Trade and commerce are now being driven by the global digital common market. What is this market all about and how is it transforming payments.
The global digital common market has the following characteristics.
- Worldwide availability round the clock
- Sharing, outsourcing and other new areas of work
- The individual as the enterprise
- Global SMEs
- Near real-time, mobile-enabled
- Cash and cheques are almost entirely absent
- The use of mobile applications to transact is a key reason for its growth
It is where we now tend to buy and sell.
The highly visible commerce between business and consumer(B2C) is underpinned by the larger trade between businesses(B2B). After all, every time we tap a card or click a pay button, there is movement in the global supply chain and a ledger entry is made somewhere. It is not surprising, then, that international B2B payment is bigger (Source-Saxo Payments quoting Mckinsey, Payvision Blog; please see list of sources below). Yet, B2B payments remain at odds with the practices of the digital common market. These are still predominantly made by cheque, wire transfer, and correspondent banking.
There is possibly, too, a lack of knowledge about the actual costs of cross-border transactions and a feeling of helplessness about tackling this and other issues. Additionally, there is less than optimal visibility on the arrival time of payments and the actual cost of transaction(Sources-White paper by Saxo Payments; McKinsey On Payments Vol 9 published by McKinsey and Co; please see below)
The gap between B2B and this emerging world can be illustrated with a simple example. Let us take a fictitious participant in the on-demand economy, a bright software engineer called Bill.
He frequently purchases books from online stores such as Amazon and pays with his credit card. These books are usually shipped from overseas. Bill is able to track these deliveries till they arrive at his doorstep. The online store receives funds into their accounts fairly quickly, depending on well-established settlement timelines based on credit card payments.
One might argue that this is an example of straight through processing both ways. Now, as an entrepreneur, Bill freelances for companies around the world. He does so directly and sometimes through intermediaries. Payments for his work frequently come across the border. In this case, Bill has to fulfil and ship his work quickly yet wait for payments patiently. He is unable to track his receivables on an ongoing basis. The information on his payment advice may not be not very detailed. Costs may be deducted from his fees along the way for recovering that lost income.
Of course, if Bill were the manager of a very large corporation, he might prefer to stay with his corporate bank. But the global digital market is not only about such organization and relationships- indeed, many of its key actors are very different from these traditional corporates. Bill is one of those actors and has to endure a payment process that has little relevance to him as an entrepreneur.
It stands to reason that this common market should have a payments architecture that is aligned with its business architecture. What would that be made of? Here are some of its components- in-app transaction capability, seamless navigation through the payment chain, use of APIs, low cost and high speed of money movement, security, richness of data and easy access to funds. How will it be achieved? This requires a fundamental change in approach. The core of business payments has been hitherto centered around the banks. Of course, banks will continue to remain the final fund repositories, the place where the money goes after it circulates. Now the core of business payments, specifically for SMEs and sole proprietors, has to be aligned to wallets.
Wallets delink the creation of value and movement of digital cash from bank accounts. This increases security and flexibility at the same time. A wallet is fungible. A freelancer can receive compensation for work, pay bills with it, transfer money to his/her dependents and make online purchases. In some cases, he/she can tap the phone and make an in-store purchase too. All the businesses need to do is download an app, register and get going. With friendly user-interfaces, inbuilt risk controls and presentment of electronic invoicing, a payment approval can be given in a matter of minutes. The funds themselves can move quite fast, unhindered by traditional frameworks which create multiple hops and accompanying fees. These are possible because wallets are backed by API-based infrastructure, allowing both external entities and internal data flows to connect and get presented easily. Of particular importance is the richness of data made available to the paying party and recipient of payments. A small business owner can create an invoice via the wallet app, populate it with particulars of work done, attach details(time sheets, screen shots, other proof of work) and send it to the customer. This can go from one wallet to another in seconds, irrespective of geography. The customer can download and scrutinize the invoice, approve the payment with a touch of an application button and authorize the transfer of funds.
The approving manager would take cognizance of appropriate funds pools set up for this purpose. The vendor at the other end can receive more information, should that be available, such as the order number against which payment was released, the product number or code corresponding to that payment and confirmation of pricing calculation. This may not be always relevant, but if it is meant for high-frequency, variable payments for freelancers, it carries weight. While wallet networks are highly autonomous, they sometimes do carry deep relationships with card issuers, allowing payment beneficiary choice in how to use their payments. This further enables processing and settlement via the card networks. In the same way, some wallet services integrate directly into debit and allow the transfer of funds directly into bank accounts. This suppleness contributes considerably to the unbundling of traditional B2B methods.
It must be pointed out that there are some conditions for an interwallet architecture to work. The underlying operating system must be feature-rich, resilient and open. External processes and entities must be able to connect via APIs. Workflows from the front-end to the back must be designed to create paths in line with intent rather than replicate traditional transaction journeys. Risk-countering measures, know-your-customer processes, and integration with regulatory compliance enablers are basic necessities. Integration into multiple funds transfer rails is of great importance, both for domestic as well as cross-border payments. The end goal must be transparent displays of costs, including the impact of forex, a choice of rails(where possible) and the delivery of payments within the fastest shortest time possible. Certainly, both cost and time have to be clear advantages that stand out from the rest of the market. Then there is clearing and settlement. It must never be forgotten that the end goal of an interwallet architecture is the most optimal straight-through processing of transactions. Regardless of where the payment eventually lands, a sign of excellent product thinking would be the creation of an independent clearing and settlement process.
Let us be mindful that while we still hear T++ terms for settlement, real-time or faster payments for domestic transactions is no longer an unknown.
While concluding, one point that should be made is that the business of payments is the business of data. After all, payments are the monetization of transactions and transactions are representative of data movement. This has a lot of implications for the digital economy as small and individual-driven businesses start their meters and bill their customers for a wide variety of services. Eventually, paying parties should be able to link their payouts to suppliers and vendors to the productivity of their received services. Similarly, suppliers and vendors (principally SMEs and sole proprietors) must be able to link their received payments to the utilization of their services in the marketplace. The ideal interwallet network will make this possible.
- “Criterio’s State of Commerce Report” quoted in Payvision Blog
- “Commercial Payments in Asia Pacific- Is there a new opportunity?”. Presented on 14-15 May 2015 in Singapore by McKinsey and Co.
- “White Paper on Cross Border B2B Payments –Today’s Landscape, Tommorow’s Opportunity”. Published by Saxo Payments and Banking Circle.
- “2016 World Payments Report”. Published by Capgemini and BNP Paribas.
- “Rethinking Correspondent Banking” in McKinsey on Payments Vol 9 Number 23. Published by McKinsey and Co.