Instant and new e-payments (interview for an E.B.A. webinar)

Instant and new e-payments (extracts from an interview of Fran?ois Masquelier for an E.B.A.)

It is coming soon! BUT do enterprises really want / need this? Is Open Banking still the next big thing? What Technology does the?Treasurer truly need? So where do we go from here?

Q.???What about centralized vs decentralized treasuries or finance functions – what works best??How can banks support this?

After the Covid crisis, we draw 2 major lessons:

1.????to prevent future crisis and challenges, we need to further centralize (and specialize) treasury function, with experts and

2.????we need to further automate processes to enhance internal controls and increase efficiency.

Therefore, I would answer centralization. I still do not see what advantages of could be to decentralize the treasury function.

At a moment when recruitment is difficult, it is essential to be optimal in terms of efficiency to better allocate limited human resources. Centralization remains a best practice in treasury we all tend to.

Regarding the role banks could play in this approach, I think that by delivering better services, by developing solutions with API’s and by co-creating with customers, they can certainly bring a lot of useful support to their corporate customers.

But they need to revamp their offer and to consider a new corporate platform of services, especially for SME’s. I am also convinced they should develop these corporate solutions, platforms, and additional services, to differentiate themselves. They cannot at this stage, for many reasons, the main one being the IT legacy and absence of agility. Now they simply play on API’s and in buying fintech’s for better servicing customers.

Q.???What are the key market trends in payments and why??What are the goals of the future near and long-term?

We have clearly seen a lot of new payment methods. To give a good and expected support to operation, treasury must be able to deliver / offer alternative sources of payments (for customers) and should also pay in different ways. I keep thinking that by offering alternative e-payment methods, treasury can give a competitive advantage for businesses and affiliates. It is a fantastic opportunity to be closer to operation and to show how to deliver value to the business. I do believe in partnership with affiliates. In terms of trends, I see the SWIFT GPI as a main trend, payments in exotic currencies via specialists, instant payments, and payment upon delivery.

Q.???What role has and is digitalization playing in the transformation of corporate enterprises… what are the key ingredients??

The digital transformation is the second listed priority for corporate treasury and confirmed after the covid crisis (see EACT annual survey 2022). We all agree we need to further digitalize and automate processes. We need to get rid of spreadsheets.

We need to limit or to exclude any single manual process.

All processes should be paperless, without any exception. Despite the fact many treasurers are on the road for transforming their organization, many treasuries are still far from being fully digitalized. Many are still simply changing their TMS’s. Therefore, yes, we are on the road but in general far from destination. The key ingredients are: solid sponsorship from the CFO, support from the C-level, allocation of ad hoc budgets, selection of the right product and a top integrator, together with a good project management team. However, what is surprising is the general absence of IT strategy, IT architecture vision and it is therefore complicate to set up the right IT organization if you don’t know what you want to achieve.

I always recommend first a diagnosis, a clear and approved roadmap and then the allocation of budget, internal resources, and external integration team. Revamping of the IT structure, often a long process given the complexity and number of applications used by treasury.

o??What are the necessary first steps, the blueprint or road map for companies looking to embrace digitalization?

As said, first a diagnosis to identify gaps, potential problems, weaknesses and to determine what need to be implemented. You should first know where you want to go before being on the road. It seems obvious but often forgotten. What is essential is to identify areas for enhancements and all means to increase internal controls. The missing piece is and remains the IT architecture and IT strategy. ?

Q.??Instant Payments – where is the demand coming from? Is it all retail? ?Is the corporate market really calling for a 24/7 global payment system or is it more “ideological” / nice to have??

The demand is clearly coming from operations and retail. Here treasury is there to serve affiliates. It depends on the underlying businesses and your activities. Not all Corp’s have need for instant payments. With instant payments, you can send and receive electronic payments in euro anytime and anywhere. In some countries, you can already send instant payments via mobile phone, giving you the same experience in terms of speed and convenience as with cash, for example when sharing a dinner bill with colleagues or lending some money to a friend or relative. In e-commerce, instant payments eliminate the risk for online merchants of not getting paid, as the release of goods and services can be easily synchronized with the payment. For business-to-business payments, instant payments improve cash flow, make it easier to manage funds, reduce late payments and speed up the payment of invoices. Instant payments can also be a vehicle for financial inclusion. According to EU law, all EU citizens have a right to open a basic payment account regardless of their financial situation or place of residence. The possibility to send and receive instant payments from a mobile phone can be an incentive for people to either access financial services for the first time or use them more often. We live in a world of instant messages, yet it can still take as long as a business day to complete an electronic payment. And if we make an electronic payment at the weekend or on a bank holiday, it might not even begin its journey to the recipient until the next business day. With instant payments, the money is made available within seconds on the account of the recipient, 24 hours a day, 365 days a year. In some countries, this is already possible. To answer your question, it is more than a nice to have, it is a market need and a reality. But it should be possible in every European country, not only for euro payments you make to a person or business in the same country as you, but also to those in another European country. To make this a reality, European payment service providers have agreed on a common set of rules and standards for instant payments, the so-called SEPA instant credit transfer scheme.

Q. Instant Payments – B2B/Wholesale vs Retail… what are the pros and cons depending on the client base??In B2B does the industry matter? ?Does geography matter.

·?????24/7 processing, without cut-off constraints or T+X settlement times

·?????Allows just in time payments, improving working capital and supplier satisfaction

·?????Reduces credit risk in the supply chain, accelerates the flow of goods and services and avoid delays.

·?????Same-day value use of funds, improving liquidity management.

·?????Immediate confirmation of payment success/rejection, increasing flow of certainty

·?????Transparent fees.

·?????May facilitate the transfer of rich information to enable automated reconciliation and account posting.

Payment service providers are not obliged to offer instant payments to their customers. The ECB encouraged payment service providers to make instant payment solutions in euro available to their customers as of November 2017. Some have done so and some plan to do so later. Experience from countries that are already using instant payments (such as Denmark and Sweden) shows that they quickly become very popular. In short, pro’s & con’s: it creates value for operations and enhance working capital, while limiting risks. Once applied, I do not see downsides and con’s. It simply enlarges the range of solutions.

Virtuous value cycles

For immediate payment initiatives to become a reality, however, there need to be benefits for the whole spectrum of stakeholders. In fact, all users benefit from instant payments which is one of the key factors creating momentum in these initiatives. National governments are motivated to support immediate payments as increasing both liquidity and the speed of the payments system brings economic benefits. For central banks, there are also advantages to increasing the velocity of cash, while instant payments also encourage consumers and businesses to move away from high risk, high-cost payment instruments such as cash and cheques. Banks too are set to benefit. Firstly, they will derive value from incremental liquidity, but more importantly, instant payments will allow them to deepen their cash management proposition and therefore provide better services to customers. Some of this additional value is likely to be derived not from an instant payment’s infrastructure alone, but also from the overlay services that will undoubtedly evolve to provide more specific functionality for specific groups of users or types of payment. For example, businesses making supplier and employee payments, governments paying state benefits and consumers paying other individuals, utility bills, suppliers and making retail purchases whether in store or online all have quite distinct payment needs. As instant payment capabilities develop, leading banks will also be investing in delivering innovative payment solutions through mobile and other digital technologies to meet the specific needs of different payment users.

Q.???Most supplier payments are NOT instant…Certainly not all retail payments are Instant! o??Will the legal requirement i.e., to move towards all banks offering Instant Payments in the EU change everything??

The ECB is interested in instant payments because it is responsible for the safety and efficiency of electronic payments in euro. To promote innovation in payments, they work with the financial industry to agree on common rules and standards and remove any remaining obstacles to payments across countries within the EU. The ECB also chairs a group – called the Euroe Retail Payments Board?– which brings together representatives of providers and users of payment services, who work together to make the payments market in the EU more integrated, innovative and competitive. The Euro Retail Payments Board has driven the work on pan-European instant payments and is monitoring progress as they become more widely used. To make it easier for more payment service providers to offer instant payments, the ECB is developing a new service that will enable them to settle payments immediately, safely and around the clock. The Target instant payment settlement (TIPS) service has been launched in November 2018 and provides additional incentive for payment service providers to offer instant payments because it will make it easier for them to reach the customers of other payment service providers across Europe, and to do it at a low cost. As a result, instant payments should soon become commonplace across Europe.

Q.???According to the EU commission about 1/3 of all banks still do not offer Instant Payments… and only 11% of all payments were Instant at the end of 2021…

It proves we are only at the early stages. I should increase overtime. Cash killer or cards replacement is the good question. Although competition always helps. One common query relating to the growth of immediate payments is whether these will mark the end of card payments. After all, card payments already allow cross-border, cross-currency immediate payments, they are widely accepted globally, and payers benefit from the credit element. As a result, we are unlikely to see the demise of cards in the foreseeable future. From the evidence so far of established instant payment schemes, use of cards has not been eroded. In the UK, for example, card usage continues to grow year-on-year, even though Faster Payments were introduced nearly a decade ago. Instead, the use of cash and cheques is declining. A likely scenario is that instant payments will complement cards by meeting payment needs that cards currently cannot support. Card usage is more common in some countries than others, and they are not applicable to every payment user or payment type. For example, cards are rarely suited to high value transactions because of credit and transaction limits, and do not meet the full spectrum of payment needs, such as consumer-to-consumer payments, salary payments in most markets, or larger business-to-business payments. While cards are ubiquitous, cost-effective, and convenient for both customers and merchants, the costs to merchants are higher than the costs of discounting offered by banks on the merchant’s receivables, and they may need to deal with multiple acquirers for better coverage. In conclusion the ratio will keep growing faster and faster.

Q.???Will a more homogeneous offering make a difference? ?

I should help. Standardization helps and it is the goal.

Q.???Will an EU ruling also force a harmonization… Will all banks do things in the same way? Does it matter?

Instant payments are an important illustration of how banks, central banks and infrastructure providers are collaborating to create the efficient, secure payment infrastructure of the future, which has the potential to disrupt existing payment practices considerably. In addition to the wider industry initiatives discussed above, banks are also evaluating opportunities to combine distributed ledger technology (blockchains) and instant payments to connect to each other directly and settle cross-border payments between banks as book transfers. This fundamentally changes the concept of correspondent banking, with the potential to reduce costs, maximize access to liquidity, and revolutionize supply chains. However, while instant payments are becoming more widely adopted at a domestic level, the ability to make immediate cross-border payments 24/7 remains a promise rather than reality. It is too early to say which of the various instant payment initiatives that are under way will ultimately succeed, but the level of motivation, expertise and technology that is coming together, with the support of regulators, to meet the needs of the payment user community is encouraging. It is not only instant payment infrastructures themselves from which payment users will ultimately benefit, but also the overlay services and specific bank solutions that will leverage these infrastructures to enhance consumers’ and businesses’ ability to make payments efficiently, robustly, and securely… and quickly.

Q.???What effect will Instant Payments have on the liquidity management of corporates today… especially if TMS’ and ERPs cannot work in real-time & leverage the advantages… ?In this case, are there actually any? (i.e., if a company received a credit in real time but only “sees” this a day or 2 later… what is the benefit?)

?Indeed, faster payments are fantastic for operations. Nevertheless, treasury cannot make use of it during the day. It will be managed the next day, at best. We could imagine one day having several readjustments of cash position during the day. Real-time cash management requires tools to do it. We are not yet there, I guess. The next step in the development of an efficient digital economy, and to extend the real time experience to businesses and the wider financial supply chain, is to accelerate the payments process that underpins consumer, business, and government transactions. A crucial means of addressing this is the development of immediate, or instant payment schemes. Already mainstream in some countries, instant payments will play an increasingly important role in facilitating international commerce and supporting the business models of the future. It will offer many opportunities for corporates to partner with operations and to extend their roles.

Q.???How important is Open Banking in the Wholesale space?? ?Is Open banking enough… or do we need Open Finance???Have banks really opened at all? Do we need PSD3?

Difficult to answer this question. At least the PSD2 is under review and should be followed by a PSD3. In my opinion, it will not deliver major changes. It should include the digital currencies and LEI for aligning IBAN and make sure the beneficiaries are the one corresponding to the account. I am not convinced we need an PSD3.

Open finance on top of open banking? It is another question. Maybe, the next step. Open banking is also known as "open bank data." Open banking is a banking practice that provides third-party financial service providers open access to consumer banking, transaction, and other financial data from banks and non-bank financial institutions using application programming interfaces (APIs). Open banking will allow the networking of accounts and data across institutions for use by consumers, financial institutions, and third-party service providers. Open banking is becoming a major source of innovation that is poised to reshape the banking industry.

TAKEAWAYS

Open banking is the system of allowing access and control of consumer banking and financial accounts through third-party applications. Open banking has the potential to reshape the competitive landscape and consumer experience of the banking industry. Open banking raises the potential for both promising gains and grave risks to consumers as more of their data is shared more widely.

Interview of Fran?ois Masquelier Chair of EACT made on 29th November 2022

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Disclaimer: This article was prepared by Fran?ois Masquelier in his personal capacity. The opinion expressed in this article are the author’s own and do not necessarily reflect the view of the European Association of Corporate Treasurers (i.e., EACT).