Published: February 01, 2013
The world of commerce is undergoing a digital transformation thanks to the emergence of new payments instruments. The march of so-called ’smart’ devices – be they phones or tablets – is revolutionising the way that enterprises and customers interact. Deutsche Bank’s Ron van Wezel discusses these developments, and why corporate treasurers are at the centre of this transformation.
Given society’s growing reliance on technology, particularly since the advent of smartphones and tablet computers – it is somewhat surprising that payment methods have largely failed to keep pace. While smart devices are fast becoming the platform of choice for online payments – spurred largely by the development of apps to further enhance the user-experience – paper-based payment methods continue to dominate offline.
However, there are signs the tide is beginning to turn in this respect with the development of more sophisticated payment methods.
In the consumer space, these new instruments are designed to merge the on- and off-line shopping experiences, enabling customers to pay either online at the touch of a button – or in-store without queuing or handing over a card or cash – and retailers can penetrate an increasingly tech-savvy customer base. This transformation has the potential to change the world into a virtual shopping centre, open 24-hours a day, seven days a week and providing unlimited choice.
Of course, developments in the consumer space do not take place in isolation. What gains traction in this arena also influences advances in the commercial realm – as proven by the effects the ease of use and customisability offered by social media tools have had on financial technology development.
With this in mind, it is likely that new payment options will lead to the adoption of new business models in both the business-to-consumer (B2C) and business-to-business (B2B) spaces. And in both instances, it will be corporate treasurers driving the changes, and finding ways to use these innovative payments options to enhance business process by lowering costs and improving risk-mitigation and operational efficiency.
In the consumer space, the emerging payments’ development has been sparked by the speed at which the online commerce market is gaining ground. ’Clicks over bricks’ is seemingly becoming the order of the day, and it is a concept supported by sales statistics.
Take the British retailer John Lewis as an example. Over the recent festive period, online sales were reported to be 44% higher than the previous year, and Johnlewis.com was said to be the channel for £1 out of every £4 of the company’s takings. And rather than being a one-off example, this boom in online sales is indicative of a broader trend.
According to Ofcom’s latest International Communications Report, Britain leads the world in using the latest technology in everyday life – including for shopping. The survey reveals that Britain buys more online than any other country, with an average of £1,083 spent per capita on internet purchases.
With these findings in mind, it is hardly surprising that the online space is becoming a key area of focus for retailers, and considered a vital area of differentiation. As a result, retailers are seeking to offer more sophisticated payments options to make the buying process quicker and easier, as well as build their brands by tying them into customer loyalty schemes.
Such efforts are beneficial for customers and retailers alike. Customers can enjoy a more intuitive, speedy and secure payments service while retailers, for their part, can engage in more targeted marketing campaigns. They can also decrease credit risk, improve cash flow management and benefit from operational efficiency gains as a result of less paperwork.[[[PAGE]]]
The growth in online commerce will continue, and be fuelled by the increasing popularity and penetration of smart devices. In what is becoming a highly competitive environment, retailers seeking to differentiate themselves will need to offer customers a superior end-to-end experience, and advanced payment solutions will be integral to their success. A prime example of an existing payment option that comprises such advantages is Amazon’s well-known “1-click” method. This is simple, quick, can allow for immediate delivery, and produces ’customer recommendations’ based on previous purchases. All of these elements are significant steps towards the ultimate aim of emerging payments: to create a truly cash-less and paper-less payments process.
The growth in online commerce will continue, and be fuelled by the increasing popularity and penetration of smart devices.
This end-goal is embodied by the ’digital wallet’ – an electronic version of its physical equivalent.
The digital wallet concept is straightforward. Accessible via a smart device, it will store all customer bank account and store loyalty card information in a central location, and provide a uniform payments process for on- and off-line transactions. It can do this by linking a customer’s shopping basket to his or her payments capability. This connection can replace the traditional pen-and-paper shopping list, as purchase information is stored, and allow for payment execution immediately upon completion. As a result, digital wallets have the potential to revolutionise the retail experience. While mainstream use of the digital wallet is some time away, its foundations are already in use. Its full development and roll-out, therefore, is almost certainly only a matter of time.
Mobile payment options are an obvious example of this, and are particularly prevalent in the emerging markets, where billions of people operate without bank accounts. Although mobile options have yet to allow the integration of value-added services (i.e., loyalty schemes) their high market penetration and scope for expansion means that they are a viable future payment option for all economies.
Advancing mobile payments options – and indeed other ’bridging solutions’ that represent a middle ground between present-day options and future digital wallets – will require greater bank-corporate collaboration. By working in closer alignment, banks – and indeed other payment services providers – and corporates can combine network, infrastructure and local market knowledge to address rising concerns and requirements in the emerging payments space.
To fail to see the benefits such solutions can offer the B2B world is, perhaps, to overestimate commercial levels of automation and efficiency. Despite significant advances in financial technology, paper-based payments (such as cash or cheque) remain the dominant method for B2B transactions worldwide. This is the case even though the inherent costs and risks are significant.
Paper-based methods are also most commonly used for the regular payments – or ’disbursements’ – that companies need to make on a regular basis, such as salary payments and employee expenses. This results in an inefficient, expensive, opaque – as it hinders efforts to track expenditure and mitigate fraud risk – and labour-intensive process. Yet emerging payments options – many of which are already available – can avoid such problems with minimal disruption to existing disbursement systems and processes.
Pre-paid cards are an example of a straightforward, ’smart’ solution that can relieve corporates of the burden of manual processing and reconciliation, as well as provide a clear audit trail for expense tracking and monitoring.
At a fundamental level, corporate prepaid cards work similarly to debit cards, except they are centrally loaded with a set amount – and perhaps with restrictions placed on where they may be used – prior to use. Advances on this basic concept mean pre-paid cards may now be issued electronically, and therefore accessed and used via smartphones and tablets. This means that, as card companies roll out infrastructure to enable contactless, point-of-sale payments, card-holders will have the option to pay by ’waving’ their card/smart device at the merchant in question’s terminal.
Such cash-free tools are becoming increasingly popular, either as solutions in their own right, or as part of broader cash management solutions. A recent study commissioned by MasterCard indicates the value of payments made via pre-paid cards is expected to grow at an annual rate of 22%, reaching £2.4tr in 2017.
Of course, it is not just the issuing of payments that can benefit from new solutions. The collections process also stands to gain.
A paper-based collections process has all the risk and inefficiency issues of its equivalent disbursements process, but with the additional disadvantage of the time lapse between funds being received and formally accredited to corporate accounts. The adverse knock-on effects this has on working capital management can be serious. Digital solutions – and particularly the leveraging of mobile payments options – have the potential to turn this situation around.
Some global banks – including Deutsche Bank – have developed tools that allow corporates to present their invoices to retail customers electronically, via a mobile communications channel. This means end users (payers) can inspect and approve invoices online, and companies can then settle payments immediately by direct debit collection, card payment, or other legacy payment instrument.[[[PAGE]]]
The efficiency gains here are huge, and are but one example of how corporates can – if they are prepared to be open-minded and work closely with their bank partners – make this new world of emerging payments work to the benefit of their businesses.
We all recognise technology as a vital business enabler, and advances in technology can only lead to better business processes – and therefore drive success in an increasingly complex, global marketplace. While the onus is on banks to ensure they have the necessary capabilities to meet evolving corporate requirements, it is up to treasurers to develop a forward-looking commercial strategy – and see emerging payments solutions as an integral part of that strategy. In an ever-changing commercial world, innovation and adaptation are vital to success. If treasurers can bear this in mind – and work ever more closely with their bank(s) – they can take the lead in driving a new and improved era of commerce.
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