In the run up to this year’s EuroFinance conference, treasurers are facing an unprecedented mix of challenges. With regulations such as PSD2 looming on the horizon, the threat, or opportunity, of digital disruption can no longer be ignored. Victoria Beckett spoke to Chris Jameson, head of sales for Western Europe, Bank of America Merrill Lynch (BofAML) about some of the key digitalisations issues for treasurers at this year’s event.
How does the corporate response to the rise in digital payments differ from that of the consumer?
Consumers expect fast, straightforward, safe and cost effective interactions with their banks, and the same is now true for Corporates. However, in terms of payments, the stats say 73% of recent fintech investment has been in the consumer space, 24% into banking efficiency and only 3% into solutions for corporates1. The personal expectations of the payments experience that treasurers have in their private lives are starting to merge into their professional expectations. But, while the demands of consumers and corporates can be similar, what corporates really require is data. Businesses want to use that data to connect with their ecosystem of suppliers and clients – that’s the difference. One example of how the industry is looking to satisfy corporate demand for data and connectivity can be seen under the Payment Services Directive 2 (PSD2) which will bring application programming interface (API) usage across the industry.
To date, developments in the payments industry have been largely driven by those initiating payments (i.e. the payer) however this is evolving and innovation is now more likely to be driven by how the beneficiary wants to receive their payment (i.e. the beneficiary). Some of the recent market developments that we're seeing are attempts to satisfy that demand from beneficiaries, whether it’s mobile connectivity via apps, virtual wallets or by using peer to peer (P2P) payments, the transaction flow is being dematerialised.
How are corporates responding to this rise in digital payments?
The main response we're seeing from corporates is a hunger for information, guidance from their banks and the sharing of knowledge between their peers. There's a real appetite to experiment and ‘build sandboxes’ to try some of this new technology in a safe environment. An example of new digital payment channels working in practice is our partnership with China Union Pay (CUP). Through this partnership, the OSI Group (a privately-owned US-based food processing corporation) uses point-of-sale machines provided by CUP to collect debit and credit card payments from their diversified base of local buyers. The funds are then automatically centralised into their BofAML account, making the reconciliation process more efficient.
On the flip side, if you think about corporates that are looking to deliver payments to multiple consumers (e.g. refunds, rewards or indeed insurance claims), our Digital Disbursements tool enables companies to settle a high volume of low value payments through various digital channels such as e-wallets, commercial cards or bank accounts.
Europe is seeing several alternative payment forms arise that override traditional banking services. What is causing this move away from traditional banking?
We have seen developments in digital payments impact almost every consumer industry in recent years, whether it be travel/hotels, music or film, and these have been driven by a demand to increase efficiency. Consumer technological developments have come at the right time to improve a client’s experience and we're at a similar point now in the financial services industry.
But what's driving digital disruption in the financial services industry? We’re currently seeing a significant demographic transition. For example, life expectancy is expected to hit 77 globally by 2050, alongside population growth of 33%. There will also be more people over 65 than children under 5 by the end of the decade.2
At one end of the financial spectrum, 4.5 billion people earn under $10 a day however collectively they have a huge purchasing power of about $5trn. They're young, connected, educated and urban with more disposable income than they've ever had.
This demographic transition is driving much of the demand for efficiencies in the finance industry. It’s also motivating our corporate clients to reassess their activities to effectively tap into the opportunities that these demographic shifts are bringing.
Many of the start-up fintechs which are flourishing are a consequence of people tapping into these changing demographics. Similarly, the significant work banks are also undertaking are to drive efficiency. We’re seeing a reduction in physical instruments, moving away from physical locations to virtual; from physical accounts to virtual accounts; and from physical cards to virtual cards.
What are some of the key challenges and opportunities regarding PSD2?
PSD2 is driving much change and opportunity across the industry. One of the aims of the regulation is to create more choice for consumers and similar to other developments in consumer payments, these benefits will filter through to the corporate world. One of the big trends we're hearing at the moment from clients, and in the market in general, is a concern around payment security and the minimum payment security standards of PSD2 will help address some of that.
Open banking will also challenge the traditional role of banks as the regulation enables third party payment providers to come into the banking space. It will also allow companies that may just want to provide account information in a simplified way, to gather information via API technology, in turn giving way to digital platforms with twenty-four/seven access.
To what extent do you see banks forming good partnerships with fintechs?
We’re seeing many banks and fintechs across the industry embracing partnerships to develop solutions that address clients’ needs. For example, BofAML recently partnered with HighRadius, a fintech enterprise software-as-a-service (SaaS) company, to create our new tool: Intelligent Receivables. It uses artificial intelligence (AI) and other software to help companies vastly improve their straight-through reconciliation (STR) of incoming payments to help them process the receipts and invoicing system much faster.
Another strong example is R3, one of the biggest consortiums with more than 80 members, including banks, which are collaborating to develop distributed ledger technology for financial use.
The financial industry is experiencing a tremendous wave of change and it will be exciting to discuss and develop these innovations even further, both at this year’s EuroFinance conference and beyond.