Powering the Efficient Economy: Innovation in Payments & Collections

An HSBC Industry View

by Helen Sanders, Editor, in conversation with Mark Evans, Head of Payments Advisory, Global Liquidity and Cash Management, HSBC

How would you characterise the payments landscape in which TMT companies operate, and how is this changing?

Technology, media and telecom companies are expanding internationally at an unprecedented speed, fuelled by customer demand on one hand, but newly accessible business models on the other, particularly in e-commerce, m-commerce and the growth of multi-seller marketplaces. It is in these industries too where some of the technologies that are shaking up the payments landscape are originating, from blockchain through to the internet of things, biometrics, wearables and big data. Technology companies in particular, therefore, play a dual role, both as consumers of payments and collections on one hand, and providers to banks and the wider retail and corporate community on the other.

As TMT companies continue to pursue international growth, what would you identify as some of the biggest challenges experienced by TMT companies, and what opportunities exist to overcome these challenges?

One of the biggest dilemmas for TMT companies is how they can take control of their international payment operations whilst maintaining central visibility and control over cash and payments processing. Some of these payments are familiar to every company operating internationally, such as regular supplier, staff, tax and customs payments. However, technology and media companies in particular face additional difficulties:

Firstly, for example, technology companies that are most frequently headquartered in United States incur most of their manufacturing costs and generate a large proportion of their revenue outside their home market, particularly in Asia. Techniques such as payments-on-behalf-of (POBO) and effective repatriation strategies are vital in resolving this mismatch in where the funds are both used and generated, and where they are ultimately required.

Secondly, technology and media companies face the additional difficulty of paying a large numbers of beneficiaries such as development and content providers, where traditional forms of payment are less suitable. New forms of payment are emerging to meet this changing demand, such e-wallets.

e-wallet solutions have rapidly gained traction worldwide, but the way in which these solutions are deployed, and the purpose they fulfil, often differs significantly. In western countries, for example, Paypal is now a common means of payment for retail ecommerce transactions, with even greater penetration in parts of Asia: in China, for example, around 18% of retail transactions now take place via Alipay. In Africa, mobile wallet solutions such as M-PESA have played an essential role in digitising payments and increasing financial inclusion. Increasingly, however, there are new e-wallet solutions emerging that meet corporate as well as retail payment and collection needs. Technology and media companies are often generating millions of payment obligations every day to pay royalties and other fees to developers and content providers. As many of the beneficiaries are individuals or small businesses, it is neither practical nor cost effective to make payments by card (with the exception of prepaid cards in some cases). Similarly, acquiring and maintaining settlement instructions for each of these beneficiaries would place an enormous burden on the accounts payable function. Many of these technology and media companies have established regional or global payment factories, so the cost of making cross-border payments would be prohibitive bearing in mind that beneficiaries are often located across the globe.

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The e-wallet concept has a valuable role to play in addressing these challenges. Effectively, the e-wallet switches the onus from payer to payee: rather than a company ‘pushing’ payments to payees, the onus is on the beneficiary to ‘pull’ payments via a self-service model. Payments that are due to each beneficiary are recorded and aggregated into an e-wallet. Beneficiaries can then access their their e-wallet statement via an online solution, decide when they wish to be paid, and via what payment method.

This is just one of the opportunities that e-wallets present beyond the type of solutions already in use, but the potential is enormous to facilitate e-commerce and revolutionise business models for both the supply and delivery of services. Other emerging payment types are also starting to make an impact on international business models. Instant payments, for example, have already been introduced in the UK, with considerable success, and countries such as Australia, Singapore, the United States amongst others are now exploring instant payment solutions. In addition, we are seeing the increased use of innovative mobile payments worldwide, again with the potential to transform business models.

Presumably, at the heart of every successful business model is not only how a company pays, but also how it is paid?

Absolutely. Many TMT corporations operate regionally or globally, with many thousands of customers, both regular and one-off, so collections can be a huge challenge. Collections are closely tied with the quality of the customer experience, so sellers need to provide customers with a convenient and secure payment experience. TMT companies themselves need incoming payments to be cost-effective, predictable and easily reconcilable. It is often not practical or desirable to hold accounts in every country and every currency, so collections-on-behalf-of (COBO) solutions and virtual accounts can play a valuable part of a solution in some cases, but they do not solve the problem entirely.

For one-off transactions, companies typically need to support as wide a range of payment instruments as possible, to attract the widest possible range of customers, some of whom will not have cards and/or bank accounts, particularly some younger purchasers and media users. For subscription-based models, companies need to maximise the use of reliable, predictable payment methods that encourage long term subscriptions, particularly direct debits, in markets where these are available. Although recurring card payments, for example, may be convenient to set up initially, for example, there is inevitably a drop off in revenue as cards expire and are not renewed. Payment cultures too determine how realistic it is to achieve a high proportion of direct debits. In Germany, for example, use of card payments is relatively low, but 70-80% of people use direct debits.

Currency exposure and erosion of value as foreign currency payments are exchanged into base currency is often a problem for technology and media companies operating internationally. While foreign currency risk and the need to maintain multiple foreign currency accounts can be alleviated by an automated FX payment conversion service offered by a bank, it is difficult to reconcile the final amount, particularly if other charges are deducted. The use of virtual accounts can be very valuable in addressing this. Companies can collect money through a local account, creating a more positive experience for customers and aiding reconciliation, but without the cost or resource overheads required to open and maintain physical accounts. At the same time, flows are physically located in a single account, therefore supporting liquidity and risk objectives.

We’ve discussed some of the issues experienced by technology and media companies in particular, but what about telecom companies?

Telecoms play a somewhat unique role in that they fulfil an important function in the payments landscape in many countries as providers of a variety of mobile money solutions. These include, for example, mobile wallets in countries with large unbanked populations in particular, mobile payments to support m-commerce transactions, typically linked to card or other payment methods, and mobile-to-mobile payment solutions that transfer value between payers’ and payees’ bank accounts. Supporting these various mobile money solutions brings different challenges, but key to their success is effective and secure integration with banks or merchant acquirers that underpin these services.

In addition, telecom companies demonstrate some of the characteristics of technology and media companies, so similar solutions are often suitable. For example, a company ‘bundling’ media and apps into their services will need to pay smaller, often widely distributed companies or individuals for these assets. Similarly, the importance of convenient, secure collection methods that encourage long-term relationships and stable flows are vitally important when setting up either fixed and mobile phone contracts.

Given the pace of change, how is HSBC responding to, and anticipating the demand for innovative payment and collection models?

We focus our innovation agenda on powering the efficient economy, which involves five key areas of activity, namely:

• Mobile transformation: the potential for TMT companies both to innovate and harness mobile technology continues to grow, and we are engaged in a number of prototypes across a variety of industries and business cases. Mobile technology is already playing a transformative role in replacing cash and physical payment instruments such as cheques, but this can extend even further, including across borders.
  
  
• International payments: HSBC’s international reach and depth in the markets in which we operate positions us as our clients’ partner of choice for payments and collections globally. Our aim is to intermediate global fund flows with industry leading security and convenience, and deliver value-added solutions that meet the specific needs of our clients according to their industry and objectives.
  
  
• Retail e-commerce: In addition to consumer payment services in several markets, such as UK and Hong Kong, we have identified and work closely with online marketplaces and e-commerce aggregators to facilitate thriving retail communities. Our particular strength lies in expanding the reach of these marketplaces across border where our expertise and solutions in foreign exchange and international payment and collection regulations, practices and cultures offer particular value.
  
  

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• B2B e-commerce: Our strengths in both cash management and trade finance are essential in smoothing the transition to more efficient, timely settlement models for both buyers and sellers, with exciting opportunities to automate supply chains and access innovative forms of financing.
  
  
• New technologies and business models: Banks are tasked to adapt to, and anticipate the technologies that are transforming the needs, expectations and practices of individuals and businesses globally. We launched our expanded Singapore Innovation Lab in 2015 to explore and innovate in areas such as domestic and international mobile payment and collection services, payments to wallets and solutions for e-marketplaces, with substantial investment in converting innovation and intelligence into practical solutions for customers. New technologies play a major part in this, from our participation in the R3CEV/ Distributed Ledger Group (DLG) to explore a variety of practical blockchain applications through to open API, internet of things, biometrics, wearables and big data.