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How global payments are changing

In March a sur­vey of 1,000 small and medi­um-sized UK busi­ness­es revealed 40 per cent trade inter­na­tion­al­ly and anoth­er 6 per cent are plan­ning to do so by 2021. The sur­vey, con­duct­ed by YouGov on behalf of mobile net­work provider EE, found 82 per cent are cur­rent­ly or plan to trade with West­ern Europe and 55 per cent with the Unit­ed States.

This actu­al and poten­tial busi­ness is under­pinned by the abil­i­ty of firms to make cross-bor­der pay­ments as effi­cient­ly as pos­si­ble. In Europe this is about to change con­sid­er­ably under the Euro­pean Commission’s revised Pay­ment Ser­vices Direc­tive (PSD2). This reg­u­la­tion, due to be finalised in 2017, will force banks to allow third-par­ty ser­vice providers to offer pay­ment ser­vices to the bank’s cus­tomers with­out putting up any tech­ni­cal bar­ri­ers. A con­sumer could sign up to a pay­ment app and it would be able to make trans­fers to and from their account on their behalf.

“There are prob­a­bly a cou­ple of inter­est­ing areas for mer­chants; one is access to bank accounts and I think the oth­er is the require­ment for two-fac­tor authen­ti­ca­tion to be under­tak­en on every trans­ac­tion with­in the Euro­pean Eco­nom­ic Area,” says Iain McLean, head of retail devel­op­ment at Mas­ter­Card UK and Ire­land. “I think banks are very well pre­pared for this, yet retail­ers, even large retail­ers, haven’t quite appre­ci­at­ed the impact it could have for their busi­ness.”

The effect on retailers

25% of SME's believe growth will come from international tradeThe poten­tial this holds for finan­cial tech­nol­o­gy (fin­tech) firms to dis­rupt the pay­ments space is con­sid­er­able. In the Capgemini/BNP Paribas World Pay­ments Report 2016, 71.4 per cent of banks and 69.7 per cent of non-banks thought fin­tech firms were a chal­lenge for trans­ac­tion bank­ing. If fin­tech firms devel­op new tech­nolo­gies to facil­i­tate pay­ments, they could poten­tial­ly dis­in­ter­me­di­ate banks from the trans­ac­tion part of the pay­ments busi­ness.

The pri­mar­i­ly effect is like­ly to be around con­sumer expe­ri­ence and pro­tec­tion, for exam­ple an improve­ment of accep­tance or fail­ure rates.

The growth of dig­i­tal busi­ness removes the phys­i­cal ele­ment of cross-bor­der oper­a­tions

Simon Bai­ley, direc­tor for pay­ments and trans­ac­tion bank­ing at tech­nol­o­gy provider CGI, says: “There are a set of tech­nol­o­gy changes going on under­neath pay­ments, some of which are slight improve­ments on the cur­rent arrange­ments, some of which are rad­i­cal­ly new approach­es, but which should be invis­i­ble to a cor­po­rate because, if they are vis­i­ble, frankly they are not work­ing.”

Digital-first

The growth of dig­i­tal busi­ness removes the phys­i­cal ele­ment of cross-bor­der oper­a­tions; Uber, Airbnb and Aliba­ba are com­pa­nies that were born online, with few phys­i­cal assets, and can oper­ate across bor­ders as long as trans­ac­tions can be made. But dig­i­tal is also chang­ing the way trans­ac­tions are made.

“Uber dri­vers need­ed to be paid all over the world and expect the pay­ment to come instant­ly, so it’s chang­ing the demand in finan­cial ser­vices infra­struc­tures,” says Dan­ny Aran­da, man­ag­ing direc­tor of Rip­ple Europe. “That’s what we believe our oppor­tu­ni­ty is. If you look at many inno­va­tions over the past 20 years in finan­cial ser­vices, it’s large­ly been at the inter­face lev­el, mean­ing a bet­ter mobile appli­ca­tion or a bet­ter online user expe­ri­ence. We real­ly want to bring some ele­ment of the inter­net into the infra­struc­ture of finan­cial ser­vices.”

Rip­ple builds dis­trib­uted ledgers, essen­tial­ly shared data­bas­es that record trans­ac­tions between every­one that shares the data­base. Instead of two banks oper­at­ing their own inde­pen­dent data­bas­es and then hav­ing to rec­on­cile the fig­ures between them, the use of a sin­gle ledger for trans­ac­tions means there is no need to dou­ble-check who has what. Every­one can see what is where and trans­fers can only be made if the data­base shows that funds area avail­able. It reduces a lot of the tech­ni­cal com­plex­i­ty that can exist between mul­ti­ple pay­ment sys­tems and allows many stages of the process to be auto­mat­ed.

In May San­tander announced it would be using Rip­ple tech­nol­o­gy to facil­i­tate cross-bor­der pay­ments from the UK via an app con­nect­ed to Apple Pay. Using fin­ger­print ID, the app will allow trans­fers of up to £10,000 into euros or US dol­lars. Stan­dard Char­tered is devel­op­ing a use-case in Sin­ga­pore for cor­po­rate clients.

In July Bel­gian bank KBC said it had devel­oped a dig­i­tal ledger with tech­nol­o­gy firm Cege­ka. For use by small­er busi­ness­es, it can con­nect buy­er, sell­er, KBC and the counterparty’s bank using a smart con­tract that reg­is­ters the entire trade process from order to pay­ment with pay­ment guar­an­teed when all con­trac­tu­al agree­ments have been met. The bank is cur­rent­ly explor­ing con­nec­tions with oth­er Euro­pean Union banks as 77 per cent of Bel­gian exports are to that region.

Graph of most popular SME global markets

The e‑commerce trade

MasterCard’s Mr McLean says cer­tain cor­ri­dors dom­i­nate from an e‑commerce trade per­spec­tive, with the UK typ­i­cal­ly look­ing at US and then larg­er Euro­pean mar­kets, such as Ger­many, France and Italy. The cor­ri­dor and scale of busi­ness will deter­mine whether a firm can use cer­tain trans­ac­tion­al chan­nels. If cor­po­rates are look­ing to make inter­na­tion­al pay­ments, the num­ber of mech­a­nisms they can use is rel­a­tive­ly high tak­en at face val­ue.

“There are many remit­tance com­pa­nies and for­eign exchange firms in the retail to low-end com­mer­cial trans­fer space,” says CGI’s Mr Bai­ley. “For larg­er trans­fers, using com­mer­cial bank­ing is eas­i­er or hard­er depend­ing on the cor­ri­dors they are con­sid­er­ing. Most banks are derisk­ing and the risk aver­sion caused by things like anti-mon­ey laun­der­ing reg­u­la­tion can make banks less com­fort­able deal­ing with cer­tain trans­ac­tions.”

There are three issues for com­pa­nies to con­sid­er, advis­es Mr McLean. “First­ly, it is about the tech­nol­o­gy, under­stand­ing con­sumers in these mar­kets and how they like to pay, then adopt­ing the right tech­nol­o­gy to serve that,” he says. “Sec­ond­ly, under­stand any bar­ri­ers to pay­ments – autho­ri­sa­tion and authen­ti­ca­tion, for exam­ple. The third point would be under­stand­ing con­sumers and how to gain trac­tion with­in those mar­kets. Places like the US are large and attrac­tive, but they are very chal­leng­ing.”

The inter­net real­ly informs the way we expect ser­vices to be deliv­ered

Many pay­ment mech­a­nisms have relied upon banks to cov­er a pay­ment dur­ing a trans­ac­tion, using mon­ey on their bal­ance sheet. Where banks are pulling back from offer­ing this, as part of the derisk­ing process, firms can look for tech­nol­o­gy and ser­vice providers that can step in.

URICA is one exam­ple, using the resources of insur­er RSA and cred­it-relat­ed insur­ance provider Euler Her­mes to pro­vide firms with pay­ment for invoic­es that cus­tomers have not yet paid in export mar­kets. This can replace bank ser­vices, such as let­ters of cred­it and increas­ing­ly rare bank-guar­an­teed bills of exchange, or tak­ing cred­it risk by invoic­ing with terms of pay­ment.

The extent to which banks or non-banks will pro­vide pay­ment ser­vices to cor­po­rates in the future will depend upon their abil­i­ty to match both the needs and expec­ta­tions of their cus­tomers.

“Con­sumers’ and busi­ness­es’ expec­ta­tions of how pay­ments should be con­duct­ed have changed,” says Ripple’s Mr Aran­da. “That’s large­ly informed by the inter­net; if I send a text or an e‑mail to some­one, I expect them to receive it imme­di­ate­ly. If I send a pack­age to Cam­bridge, I expect to be able to track it online for vis­i­bil­i­ty. The inter­net real­ly informs the way we expect ser­vices to be deliv­ered.”