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Why mid-sized businesses are the driving force behind global B2B payment innovation

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By Spencer Hanlon, Head of Europe, Nium

 

Change is coming to global B2B payments, and it is being heavily driven by mid-sized companies. With a turnover between £25million and £500million, these are sizable firms that provide valuable products and services, create thousands of jobs, and contribute heavily to the global economy. But much like their multi-billion-pound competitors, mid-sized businesses can no longer achieve optimal performance with outdated payments models. Legacy solutions need to be retired, and they know it – and that’s why they’re driving a push for innovation and evolution within how payments are initiated, processed and completed. Their needs have already become known, but it’ll be up to new players in the payments space to ensure those needs are met.

 

Spencer Hanlon

Real-time payments are needed to fulfill expectations

Traditional payment methods are slow – they can take several days or weeks to complete and include fees that increase the expense of transferring money. When examining individual payments, this might seem like a small matter. But when carried across the high volume of transactions that mid-sized businesses make every year, the costs really begin to stand out as they encroach on the bottom line.

According to a McKinsey report, for instance, income from handling global payments made up a staggering 39% of banks’ revenues in 2020 – illustrating the high cost of processing transactions today. But that’s not the only issue – the Chartered Institute of Credit Management found that more than half (54%) of the UK’s medium-sized businesses are suffering as a result of late payments, with an estimated £17.5billion in late invoices owed to these firms. Imagine what would happen if the same percentage of UK salaries were paid late. People would quit and find another job! But in the world of traditional B2B payments, the system itself is broken and in need of a modern replacement.

Considering that businesses now expect most things to be on-demand, mid-sized companies are very excited about the prospect of switching from traditional payment methods to a real-time solution. A PYMNTS survey found that 56% of businesses believe that real-time payments – which can shorten settlement times and offer much greater control and flexibility – would boost their revenue.

 

Innovation is expected as mid-sized businesses grow and global B2B trading increases

B2B transactions make up the largest share of all financial transactions; according to EY, this will amount to approximately $150 trillion worldwide by the end of the year. Digital innovation – which accelerated significantly in the months following the pandemic – is certainly helping this along. While SWIFT transfers and other traditional methods are often plagued by regulatory obstacles and various pain points, leading to inconveniently long settlement periods that eat into cashflow, payments technology enables the opposite. Businesses now have access to a variety of tools, including payment corridors, that deliver quicker and cheaper payments without all the hassle. These advancements could be why (per the EY report) cross-border payment flow is growing at a compound annual growth rate (CAGR) of roughly 5%.

New entrants in the fintech space are also bringing innovation to a market that was historically ruled by legacy financial institutions. While these organisations certainly have a lot to offer, their attempt to shoehorn new solutions into old systems has not yielded the game-changing payments experiences that businesses want. By taking a different approach – instead of competing head-on with big banks, fintech businesses offer unique features like automation and application programming interfaces (APIs) – financial services startups can deliver a faster and more straightforward payments experience.

 

Automation and machine learning are enhancing the future of payments

There’s an extra benefit – and a competitive advantage – that digital payments provide to mid-sized businesses: data. They can use machine learning (ML) to better examine the data generated by each payment and gain greater insight into every transaction. This, in turn, could reveal valuable patterns and trends. APIs can also be added to the mix to more easily link payments directly to accounting and payroll software, providing a closer look at the data stemming from cashflow, accounting and business strategy.

As mentioned above, automation is another critical feature – one that is increasingly used to overcome the sluggish processes that typically postpone payments. Identity verification and fraud checks are no doubt important, but delays are no longer welcome in this fast-moving business environment. At the same time, security cannot be compromised, so businesses are turning to technology to handle these tasks automatically.

 

The world of payments is changing to keep up with evolving businesses

The B2B payments space has been long overdue for an evolution, and mid-sized companies are leading the charge in inspiring some of the latest changes. The sheer volume of transactions and the value they provide to their respective markets cannot be denied. But when payments are held up by outdated processes, their business – and the progress they’ve made – can come to a screeching halt. Those days are finally over, however, with the arrival of real-time payments, APIs, automation and other payments innovations.

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How can businesses boost employee experience for finance professionals?

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By Martin Schirmer, President, Enterprise Service Management, IFS

Over the course of the last year, The Great Resignation has seriously impacted organisations across the globe. Staff are quitting in huge numbers, leaving companies unprepared and struggling to fulfil their workloads. In fact, mass departures are happening at all levels of the labour market, as employees attempt to adapt to the hybrid working model and growing socio-economic uncertainty.

In light of this, optimising the employee experience (EX) to attract and retain talent has become a top priority for employers. Organisations have come to understand the necessity of taking immediate steps to drive employee engagement and reshape workplace culture.

The financial services (FS) industry is no exception to this trend. From increasing employee burnout to growing career dissatisfaction, the pandemic has exacerbated the need for transformation across finance teams. This is exemplified by recent data from Spendesk, which found that approximately 40% of finance professionals are willing to leave their roles or already have concrete plans to do so.

Organisations looking to get ahead of the competition must put in extra efforts to retain their existing workforce. The fact is that employee expectations and requirements have irreversibly changed, with more workforces becoming increasingly distributed. Today’s hyper-connected workforce values flexibility and simplicity, and it is organisations which offer these experiences that will succeed in the long term.

As part of this process, finance companies must look towards the power of technology to create seamless user experiences across devices. From automating workflows to improving overall efficiencies, Enterprise Service Management (ESM) can help organisations to boost user satisfaction and go that extra mile for their employees.

How poor EXs are driving finance teams to quit

With over 40% of employees spending a significant proportion of their time carrying out mundane, manual tasks, it is not surprising that poor EXs are having a detrimental impact on job satisfaction. Finance teams in particular have been slower to digitise core processes, leading to a heavy reliance on manual tasks. This not only increases the amount of time spent on each task, but also impacts the engagement levels of finance professionals who cannot focus on more strategic aspects of their roles.

As a result of the pandemic, flexibility has also moved to the forefront of finance teams’ desires. Given the fast-paced nature of this industry, the conversation surrounding work-life balance has increased rapidly. Failure to offer flexible working policies, coupled with a lack of technology to facilitate this flexibility, has led to poor EXs across the board.

Most notably, the overarching move to omnichannel, digital-first approaches has dramatically reset both customer and employee needs. Finance is the third-slowest running corporate function behind legal and IT. Operating in a competitive environment, 73% of finance operations are facing pressures to speed up, improve efficiency, and prioritise automation.

Mitigating the problem using technology

ESM, an offshoot of IT Service management (ITSM), is the cornerstone of smart digital transformation for organisations. It can help finance teams to streamline and automate routine processes, such as monitoring the status of service requests, approving expenses, sending invoices, and tracking payments. In turn, this will free up employees’ time, reducing the burden of manual tasks and enabling them to focus on the more strategic tasks.

Another advantage ESM can offer finance teams is the ability to adapt to each department’s minimum requirements for data privacy. Accounting, for example, needs additional layers of compliance built into the system.

ESM can also facilitate cross-departmental collaboration, helping finance professionals to communicate with the wider business and perform tasks more effectively.  Organisations can use ESM to incorporate all internal services into a single platform, offering employees a well-rounded view of the business and promoting a sense of community across all levels of an organisation. This will boost productivity, whilst enhancing visibility and control.

Ultimately, the current job landscape has brought with it a new set of challenges. Organisations in the FS industry looking to navigate the storm and retain top talent must refocus their efforts on bolstering the EX. Embracing a new era of technological innovation that empowers employees and boosts engagement is a critical step in this process.

 

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CBDCs: the key to transform cross-border payments

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Dr. Ruth Wandhöfer, Board Director at RTGS.global

 

If you work in finance, you’ll have been hearing a lot about central bank digital currencies (CBDCs) and the moves different markets are making towards using, regulating and evaluating the viability of moving to an economy based on digital currency.

We are already seeing progress in the research, piloting and introduction of CBDCs into the financial system. The Banque de France for example, recently launched its second phase of CBDC experiments in line with the “triple digital revolution” unfolding in the financial sector. The infrastructures of financial markets and fintechs, however, are not prepared to accommodate their security, stability, and viability.

This could be an issue in the not too distant future. Each year, global corporates move nearly $23.5 trillion between countries, equivalent to about 25% of global GDP. This requires them to use wholesale cross-border payment processes, which remain suboptimal from a cost, speed, and transparency perspective. In fact, the G20 cross-border payments programme considers improving access to domestic payment systems that settle in central bank money, as one of the key components in facilitating increased speed and reducing the costs of cross-border payments.

The current state of cross-border payments

International transactions based on fiat are currently slow, expensive, and highly risky due to today’s disconnected financial infrastructure, messaging, and liquidity. Wholesale cross-border payment settlement can take 48 hours or longer, which is not practical in today’s digital world. Even if not every market moves to CBDCs, in an increasingly digital era, cross-border settlements between central banks will unavoidably involve dealing with CBDCs. So, not only will we have different currencies, we’ll have different technical forms of currency being exchanged – digital and fiat – as markets adopt CBDCs at different rates, adding another layer of complexity to cross-border settlements.

While there is much anticipation about the opportunities CBDCs can bring, the adoption of this technology will only be widespread if payment and settlement capabilities are overhauled to allow for new innovations in currencies.  This need for transformation represents an opportunity to redesign existing infrastructure to support cross-border CBDC transactions.

The current cross-border payments system involves correspondent banks in different jurisdictions using commercial bank money. Uncommitted credit lines used in cross-border transactions are a potential risk for any bank that relies on credit provided by a foreign correspondent bank. Interestingly, there is no single global payment and settlement system, only a complicated network of interbank relationships operating on mutual trust. While trust has allowed financial systems to function smoothly, when it begins to fail, as it did during the 2008 financial crisis, the result can be catastrophic.

Following the crisis, the Bank for International Settlements (BIS) implemented the Basel III agreement, which required banks to maintain additional capital against correspondent banking account exposures. These risk-weighted assets impose a costly capital charge on positions held by banks at other banks under correspondent arrangements. While this framework helps combat risk, it neglects to address the inherent problems in traditional correspondent banking that contribute to these risks.

Making the case for CBDCs

CBDCs can offer an improvement in settlement risks and are certainly thought to have potential benefits by the BIS. If implemented correctly, wholesale CBDCs can indeed accelerate interbank transactions while eliminating settlement risk. They can also encourage a more efficient and straightforward method of executing cross-border payments by reducing the number of intermediaries.

It is likely the evolution towards CBDCs will initially see the financial market supplement rather than replace existing payment instruments with new types of digital currency. CBDCs will coexist with current forms of money in a wholesale context, and their payment rails will also work alongside the existing payment systems. In simple terms, CBDCs will need to be linked to the broader capital markets ecosystem and applications such as securities settlement, funding, and liquidity.

If built with an innovation-first mindset, the future of banking infrastructure should provide full interoperability and convertibility between fiat, CBDCs, and any other type of digital money used in wholesale payments.

The future of CBDCs

To unlock the full potential of CBDCs, a ‘corridor network’ will need to be formed. This involves combining multiple wholesale CDBCs into a single, interoperable network under common governance agreed upon by all central banks involved. The legal framework of this platform would then allow for payment versus payment (PvP) or, where applicable, delivery versus payment settlement.

Practical wholesale CBDCs appear to be on the horizon, either as a supplement to existing financial systems or as part of a transition to a digital, cashless world. Looking ahead, central banks would benefit from collaborating with fintechs that provide innovative cloud native technology to enable seamless wholesale cross-border payments without interfering with the flow of funds. If wholesale CBDCs are to become a reality, fintechs must be prepared to accommodate them.

 

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