Friction in Payments

(extract from an interview of F.Masquelier)

Payments are the lifeblood of global commerce, facilitating the exchange of goods and services between businesses and individuals. In the modern era of digitalization, payments have become increasingly diverse, and the need for efficient treasury management has never been greater. Despite the significant advancements in technology, however, friction in payments remains a persistent issue.

Preliminary remarks:

Friction in payments refers to any obstacle or impediment that hinders the smooth and efficient processing of payments. It can take many forms, including transaction errors and delays to high processing fees and regulatory compliance issues. These issues can impact cash flow, disrupt supply chains, and damage relationships with partners and customers. In this section on friction in payments, we explore the various factors that contribute to payment friction and the innovative strategies that corporates, SMEs or retailers can adopt to minimize these challenges. We explore the concept of taking friction out of payments and the various strategies businesses can use to streamline their payments processing. We discuss the latest trends in payments, including the advancements in real-time payments, embedded finance, and the adoption of open banking, and examine how these innovations can help businesses reduce payment friction.

Questions:

- What benefits do frictionless payments offer for corporate treasurers?

Corporates, especially those not that much sophisticated in terms of IT solutions and automation, are still suffering from frictions and noises related to their payments. It is key given increasing risks of frauds and errors (when manual processes are still applied), to revamp payments for making them more efficient and secured.

What is key, in my opinion, are the guarantee that payments have been received, including confirmation or potential access to a confirmation when needed, the guarantee that the requested value date has been applied, removal and avoidance of deducts and cost frictions, the speed of execution. It is exactly what SWIFT GPI was supposed to deliver. Therefore, we corporates see many benefits to answer your question: speed, 100% amount transferred and credited on counterparty account, faster cash-in and booking (the faster the better to improve working capital needs), confirmation upon request (important for M&A transactions) and security, which implies to make sure we transfer the funds to a correct bank account belonging to the account holder we want to transfer money to. The ways to smoother reconciliations are also essential for finance departments. These are the main benefits corp’s are looking for.

- Some of the benefits of instant payments in the retail world are obvious, but what are the biggest impacts on the corporate treasury department of these initiatives?

Instant payments, if successfully implemented, can be revolutionary for corp’s. It could be what EU Commission is looking for: an effective competitor to VISA & MC. But to avoid problems faced in the US, we need to secure them, and IBAN-name check will be important, in our view. It is an opportunity to offer alternative methods of payment to customers and be closer to operations. We can as treasurers bring added value to business operations. However, instant payments should also be “bulk” (important for some NGO’s or some corp’s and insurance companies). So, it will be a new tool in our payment arsenal we are expecting, if properly fit and designed. Treasurers are closely contemplating the new e-payment method, although it will mean more work and complexities. It can also enable direct crediting on the bank account 24/7. Potentially treasurers will one day clean and zero balance the accounts several time a day. Who knows… The impacts will be technical, IT and indirectly on ways to manage cash. Link with client management and credit control will be important to free faster client credit facilities and to sell more and more quickly.

- How can we have frictionless payments if we also want rigorous fraud prevention?

In my view, it is not incompatible: we can mitigate frictions whilst reducing frauds. The IBAN name check is a good example on instant payments, and it can be extended to all types of payments. Speed is a way (again if properly managed) to reduce risks. The less manual and framed a payment will be the less fraud corporates will face. Here, we at EACT always encourage robust and rightly shaped regulations to frame these types of transactions. However, security should ideally (maybe a wishful thinking) not imply additional costs. For instant payments we clearly asked for a free IBAN name-check process executed by banks.

- In 2021, Starling Bank chief Anne Boden told the UK Parliament that open banking had failed… how does that assertion stand up two years later?

It is a tricky question for corporates and more one for bankers.

I guess Open Banking did not fail at all. It is simply growing and maturing slowly. It was a soft revolution. We should push a step further. I do believe the PSD2 under review will be corrected in its third version and even open more banking data base. We only are at the early stages. I am confident. It will also be a fantastic differentiator for banks and open opportunities for the pioneers, the smartest ones, and the proactive banks. We can here in Europe as for ESG for example, take the lead.

- How might embedded finance generate insights that treasurers can use to support/enhance business operations?

I think embedded finance and new non-bank offering are good for customers. New financial services offered by non-banks make sense. But never at the expense of control, regulation, and compliance. We are not in favor of double-level of obligations. If you want to offer banking services, behave as a bank. I am afraid of fierce and unfair competition. And behind payments, I believe bank can also offer open platforms or BaaS.

Embedded finance looks like “libertarian” and it is fine but let’s pay attention to respect of fair rules and similar securities. And for banks, if you offer new services, use BaaS platforms to differentiate your offering.

- How are bank APIs helping to remove friction from payments for treasurers?

API’s use is increasing overtime. Looking at the last EACT survey, in terms of technological innovations, it appears that in the next 12 months, the priority will be placed on Data Analytics (#1), APIs (#2), the Cloud solution and Treasury as a Service (#3), and finally Robotics Process Automation (RPA) (#4) Artificial Intelligence & Machine Learning (#5), followed by Crypto currencies & CBDC technologies (#6). However, the ranking only slightly changed, we feel a greater appetite for the other “new technologies” in treasury. Regarding APIs, they have shown the use banks and corporates can make of them, to enrich reporting. Contrary to the recent excitement for Bitcoins and announcements around CBDC, cryptocurrencies do not seem to be a priority for treasurers. Nevertheless, it is higher ranked overtime. All-in these answers show a certain lucidity on the part of treasurers who seem realistic in their use of new technologies. API’s are in the infancy and will deliver great value soon.

How can API’s help treasury? By alerting issues around payments, by analyzing behaviors and detecting abnormal movements and flows, producing ad hoc reporting, by linking customers and banks to give access to data which crunched can deliver new useful reports. But it requires co-creation between clients and banks.

- What role can automation technologies such as machine learning and intelligent technologies such as AI play in removing payment frictions?

Prevent errors, mitigate risks of fraud, removal or identification of bad behaviors, enhancement of internal controls, free time of corporates to allocate it to more added value tasks. Regarding AI I am a bit more skeptical now… maybe not for payments at inception, but it will come soon and bring value. I see more immediate value of AI for CFF. It is coming but we need solid and well-organized data lake to access data.

Looking at the Top priorities for Corporate Treasurers:

This year the results have changed significantly. Fundamental and pure financial issues are back at the forefront of the treasurers’ priorities.  Digitalization of treasury, including AI and robotics comes only in 7th position. It is coming but slowly… We have other priorities to sort out first.

Should treasurers experiment with these technologies directly or leave it to the third-party solution providers?

Difficult to answer this question. Always better to experiment tech’s directly. But depending on your size and resources, outsourcing may offer some benefits too. It is always good to have choice and alternative solutions. Costs will be an issue as well as time and expertise to implement and test, I guess.

- What critical payments developments should treasurers pay closest attention to in the next couple of years?

I do believe there are couple of critical developments to closely follow. For example, digital currencies which will come soon and all regulations around new techniques to secure use of them; instant payments, as early mentioned; full roll-out of SWIFT GPI (we are still far from a full roll-out and there are headroom for improvements); IBAN name-check which is absolutely necessary to prevent frauds on all payments; automation (to the next level -what I call hyper-automation); new technologies to enable smoother but faster payments; enhancement of Internal Control’s which are key; potential consequences in terms of cash management if accounts are credited 24/7, what we call real-time collection/real-time payment and reporting, and eventually (it is not a comprehensive list) the “more exotic payments”, which are still an issue. However, there are solutions like StoneX, Transfermate, Ebury, … to reduce costs, make payments as ACH and reduce frictions and guarantee value dates, …. Here again promising solutions that need to mature further. Great expectations from our members across Europe.

(interview of Francois Masquelier, Chair of ATEL – Luxembourg)