Pondering Payments

Ten years ago, the collapse of Lehman Bros and the rampaging financial crisis that followed started at Sibos. Despite the whirlwind that followed, the eye of the storm, in a room full of the world’s bankers, was eerily silent. The lights at the Lehman booth were, quite literally, turned off, and over the course of a day, the conference emptied out as senior executives power-walked their way to the exit clutching their phones, ashen-faced.

Until this year, Sibos has been a very different place to pre-2008 days. The focus has been largely defensive: how to tackle the regulatory compliance burden; how to protect market share with the threat of new, fintech-shaped thunderclouds on the horizon; how to face up to the reputation of being the global ‘bad guys’.

What a difference this year. Gone is the defensiveness, gone is the mutual suspicion that has tinged previous events. Instead, conference sessions and exhibition alike at Sibos were infused with dynamism, enthusiasm and renewed confidence. Yes, banks compete with each other, and yes, they may compete with technology companies in certain situations. More often, however, technology companies and banks complement each other. As a result, there is a new-found momentum behind collaborative efforts to address the challenges that affect everyone and on which no-one competes. For the first time in many years, the customer was central to almost every presentation and panel discussion. But what does this really mean – and are corporate customers ready or interested?

What’s a ‘mainstream’ treasurer anyway?

So far, I have been in this industry for 24 years and counting, and in some respects, a great deal has changed over this time. When I started my first treasury role, we sent payments by fax, having run around the building looking for people to sign, we settled securities via telex (actually quite exciting, I always felt like the security services), we typed confirmation letters manually, and our ground-breaking electronic banking system was an excruciating dial up. The reconciled cash position was written on an A3 pad every morning (a job I was singularly poor at) and updated on a whiteboard throughout the day. Unusually, we had a treasury management system, an in-house built monstrosity that had cost millions. Despite being impossible to interrogate, update or integrate, it was long considered ‘irreplaceable’ as it produced a particular board report on which the business apparently entirely relied (incidentally, when it stopped being produced, I don’t think anyone either noticed or cared). Two years later, our reality was already quite different, as an early adopter of a modern treasury management system, with efficient processes and reporting that many treasuries today would still aspire to.

While we were probably pioneers (although I’m not sure we ever considered ourselves as such at the time) over twenty years later it’s not always easy to see how treasury processes have moved on. Technology has certainly evolved, and the opportunities for process automation, efficiency and control, online dealing, integration and data analysis have vastly improved. Expectations have also been transformed, not least in the way that treasury interacts with, and contributes to, the wider business. However, while the opportunities have increased, too few treasurers are realising the potential that exists. There are still treasury functions of large companies that lack a treasury management system or efficient ERP treasury module. There are still treasurers who shrug resignedly when asked why they cannot integrate bank statement information into their systems, whether through lack of availability of bank systems, inconsistent formats or lack of internal priority.

Even for those treasuries that have implemented or upgraded to modern systems, policies and processes over the past five years or so, many lack the time, motivation or in some cases ambition to understand and contribute to the innovations that will challenge and change payments and collections in the future. Firstly, there are advantages to doing so, specifically to support the business more effectively as geographic expansion continues and business models become increasingly digital. Secondly, however, there is an obligation to tackle the internal fraud and external cybersecurity threats that are becoming more prevalent than ever. As FIS’ 2017 Corporate Payments and Bank Connectivity Report: Simplifying the Global Payments Journey survey report observes,

“Increasing controls (55%), payment fraud (54%) and cash visibility (48%) are the top challenges and drivers for a payments project. The continued era of cybercrime has become so widespread, complex and frequent, the role of the treasurer has evolved to a much more active player in mitigating this type of risk. Treasurers are relying on system providers to reduce the likelihood of a cyber-attack or any other fraudulent event. Those without access to the latest in payments technology feel the most exposed, and are addressing that exposure through payments improvement projects.”

The treasury and finance profession is on the threshold of one of the most exciting and potentially transformative (a word I detest, but I don’t feel it is hyperbole in this situation) periods I have seen over the past 24 years in a number of areas, including payments. Whether the focus is to mitigate risk or create value through cost efficiencies and serving the business in new ways, there is a unique opportunity for treasurers to shape the payment environment of the future, but this will require engagement and the end to complacency. There are undoubtedly obstacles, but there is perhaps more momentum behind overcoming these than we have seen in the past.

Real-time payments

Coming from the UK, where the faster payments scheme has existed for nearly a decade, albeit only for transactions of a limited value, I have always been a little surprised by the relative lack of enthusiasm for real-time payments amongst corporate treasuries. From a bank perspective, I understand this reticence; similarly, I recognise that the value proposition for corporate high-value payments, particularly treasury payments, may be limited. David Kretz, Bank of America Merrill Lynch at Sibos, notes,

“There is a variety of use cases for real-time payments, such as emergency payroll, B2C refunds, and replacing cash on delivery.”

The opportunity for real-time payments, both incoming and outgoing, is not a minor issue. Looking at outgoing payments first, the ability to make a payment, and know it has been received by the beneficiary immediately, can substantially accelerate supply chains, benefitting participants at every point. Similarly, for incoming flows, there is a significant impact on credit risk with a far greater opportunity for ‘just in time’ fulfilment, not only for B2C transactions but B2B too. Treasurers need to be creative in reassessing current business, payment and collection models, and to work with the business to understand what the potential could be. After all, with 12 real-time payment schemes already live, a number that is set to double in 2018, the issue is becoming ever more immediate. One of the reasons that treasurers and finance managers may be reluctant to look seriously at real-time payments is that their processes also need to be real-time. As David Kretz, Bank of America Merrill Lynch indicates,

“The degree to which corporate treasurers are prepared for real-time payments varies. Some companies, particularly consumer-facing companies, are often well-equipped.”

However, given the variations in treasury and treasury technology sophistication, this is not universal, and the fear of major, disruptive projects may well be a disincentive. “If it’s not broke, don’t fix it” may well apply, but equally, we said that about the telex. Although it was often broken.

Cross-border payments

While the acceleration of domestic payments is being met with varying levels of interest amongst corporate treasurers, the same does not apply to cross-border payments. For example, I can’t remember seeing such a consistently enthusiastic response to any single initiative as we have seen recently for SWIFT’s global payments innovation (gpi) initiative. 120 banks are now signed up, representing 75% of global cross-border traffic via SWIFT across 200 countries. Although the volume of gpi transactions and the number of corridors is growing rapidly, the potential remains enormous, particularly in the range of services that is emerging around gpi payments, starting with payment tracking capabilities.

SWIFT gpi is, unusually, an example of a ‘win win’, an expression that is used often to mean anything but. Banks benefit, in that they can develop new services for customers and can reduce the time spent on investigations, while corporate customers derive enormous advantage from quicker, more predictable, traceable and transparent payments. The service level for SWIFT gpi includes same day cross-border payment, but as Bart Verweij, deputy treasurer of booking.com highlighted during one of the corporate sessions at Sibos,

“The value of SWIFT gpi is the predictability of payment, potentially more than increasing its speed. In addition, the quality of data accompanying the payment is essential to identify and reconcile flows automatically.” 

All about the data

Verweij’s latter point is critical, echoed by Javier Orejas Saldaña, head of banking services, AEMEA, IATA who observed,

“Speed, cost and security are the top requirements for cross-border payments. Unfortunately, today the answers are not simple because they depend on so many factors. Transparency is the foundation, because it makes it possible to compare.

We would like to see the transfer of rich data, ideally including compliance information, the ability to stop a payment at any point, and easy integration with corporate ERP systems.”

Although there are plenty of advantages of faster, predictable and traceable payments and collections, it is the data around the payment, rather than simply the transaction itself where treasurers see value. For multi-banked corporations however, it doesn’t matter how rich, detailed and complete the data provided by one bank if this is not matched in quality and format by other banks. Shirish Wadivkar, Global Head, Correspondent Banking Products, Standard Chartered discusses,

“SWIFT gpi payment data has little value in itself unless it can be harnessed in a meaningful way. As the underlying transactions from corporates will really drive up SWIFT gpi usage, it is imperative for banks to figure out how to expose this data to corporate users in a way that is useful to them. This is particularly important given that corporate origination of SWIFT gpi transactions or a standardised way of making data available back to corporates is not available today.”

The problem of lack of consistency across banks is not a new one for corporate treasurers. Although formatting standards for financial messages exist, most notably ISO 20022, there are various problems, the first of which is adoption. David Kretz, Bank of America Merrill Lynch commented,

“Improving the quality and consistency of payment data is a priority for every corporate treasurer, which is a key value proposition of ISO 20022; however, adoption varies across industries and regions.”

Second is that banks continue to add their own ‘flavours’ of ISO 20022 which is a huge frustration for treasurers and finance managers trying to streamline communication and processes across banks. Third, and the issue that is least discussed at present but will become more important in the future, is the data itself. As Shirish Wadivkar, Standard Chartered describes,

“There is currently limited information about the payment included with the payment message, a legacy of the move from telex formats when the message transmission cost was proportional to its length. Migrating to ISO 20022 formats helps if the data is available in the first place. As yet, there are no globally acceptable standards for rich data. Therefore, while adoption of standard formats is important, there also needs to be consistency in the data that is exchanged. This is not simply an issue for standards forums, but must also be a conversation for organisations such as the ICC: if we were to contemplate standards for invoice data they need to be globally acceptable and legally sufficient.”

These issues are neither new nor surprising to treasurers; however, for the first time in a long while there seems to be progress on resolving them. There is something of a carrot and stick issue here. The credibility of non-bank providers and the solutions they offer is expanding, and regulatory changes such as PSD2 are creating further opportunities for competition. As David Kretz, Bank of America Merrill Lynch comments,

“The industry is working hard to improve payment instruments and functionality, as initiatives such as SWIFT gpi and developments in mobile payments technology illustrate.”

He adds,

“I think the global growth of real-time payments is a very exciting development, with a number of schemes currently in different stages. I would also highlight the value of open banking via APIs, which offer the opportunity to augment capabilities and present a broader, and differentiated offering.”

While the threat of disruption and disintermediation remains (both words that should be consigned to outer darkness), non-bank providers are not necessarily ‘going it alone’ but working collaboratively with banks, which offers benefits on both sides. Regulators too are playing an increasingly important role, Shirish Wadivkar, Standard Chartered highlights,

“An important trend we are seeing is that regulators and central banks, such as the Monetary Authority of Singapore, Bank of Japan and Royal Bank of Canada amongst others, are proactively engaged in co-creation with banks and fintechs directly. This is an important step in the journey towards secure and frictionless exchange of value using newer methods of value transfer. It also reflects regulators’ wish to facilitate and improve the payments process rather than creating obstacles or regulating after-the-fact. This collaboration and co-creation will become particularly important as the concept of money – a relatively recent concept in itself, compared to human evolution – evolves and currencies potentially become entirely digital.”

What’s the problem?

New players, solutions and technologies will undoubtedly make an impact on improving the speed, consistency, traceability and quality of payment and collection processing and accelerate digitisation. However, there is an important word of caution from the corporate treasury community that was emphasised strongly at Sibos. As Ed Barrie, Treasury Director as Tableau Software urged,

“In many cases, the basics that we’ve been seeking for years have not yet been achieved, which is more important than delivering solutions based on more advanced use of technology such as mobile, predictive analytics, artificial intelligence etc. We would like to first see the fundamentals addressed, that are essential for both bank and corporate, such as accurate, efficient management of bank signatories.”

Innovation cannot be a case of simply finding new toys to play with. Almost every session I heard at Sibos emphasised the importance of delivering solutions to corporate customers; however, for this truly to be the case, there needs to be a concerted effort to ask these customers what they need, not tell them what they do, or should want. This does not apply only to the early adopters, but the wider treasury community that does not always have the most sophisticated infrastructure or appetite to implement one. 

A poll during one Sibos session (attended almost exclusively by bankers) revealed that 39% believed that new technology such as artificial intelligence (AI) and machine learning was the issue that had had the greatest impact on corporate treasury over the past year, ahead of market uncertainty, cybersecurity and fraud risks, and interest rate/FX risk (which received zero votes). This is not a view reflected in any corporate surveys I have seen, nor the discussions I have with very many treasurers. So why, despite the fact that so many banks emphasise their commitment to ‘co-creation’ (another term to join ‘transformation’, ‘disruption’ and ‘disintermediation’ in the Lexicon Room 101) does there seem to be such a mismatch? Firstly, as we have said, the experience of early adopters and treasury technology pioneers is not representative of most treasury functions. Second, many of the initiatives that are in proof of concept or pilot stages today are yet to be used in ‘live’ operation so the value has yet to be quantified. Therefore, far from being the factors that have had the greatest impact, new innovations such as AI and machine learning, but also developments such as open banking APIs could be better described as having the greatest potential. It is important not to confuse the two. David Kretz, Bank of America Merrill Lynch concludes,

“One takeaway for corporate treasurers from this year’s Sibos is that banks are investing very heavily in enhancing the cross-border payment process. In addition, they are working with fintechs to develop alternative solutions via open banking that can be targeted more precisely at customer needs and provide higher quality payments data. Ultimately, it is corporate treasurers who benefit from these initiatives, so it is an exciting time.”