparation and reconciliation they used to rely on the banks for, what they get is a more agile environment where changing banks doesn’t mean changing processes or system integrations. What once could have ballooned into a months-long project can be done with a few keystrokes on the back end of a third party system.

Innovation in LATAM

When we really try to look ahead to see what could be in store for our depository clients, we are looking at LATAM. While much of the world has spent the last two years figuring out the most efficient way to take contactless payment, LATAM had already leapt ahead and found a way to accept cash payments online. Customers can make their purchase via OXXO in Mexico, Boleto in Brazil, or Baloto in Colombia and then go to a centralized location to scan the bar code and pay for it with cash. Retailers and utility companies especially, we are curious – would you embrace this kind of change?

Constance Veron, Frederic Vincendon, & Sarah Gundle

A special report on the cash management & payment trends that will transform your treasury department in 2022

The growth and vitality of the payments industry has fascinated all observers during the past two years of the pandemic. Now with recent geopolitical developments arising from the Russia-Ukraine conflict, it is being tested again.

Our new publication analyzes the most prevalent trends and innovations in the treasury world today.

As the webinar made clear, there are now many different types of payment methods available to consumers and businesses, from traditional checks and ACH payments to electronic and digital options. While each method has its benefits, they also have associated costs. Determining the true cost of each payment method is important for companies to understand their financial impact.

Deranek says his organization uses a “combination of bank fee software, our treasury management system and something we call our ‘tier database.’ We’re really putting a lot of effort into it.” He says the company is conducting a modernization project because “we can’t do it manually. It’s just too overwhelming.”

A survey by AFP of cost awareness shows that most organizations are either aware or extremely aware of the costs associated with payments, depending on the type of payment. For example, 40% of survey respondents indicated that they are aware of the costs of checks, while 45% said they were extremely aware of these costs. So there is a high level of awareness of the costs. But how can organizations effectively calculate such costs?

Choosing a model for determining payment costs

Meyer offers some advice on how companies can calculate the true cost of different payment methods. The initial step is to isolate all charges related to the payment type, including those hiding in other product families.

“The first challenge to any project is the accessibility of data,” she says. “You need to understand if you’re going to be building this for a single bank or all of your banks. It’s not as simple as just looking at a PDF statement.”

Bank statements can also lack transparency. “Banks can add additional charges in the general account services section for credit and debit postings. You have to decide how accurate you want to make your model for determining payment costs.”

After the data for the model has been gathered, all one-time setup fees need to be removed. For Meyer, this approach to cost analysis is like a “jigsaw puzzle” because it involves assembling and putting together the various pieces. “Are we going to keep or remove all hard charges, exceptions, reporting, etc. Or are we taking them out and just focus on core processing charges? That’s going to be activity-based charges. It’s a big decision.”

Once this step is done, payments and collections need to be separated. “It may seem obvious, but it’s not that simple,” says Meyer.

After the data has been gathered and the decisions regarding modeling have been determined, it’s time to think about the divisor. As Meyer notes, “You can’t just take all of these line items that you’ve isolated on your analysis statement and add the volumes.” Instead, you need to isolate specific trigger volumes of line items to avoid duplication.

One service line does not tell the whole story. Including other items like ancillary costs, fraud charges and maintenance fees, for example, is very important. Meyer says the key question to ask is, “If I were to completely change from ACH to RTP transactions tomorrow, which services would go away?” Any services that would not disappear should be included in the model.

How AFP codes help

AFP codes allow organizations to sort data by product so they can easily identify the various charges on their statements. Each has a designated product family in the product code structure. Assigning the correct AFP codes makes it possible to easily filter prices and volumes. However, it is also important not to double any volumes.

Meyer says that ACH payments can be the most difficult product family to calculate correctly. This is because in many cases, banks do not differentiate between debits and credits. There are additional fees for credit postings in general services. And significant maintenance charges can swing results.

A case study in determining payment costs

HCSC offers a case study in managing bank fees. The company is currently implementing a payment modernization project that involves standardizing data. As part of this effort, the treasury department is trying to create a new foundation for evaluating both the company’s payment cost and its overall cost in bank fees.

“We know our business is swimming in data and we need to make sure that we’re in a position to use that data to make more informed decisions for the profitability of our business,” says Deranek.

The future is digital

One of the company’s main focuses is moving more payments to a digital format. “Obviously, you want to be more digital in your payments, but there are still those aspects where you’re doing checks. You can’t get away from it. It’s a slow process to convert it,” says Deranek.
According to the AFP survey, about 73% of responding organizations are currently moving B2B payments away from paper checks to electronic payments. The primary reasons for this shift are fraud prevention, reduced costs and increased efficiency.

While there may be some pain points when adopting automated payment solutions – including a lack of IT resources, existing supplier relationships (which would require a major effort to update) and multiple workflows – doing so can lead to operational efficiencies and make determining the true cost of payments easier.

Understanding costs propels the future

Understanding your true cost of payments is not an easy task. There are a number of factors involved, and considerable time and effort is required. However, taking the time to determine your true cost of payments will allow you to make informed decisions, build bridges across all departments and better prepare for the future.

What is ‘Buy now, pay later’?

BNPL is a service offered by various companies that allow consumers to online shop and divide purchases into multiple equal payment options.

Typically, the first installment is due at purchase, but most BNPL providers allow customers to pay in a weekly, bi-weekly, or monthly installment. This allows consumers to receive their purchase right away, while giving a flexible alternative to credit cards.

In the U.S. and across the globe, companies like Klarna, Sezzle, and Afterpay have dominated the BNPL landscape partnering up with large scale retailers like Walmart, Target, and Amazon to offer their services.

Key players in the BNPL field

Recently flooded with new players, only a few major players have dominated in the past year. These include: Afterpay, Affirm, Klarna, Zip (previously QuadPay), Sezzle, and now PayPal’s ‘Pay in 4’.

What are the benefits of retailers offering BNPL services?

Not only does BNPL offer consumers the benefit of financial flexibility and increasing purchasing power while making purchases online, but retailers offering this service have also seen significant benefits this past year. As Forbes notes, an estimated $99.4 billion in retail purchases will be made by consumers using BNPL programs in 2021, this is up from $24 billion made in 2020.

Many retailers currently offering BNPL payment options see similar benefits at the end of the day:

1. Lowering cart abandonment and sticker shock

Sticker shock is one of the main reasons consumers abandon their carts. The reality is, for large-ticket items in particular, many consumers simply cannot afford to spend a large sum of money in one transaction. This is where BNPL options provide some relief for consumers.

2. Increase sales and average order value

Retailers know the impact of abandoned carts have on the overall bottom line. This is why it is important to take measures to limit the number of abandoned carts in order to convert these customers.

Businesses who offer and prominently message alternative payment methods, like BNPL, to consumers see the immediate benefit: the BORN Group notes an increase in average order value of more than 30%, meaning that installment payments encourage larger basket sizes and higher-priced sales.

3. Building a larger consumer base

By providing additional, more flexible payment options, retailers – and truly any merchant – have the ability to expand their consumer base to a wider range of demographics. A BNPL option might attract customers who were previously hesitant to buy products because the price was out of their budget.

4. All while still receiving the Full upfront payment

With third-party BNPL providers, businesses don’t have to be wary of the potential risks of managing fraud cases, non-payment, or other related issues. BNPL providers will manage the automated billing, repayment, and fraud cases.

Why BNPL might not be the best solution for all retailers and consumers?

Although offering BNPL solutions can offer a variety of benefits for retailers and consumers, the merchants themselves pay the price for this consumer-friendly financing alternative. Buy Now Pay Later firms charge retailers significantly more than traditional card acceptance.

BNPL players charge consumers’ cards, or bank accounts, themselves, rather than the retailer, and pass on the cost as part of a bundled fee to retailers for different services provided.

According to Tom Richardson, of Financial Review, a typical Visa processing fee in the US is 3%, he says. A BNPL provider, like Sezzle for example, charges retailers fees around 6% plus 30 cents per transaction, with the pitch that this includes the 3% card fee. In most cases though, a 3% processing fee may be well above the actual cost of acquisition. The rate that BNPL companies charge retailers depend on different factors:

• Type of product or service
• Length of time the store has been in business
• What item is purchased

On the consumer end, BNPL can prove to become a slippery slope for a segment of users. BNPL services are often criticized for encouraging consumers to take on debt they might not be able afford.

In addition to these concerns, the BNPL payment option does come at a hefty price. One downside can be from missing scheduled payments that can result in late fees of up to 25% of the past-due amount, depending on the provider you use. Consumers may also mistake that the merchant assess the late fees, potentially damaging their reputation.

Additionally, if you don’t repay the balance amount in due time, you can be reported to the credit bureaus as delinquent.

Regulatory issues

The staggering growth of the Buy Now Pay Later industry is expected to attract the attention of financial regulators. Right now, “buy now, pay later” is not regulated in the way that credit cards are.

In the U.S., BNPL services are covered under the Dodd-Frank Act, which are enforced by the Consumer Financial Protection Bureau, but the federal “Truth in Lending Act” doesn’t apply to many BNPL provider services offered because it only covers credit products that involve at least five payments. This is why the ‘Pay in 4’ model has become so popular across most of the BNPL providers. That means there are no standards for disclosures on fees, amounts owed, credit reporting and payments.

California’s regulators are among the few U.S. watchdogs that have taken substantive actions against the services. Even though most “pay-in-four” products are exempt from those federal rules, California has classified some pay-later products as loans.

The future for BNPL

With COVID-19, there has been a shift in retail shopping and created a new normal. More and more consumers are more apt to making purchases online. According to IBIS World, industry revenue is forecasted to grow at an annualized 9.8% over five years through 2024-25, to $1.1 billion.

This industry expansion and growth has led other non-BNPL specialized fin-tech companies and providers, like PayPay, to offer similar ‘Pay in 4’ services. As a payment gateway service that most merchants already offer, PayPal clearly has, despite its late entrance into the game, a natural advantage.

In late September, Mastercard announced their first step towards offering a BNPL program in the U.S., Australia, and the UK. Their program announced is called “Mastercard Installments,” which allows Mastercard to act as a middle man by enabling banks and fintechs to utilize this installment program to offer loans directly.

Citibank, American Express, JPMorgan Chase, and Goldman Sachs (in partnership with Apple) have also announced future plans to offer ‘post-transaction’ financing options at much more affordable fees.

As we continue to see the growth of BNPL in the retail industry, we will see the expansion of major players in the merchant card and banking industry make a late but large wave in this future trend.

Hector Galvan & Gabriel Lucas

A special report on the cash management & payment trends that will transform your treasury department in 2022

The growth and vitality of the payments industry has fascinated all observers during the past two years of the pandemic. Now with recent geopolitical developments arising from the Russia-Ukraine conflict, it is being tested again.

Our new publication analyzes the most prevalent trends and innovations in the treasury world today.

At the MAG mid-year conference earlier this February, a panel of key stakeholders in the payments ecosystem gathered to discuss the latest in payments technology. Here are the practical insights from panelists at Nordstrom, Elavon, MasterCard, and Redbridge.

Angie Grunte, Managing Director at Redbridge says, “Having a well-established yet flexible payment strategy is key to being able to effectively adopt new payment types and methods. However you must first determine which options will truly create the best experience for your customers and value for the organization.”

“For us, it came down to looking at what platforms were available,” says Daniel Crisologo, Director of Payments at Nordstrom. “There were a lot of criteria that we needed to look at.” These criteria included the number of new customers coming into the sales funnel, a virtual card versus API integration and the cost differential compared to the ease of use for the consumer. “At Nordstrom, we always focus on the user experience first,” says Crisologo. “Obviously, cost is a factor, but the user experience is paramount.”

Joe Myers, President, Elavon North America, a global payment processor, notes that there several critical points for merchants to consider. “The integration path, how it all comes together. The experience for consumers and how easy it is for them to adopt and use.” Ultimately, he notes, it’s about expanding the options for consumers to be able to purchase goods, either in-store or online.

Referring to his company’s involvement with acquirers and merchants, Pablo Cohan, Senior Vice President of Digital Solutions at MasterCard, says, “There are a lot of options out there, so we need to take a step back and understand the (merchant’s) pain points.” He notes that MasterCard is focused on giving lenders the ability to attract consumers to the platform and providing those consumers with purchasing power.

What to consider during implementation

There can be challenges during the implementation of any new channel and this is also true for buy now, pay later.

Nordstrom’s Crisologo, noting the biggest challenges the retailer faced during the implementation of its buy now, pay later program, says “Having an effective testing platform is important. As is understanding the success metrics and making sure you can measure these effectively.”

In addition to metrics, there is also the question of the type of implementation. Says Crisologo: “You have to decide whether you want quick and easy, which is a virtual card and API integration, or a hybrid of the two.” Whatever type of implementation a merchant chooses, it is important to try the product before using them. “If I had the opportunity to go back, I would use the product a lot more to make sure some of the gaps in servicing were resolved.” Another important aspect to consider is the amount of time for integration. How long will it take for the program to be up and running so the merchant can take advantage of the channel? In Crisologo’s experience, it doesn’t necessarily have to be that long. “They’re very good at rolling these out. It’s literally a tap and go transaction. It’s super easy.”

There is significant involvement from all key players during the implementation phase. MasterCard’s Cohan notes that his company is “very involved” with its acquirers and merchants during the implementation phase. “We’re highly engaged to make sure everyone’s ready for that first transaction to work without a problem. This is a turnkey solution with a low investment and if it drives volume and value, then great.”

Following up: data and privacy are paramount

The evaluation of the program doesn’t stop once it has been implemented, though. There may be some difficult situations that arise for merchants and consumers. This includes fallout, for example. Myers notes that this can be a problem: “If there’s a consumer in the store looking to get approval and expecting to get approved and they don’t, that causes frustration.”

While there may be some difficulties, for merchants like Nordstrom, the benefits clearly outweigh any negative factors. Notes Myers, “Giving that choice across payment methods and driving activity and, ultimately, sales and revenue” are some of the key benefits. Nordstrom’s Crisologo agrees: “We want our customers to be able to choose the platform that they use.” And the company has seen significant growth in customer acquisition and incremental sales as a result. Once the channel has been implemented, it needs to be tracked and measured. And that requires a basic infrastructure to gauge the success of the program. “Data is 100% a key part of that,” says Crisologo. “You want to be able quickly learn and evolve.”

As with everything, privacy is also a major concern. The data that is generated needs “to be used only for the purpose for which it is intended,” as Cohan says. “Anything else without consumer consent is not okay.” Merchants need to spend a lot of time talking with their legal and security teams about this topic. Merchants also need to think about the breakeven point for accepting buy now, pay later transactions to make sure it’s a sustainable channel in the long term. “Where incrementality is helping to offset the costs, when does the funnel dry out?” asks Crisologo.

An evolving channel – with lots of promise

What is the future of buy now, pay later? How will it evolve? While there are still questions about how buy now, pay later will change over time, the channel is off to a good start, with acceptance among both consumers and merchants increasing and transaction volumes rising.

Redbridge’s Grunte remarks that “As the buy now, pay later space continues to evolve, it is important to be selective in choosing the right partners and being prepared to deal with dynamic changes as the market continues to develop and face regulatory scrutiny.”

Before and after GPI

Cross-border payments are renowned for their pain points, hidden costs and opacity. Historically, neither the sender nor the beneficiary had any details on the location or date of arrival for payments. As a response to these issues, SWIFT introduced a new and improved service, SWIFT Global Payments Innovation (GPI) in 2016 and has continued to make improvements to this service over the years. SWIFT gpi is based on a multilateral Service Level Agreement (SLA) across banks to implement common processing standards that improve speed, transparency, and tracking mechanisms of international payments.

Since its launch, adoption has been slow but steady. Today, 78% of all cross border MT103 messages are now being sent via gpi, this equates to nearly $438 billion daily. Including both financial institutions and corporates, there are over 1,800 live gpi clients. According to Kalyani Bhatia, SWIFT’s Global Head of Payments, banks and corporates are seeing the benefits of using gpi. She explains that banks are seeing less inquiries and investigations since clients have access to real-time information, saving client’s time and money. Additionally, cross-border payments through gpi are considerably faster than before. Around 44% of payments are credited within five minutes, 70% under 30 minutes, and nearly 100% under 24 hours.

The GPI initiative

Overall, SWIFT has three main goals with GPI:

1. Empowering customers and smaller banks
2. Modernizing and digitizing global payments to meet new standards
3. Accelerating embedded finance

In order to achieve these goals, banks and other financial institutions have invested a significant amount of time and resources on improving and adopting SWIFT gpi. A complete list of banks that are members of the SWIFT gpi community are included here. According to a major American bank, SWIFT gpi can be leveraged in different solutions. The bank does this by offering multiple gpi solutions to its customers. First, clients can use online banking module to visually track and trace outgoing payments in real-time and see any charges that have been deducted along the way. In addition the bank offers an online portal which is publicly accessible. Clients can leverage this tool by providing a URL to their payees who can then keep track of the payments made to them in real time. The bank also provides solutions enabling clients to integrate gpi data with their TMS or ERP systems through APIs. Using these APIs clients can integrate outgoing and incoming transactions enabling optimized use of intraday liquidity and forecasts.

Advantages

According to a global firm in the commodities industry, the main advantage of SWIFT gpi is traceability. Users can now track and trace international payments through a unique tracking number called a UETR (unique end-to-end transaction reference). In North America, clients can choose their own UETR. This new functionality is very important because before gpi, each bank had the ability to change the tracking number throughout the process, making it very difficult for clients to track payments. The tracking number enables users to check the status of payments as well as the fees paid each step of the way. The latter is a key advantage for this firm as they are now able to tell their beneficiaries the status of payment, which contributes to building stronger partnerships with suppliers and avoid long and costly investigations. Additionally, transactions that go through gpi are significantly faster, which enables liquidity efficiencies. Transactions that used to take days now take a matter of minutes for most companies.

Drawbacks

However, corporates still encounter issues with gpi. SWIFT gpi’s capabilities can vary from bank to bank. While larger banks offer gpi data with a considerably high level of detail, this is not always the case for medium-to-smaller banks. For instance, while some banks allow their clients to access SWIFT gpi’s tracking system directly through their internet portals or APIs, others require corporates to pass through the bank’s customer service. Overall, corporates need to keep pushing their financial partners to adopt the latest services available to fully benefit from SWIFT gpi’s advantages.

Future of GPI & alternatives to SWIFT GPI

The rise of new technologies such as blockchain and crypto currencies is now challenging SWIFT’s dominance on the cross-border payment industry. Several fintechs are developing innovative solutions that intend to improve the services offered by the rigid traditional players in the financial industry. One that stands out on the cross-payment market is Ripple. Branded as the “internet of value”, Ripple is a global decentralized network that connects payment providers around the globe. Ripple promises to solve most of the issues related to cross-border payments such as payment speed, fees, and transparency. This is achieved by the use of a decentralized consensus model in which a set of computers determine which transactions sent by the network are valid. In addition, Ripple’s cryptocurrency, XPR, uses the power of the blockchain to confirm transactions in seconds with a very small cost. Below is a step-by-step guide to transactions on the Ripple network.

Their three main products, xCurrent, xRapid, and xVia enable members of the Ripple network to process real-time payments, lower the costs of processing and settlement, and minimize liquidity costs. Over one hundred banks and other financial institutions, such as Santander Bank, American Express, and MoneyGram, have joined the Ripple Network. The table below summarizes and compares the Ripple Network and SWIFT gpi.

Updates and Improvements

SWIFT and its members are constantly listening to the marketplace in order to make updates and improvements to current and new gpi features. Two other gpi products that SWIFT offers are Pre-validation and SWIFT Go. The pre-validation feature enables the sender to validate the beneficiary’s account prior to sending the payment. This enables the payment process to be faster and smoother allowing financial institutions to catch problem areas at the beginning, 75 banks have already signed up for this service. SWIFT Go specifically targets consumer low value retail payments. The normal SWIFT gpi SLA is 24 hours, for SWIFT Go they have reduced the SLA to four hours. Ten customers are live on this service and 100 more are in the implementation process.

SWIFT is updating the gpi platform in November 2022 with features to bring ISO20022 to all of its members. By 2025 all financial institutions have to switch from MT messages to ISO. SWIFT understands that all banks will transition at different times and the new platform will allow its members to switch at their own pace. The ISO format provides more information than MT messages and SWIFT wants to ensure corporates do not lose any valuable information during this transition to ISO. To do so, the new SWIFT platform will keep all of the information along the payment process on its own platform to ensure the integrity and security of data.

SWIFT is still the principal network used for cross-border payments, with over $100 trillion USD being transferred through the SWIFT gpi network. A considerable number of financial institutions and corporates across the globe have adopted the SWIFT network and several of their underlying products such as SWIFT gpi. However, an increasing number of new solutions for B2B cross-border payments are being developed. When making cross-border transactions, corporates should seek to understand and evaluate their options, taking into account the pros and cons of each solution.

Ashley Krause & Pedro Hernandez

A special report on the cash management & payment trends that will transform your treasury department in 2022

The growth and vitality of the payments industry has fascinated all observers during the past two years of the pandemic. Now with recent geopolitical developments arising from the Russia-Ukraine conflict, it is being tested again.

Our new publication analyzes the most prevalent trends and innovations in the treasury world today.

Brick and mortar retail proves to be resilient

With the in-store shopping experience evolving and more blossoming years ahead, payment terminals and their capabilities are also evolving; however, payment terminal selection and management tend to be overlooked by many treasurers – especially in the USA, where acquirers remain the primary distributors. Yet, treasurers and other key stakeholders need to consider terminals and their broader functionalities as part of their payment strategy. This is especially important as terminal technology and its touch on the customer continue to evolve.

Trends to consider when choosing a payment terminal

New Consumer Behaviors

The pandemic has caused a great disruption in the way people do things. It changed the way people work with work-from-home, most countries and cities had lockdowns. It is not surprising that it also shifted consumer behaviors. One form of behavior change is how consumers make payment. Contactless payments defined as the ability to pay by tapping a physical card, wearable, or smartphone enabled by RFID or NFC technologies over a card reader, it was already on the verge of widespread global adoption. However, usage accelerated quickly due to the pandemic since safety was a key driver of payment adoption in 2020. However, convenience and simplicity will continue to drive further consumer acceptance in 2021.
Around the world, consumers are choosing to shop with businesses that offer contactless at the point of sale. “Contactless payments have become a driving differentiator: If all other factors were equal (price, selection and location), nearly two-thirds (63%) of consumers would switch to a new business that installed contactless payment options,” according to The Visa Back to Business Study.

In the US, American Express found that 70% of merchants reported customers are requesting the option of contactless tap-and-go or mobile app payments. Cashless payments adoption in Asia Pacific has also been on the rise as it is growing 2.5x faster in the region.

According to a 2020 survey by Visa Inc., the adoption rate of cashless in Singapore accounted for 98%, followed by Malaysia (96%), Indonesia (93%), Vietnam (89%), Philippines (89%), and Thailand (87%).

The use of debit and credit cards in point-of-sale payments is also a factor that is driving the need for POS terminals. Worldpay, in 2020, digital or mobile wallets accounted for the largest share of point-of-sale payment methods in the Asia-Pacific region, with over 40% of payments. This was followed by card payments (debit and credit), which accounted for 33.6% of the payments, and cash (19.2%).

Other trends that have been on the uptick since the start of the pandemic that will continue to grow are curbside pickup, virtual consults, social commerce (social media marketplace). These trends will drive businesses to change or update their POS payment terminal rapidly. The need for the terminals to be able to accept contactless payments whether it is card or mobile is crucial. Terminals should also be more mobile, accessible and the software needs to be seamless and secure.

A focus on the Android ecosystem

Allowing the Android ecosystem on to the payment terminal unlocks all sorts of new possibilities. Acquirers and value-added providers can develop their own applications, bringing new ideas to banks and acquirers. Front-office apps could be in the form of store applications, loyalty, click & collect and ticketing. Back-office apps can deliver reporting, staff management and much more. This will help banks and acquirers to improve their customer retention. With devices being able to do more, depending on the context, it might reduce the need for multiple devices in store. Another important point is the ability to accept alternative payment methods, leveraging extended device capabilities, such as cameras, scanning and NFC. Android also unlocks the ability to port new applications, including QR codes and digital wallets – on top of traditional payment methods.

Merchants are receiving more and more mobile terminals with SIM cards. A smartPOS based on Android offers more than the legacy portable terminals and mPos dongles. The shortage of semiconductor and other components might slow the manufacturing of these terminals since they are used in almost all electronic devices.

A focus on new pos devices

Many new devices have launched recently from updates to the traditional fixed kiosks to more innovative mobile solutions. Samsung Electronics released the Samsung Kiosk, an all-in-one solution that offers contactless ordering and payment capabilities in June 2021. Providing customers with easy install options and a protective coating, the Kiosk is now available in 12 countries worldwide, including the United States, Canada, the United Kingdom, Ireland, France, Sweden, the Netherlands, Belgium, Spain, Austria, Australia, and Singapore.

Samsung Kiosks (Source | Samsung)

PAX Technology announced the European launch of the M30 & M50 Android PayPhones in September 2021. The M-series PayPhones are the first ever smartphones with inbuilt point of sale technology. It combines the benefits of a secure EMV & PCI 6 certified payment terminal within an Android smartphone ecosystem. These new devices bring an interesting proposition for acquiring banks and payment service providers looking to better partnerships with telecoms or to provide an additional new option to merchants. These devices enable companies and entrepreneurs to operate an E-Commerce business on the run. All major global payment methods can be accepted.

PAX MSO (Source | PAX Technology)

Features to consider when choosing a payment terminal

Different models of terminals for different use cases

Sales depend on the means of payment, what a merchant can accept in store heavily depends on the hardware they have in store. Merchants can enhance customer experience (hence boosting their sales) by selecting a terminal relevant to their activity and client profile. There are a few key features to keep in mind when selecting the right payment terminal including the trends listed.

Some industries require their vendors or employees to move around the store/station/restaurant/etc. and to be able to accept payment at any moment anywhere on the premises. In this case, a mobile terminal or mPOS (i.e. a credit card reader attached to a smartphone or tablet) would be relevant.

Connectivity

The main connections available are Wi-Fi, Bluetooth, Telephone line, Ethernet, and GPRS/4G and there is no one-size-fits-all solution. However, the safest option would be to choose combine connections to prevent any interruptions at the checkout. For example, a fixed terminal connected to Ethernet with a SIM card to have a 4G Back-up.

Standalone vs integrated

Standalone terminals do not connect to the electronic cash register (ECR), requiring the cashier to manually key payment amounts into the terminal. On the other hand, integrated terminals automate this process offering a faster checkout while reducing the risk of human error. While advantages of integrated solution are obvious, it usually costs a lot more and installing it might take longer.
When it comes to integration, you can choose to fully or semi-integrate your terminals. In the first option, card data is going back and forth from your terminal to your payment processor through your ECR. In this case, the merchant’s system must comply with higher PCI DSS requirements (because cardholder data are transiting through the merchant’s system). The second option is usually the preferred method, where the data goes directly to the processor for payment authorization (without passing through the merchant’s ECR), and allowing merchants to reduce their PCI DSS scope.

Software

Proprietary operating systems were the conventional choice for terminals. However, the trend is to shift to Android-powered terminals that allow merchants to run all kind of Android applications and to benefit from new functionalities.

Beside traditional VISA and MasterCard, Merchant can install many more payment applications such as local schemes, gift cards, DCC, contactless, etc.

Security

Security should be given great consideration when choosing a terminal. As devices become more interconnected, security threats could also come from different sources. Day to day business can be disrupted if a business was hacked.

2021 saw a large number of high-profile hacks like Colonial Pipeline, SolarWinds, Twitch, CNA and many more. While these headline hacks might not have been through POS terminals, POS devices remain a desirable target to cybercriminals.

Environmental impact

As ESG adoption and concern grows, more consideration is given to producing and disposing of these terminals and devices. Device producers could have sustainability as part of their goals when producing new terminals. The result might be a more eco-friendly terminal produced with recycled materials or super low power consumption. On the other side, disposal or recycling old terminals might prove to be more of a challenge, most of these devices are considered e-waste. Traditional waste management companies might not be equipped or able to dispose or recycle these items.

Samuel Tong & Pauline Lion

A special report on the cash management & payment trends that will transform your treasury department in 2022

The growth and vitality of the payments industry has fascinated all observers during the past two years of the pandemic. Now with recent geopolitical developments arising from the Russia-Ukraine conflict, it is being tested again.

Our new publication analyzes the most prevalent trends and innovations in the treasury world today.

Looking at the banking and banking services industries, digital capabilities have now become a vital need for both individual consumers and for corporates. Having to now handle day-to-day business activities virtually, the need for banking’s digital transformation has become a necessity.

The digital transformation

With the recent increase of many companies adopting the latest digital trends, there has been a boom in the ecommerce space. Ecommerce has been on the rise over the last decade, but the pandemic has contributed even more to the success of online shopping with physical shops being forced to close indefinitely. Corporates without an online/ecommerce presence have rushed to join those who already invested in the infrastructure.

What exactly is digital banking?

Digital banking refers to the use of both online and/or mobile tools to access various financial services and activities that were historically only available through physical bank branches. Driven largely by individual consumers (mobile banking apps, personalized financial planning, contactless payments, voice banking or on-demand loans), banks have expanded their digital offering to corporates both large and small(cash flow forecast, working capital, artificial intelligence – AI). Even though the needs for consumers and corporations are not exactly the same, they both have one thing in common that is now the new normal for our society: the need for real time digital banking.

Contributing even more to the ongoing ecommerce boom, the acceptance of digital wallets by corporates and the use of digital wallets by consumers grew rapidly in 2020 where they were used in “44.5% of the e-commerce transaction volume, up 6.5% from 2019” according to FIS from their annual global payment report. Even though there has been a rise in the use of digital wallets, it does not mean every region is on the same level. Some regions clearly had a higher usage of digital wallets when compared to others. However, all regions have seen an overall increase in the usage of digital payments in general. As more and more consumers switch to different forms of digital banking, one payment method suffers greatly. In today’s digital age, consumers and corporates have accelerated their transition away from holding, accepting, and paying in physical cash.

According to FIS’ Global Payments report, cash sales at the POS fell from 32.1% in 2019 to 20.5% in 2020 and have no sign of gaining back any market share lost to the other digital payment methods.

The treasury teams within most global corporations are no strangers to the digital transformation within their business function. However, the outside pressure of Covid-19 has expedited their need for innovation. (See graph below)

How has the pandemic impacted the digital transformation of your treasury

(Question asked to corporations with more than $2bn in revenues)

In this current environment, treasurers and their teams are focused on improving current processes around developing new key API’s, cash flow forecasting, and their liquidity and cash management. Identifying new data points and improving the teams overall data capabilities with more accurate forecasting, even with uncertainty ahead, is critical for the company’s survival. According to JPMorgan “40% of companies are exploring initiatives to enhance their data capabilities in treasury” A further one-third have already invested significantly in these” which is a clear indicator of what direction treasury is moving towards.

Where do banks stand in the race for digital?

Banks invest to improve and digitalize both their internal processes and their customer offers. Even so, there are still huge differences among them, as all banks did not start this race at the same point and do not move at the same speed.

Indeed, some of the oldest banks (especially the international ones) have a heavy legacy that might slow their evolution down and make it more difficult to innovate. Their 25-year-old banking platforms are not compatible with today’s varying needs. Sometimes, they even have to deal with layers of different platforms depending on the banks they have as acquirers over the past years.

What is a neobank?

A neobank is a bank fully digital, operating entirely online without a single physical branch.

Banks are now facing the fierce competition of neobanks and fintechs, which are more flexible, agile, and innovative. Neobanks such as, Nubank, founded in 2013, in Sao Paulo, Brazil offer a more streamlined approach to banking. Claiming 3 million clients in 2018 and now up to 48 million clients as of September 2021, this neobank has been seeing tremendous success. They are planning to raise up to 3,000 million dollars (2,590 million euros) and reach a valuation of 50,000 million dollars after its introduction into Wall Street. Nubank will likely soon be more valuable than the main Brazilian bank iItau Unibanc. Yet, Nubank is not the only one seeing success, they are followed by Chime in the US, N26 in Germany, and many others.

It is no surprise as to why neobanks are so successful. These fintechs focus on client needs and are agile enough to adjust their solutions based on what people are looking for. Nubank has specifically targeted people that traditional banks have neglected for years, offering bank accounts and credit cards for free to the unbanked. This offer along with the sweet promise of a simplified service accessible on a smartphone has captured many new customers.

In the past, banks used to predominantly focus on being compliant with the many heavy regulations placed upon them, but today they have changed their strategy. In order to keep up with this fourth industrial revolution, they have become more client oriented and are embracing relevant digital trends (while continuing to comply with regulations; if we had to specify).

To keep up with the industry, some banks have chosen to collaborate with fintechs, while others have decided to internalize their developments and innovation strategy.
Generally speaking, small or local banks tend to build partnerships with fintech. For example, ING has recently concluded a partnership with the fintech Minna Technologies. The objective is to launch a new digital banking service: an online subscription to new services or products. ING’s customers will be able to directly manage their subscription in the banks digital channel without being redirected to another environment. Customers will have a clear view on all the services or products they have subscribed to and they will be able to cancel or upgrade them.

Other banks combine self-developed innovations and partnerships with fintechs such as the US bank JP Morgan: “We have an annual technology budget of $12 billion and in the last 18 months have added over a hundred new team members focused on treasury innovation, exposed dozens of treasury services APIs, engaged several hundred clients on corporate treasury innovation & co-creation, and engaged over a hundred FinTechs in this space.”

Navigating the digital banking landscape

In recent years, we have seen a race for innovation in which companies seek to be the first in launching a new product or service that will address a customer’s (new or growing) needs. For example, since the Covid crisis, the need to improve cash forecasting processes and the desire for more accuracy are more important than ever (as we can see in the graphics below).

With innovation in mind, banks will try to address the needs of their clients, whether they are large corporates or everyday consumers. Their goal will focus on becoming the first player in that market and if they are not able to achieve this, then they will try to differentiate their solutions above the others. Nevertheless, all of these services are relatively new and we cannot truly determine their effectiveness or efficiency for the future.

The main risk corporates will face, and are currently facing, is the uncertainty of investing in a service and its infrastructure that may not fully answer their needs. Now more than ever, consumers face increased risk, such as fraud, due to the rise of digital banking. Consumers are not alone in their concerns, as fraud prevention and management is always a large topic for corporates. That is why it is very important to always spend time in assessing your core needs and doing an RFP to assess the quality of the offer. Regardless of if you are just a consumer or a large corporate, due diligence should always be done when it comes to decisions around banking digitally.

Read our new special report on the cash management & payment trends that will transform your treasury department in 2022

The growth and vitality of the payments industry has fascinated all observers during the past two years of the pandemic. Now with recent geopolitical developments arising from the Russia-Ukraine conflict, it is being tested again.

Our new publication analyzes the most prevalent trends and innovations in the treasury world today.

The importance of cashflow forecasting

According to a survey by Redbridge conducted in 2019, 94% of companies perform some form of cashflow forecasting. Most of the survey respondents noted that there are two key success factors to ensure high-quality and accurate cashflow forecasts:

Data quality

The importance of data quality is clear; without good data, a company will not be able to produce accurate cashflow forecasts that meet their needs.

Communication among contributors

The other key success factor may be less obvious, but communication among the various stakeholders in the company is just as critical for predicting future cashflows accurately. This work can become difficult and less productive if there are competing visions among departments, impacting the quality of the forecasts. It is therefore essential to get buy-in from all key parties in the process, or to automatically interface the cash forecasting production tool with the group’s various systems (e.g., CRM, EPR, credit management tool).

Despite the importance of cashflow forecasting for a company’s investment and financing decisions, a majority of companies still rely on a single technology – Excel spreadsheets – for this important task. However, spreadsheets have severe technological limitations and require a lot of manual effort. They are also susceptible to errors. The Covid-19 pandemic, and now the current political both highlight the need for companies to be able to produce different forecast simulations quickly. For this reason, treasury departments need to consider automating the cashflow forecasting process using more sophisticated tools and systems. However, automation remains a real challenge for many treasury departments, as this requires the selection of the systems and .

Overview of the main cashflow forecasting tools

In general, companies with an advanced solution use either a treasury management system (TMS) or a specialized cashflow tool to prepare their forecasts. Each has its own distinct advantages and disadvantages. For example, a TMS enables data centralization and saves times while improving the company’s cash culture. However, such systems might have limited reporting and analysis capabilities. They also require dedicated training to ensure optimal use.

A specialized cashflow tool provides advanced consolidation methods as well as advanced reporting. This can allow for a more extensive analysis and greater detail. It can also improve the company’s cash culture and optimizes internal processes. However, these tools also require an interface with the TMS or ERP and .

With the capability of more in-depth analyses, specialized tools parallel scenario management. For this reason, some companies, especially large conglomerates with a lot of subsidiaries, may choose this .

The impact of AI on forecasting

Artificial intelligence (AI) is becoming increasingly important in a number of fields, and cashflow forecasting is no exception. Both TMS and specialized cashflow forecasting tools are increasingly integrating AI into solutions. However, it is important to emphasize that AI is not intended to replace humans. Rather, it complements the work they do. Combining the power of AI with the critical vision that people provide results in cashflow forecasting modeling .

Artificial intelligence requires a lot of historical data to work well, both internal and exogenous. The data also needs to be very good quality, which involves cleaning it before it can be used and can be a time-consuming process. In addition, AI is not always transparent, which is another reason that can lead to hesitation when it comes to adopting AI. However, there have been great strides in terms of the tools that integrate AI.

Cashflow tools that use AI

On the TMS side, there are already several systems available on the market that use AI to forecast cashflows. These include Diapason, Kyriba, and Integrity, which add AI capabilities and algorithms to trending and modeling.

Another company offering AI-assisted tools is Coupa, which acquired Llamasoft and now offers machine learning solutions. These are based on an analysis of historical transactions, which are imported into the Coupa TMS and have been developed both for fraud management and to improve .

There are many more examples of TMS solutions using AI. However, a number of specialized forecasting tools involve artificial intelligence as well. These include:

• Agicap, which has developed a machine learning system for SMEs that enables daily cashflow forecasts based on actual cashflows
• Verteego, which applies AI to sales forecasts based on historical ERP data and then adds external data
• CashForce also provides an AI solution that involves machine learning
• TipCo is a European company that specializes in treasury reporting. They also offer a predictive analytics solution for automating cashflow

How to choose the right cashflow forecasting system & tools

Currently, a large number of companies rely on simple spreadsheets to determine their future cashflows. While Excel is cheap and easy to use with minimal user training, often there is only one person at the company who knows the file macros. This can lead to risks if that person isn’t there (because they are on vacation, or they’ve left the company).

If senior management wants weekly or bimonthly updates, automating the process to save time, reduce manual effort, and improve accuracy often results in the best cost-benefit ratio. Next, based on your particular environment, the quality of the data available within the group, and your reporting needs, you need to assess which methodology and tools provide you with the best return on investment.

Overall, finding the right solution or method depends primarily on your company’s size. Each option should be assessed thoroughly from a cost benefit perspective to allow you to choose the best one. If nothing on its own seems like a good fit, using a blend of different solutions or methodologies to create something specifically tailored to your company would be a necessity, as author Iris Rousselière points out in another article about cashflow forecasting. While best market practices are an ideal many strive for, you might need to complete a data management project first before you are able to fully unlock the true power of the cash forecast .