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Treasurers grappling with innovations in digital payments

innovations in digital payments

Payment is changing and is currently facing considerable upheaval.

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Digital Payments

A payment is a payment, is a payment… wrong. This is no longer true. Processing payments, considered a fundamental operational treasury task, is currently facing considerable upheaval. Digital payments, cryptocurrencies and B2B marketplaces all harbor unprecedented challenges. Can the corporate treasury cash manager rise to the challenge?

Change had been occurring in agonizingly slow steps, with the shift from DTA to SEPA taking up all of the last decade and with instant payments just now becoming a thing. The corporate treasury world quickly adopted SEPA payments, but instant payments saw corporates press banks about use cases and how to embed these real-time transactions into standard batch processes.

The persistence of the Corona pandemic forced brick-and-mortar retailers into a widespread acceptance of debit or credit cards at their points-of-sale. Almost everywhere, German end customers, ardent advocates of good old cash, were suddenly forced to pay by card and contactless. On top of that, retailers are fueling this trend by touting its hygienic benefits. The German banking industry could hardly believe its good fortune: transactions have increased by 1 billion (+21.7%) within just one year. There has been a jump in contactless payments from 35.7% to 60.4%. 
[Source: gi Geldinstitute, 10.02.2021, https://www.geldinstitute.de/business/2021/jahreszahlen-2020--girocard-so-haeufig-genutzt-wie-nie-zuvor.html]

On top of the changes in the B2C business, there is an ongoing discussion on the digital euro (Central Bank Digital Currency, CBDC) and cryptocurrencies. ECB head Christine Lagarde is leading this rally with her statement that "the digital euro will become reality.” Not tomorrow, but the day after. Visa CEO Alfred Kelly praised cryptocurrencies as "digital gold" and just announced the launch of a digital interface (API) for banks and institutional customers to allow payments and trading. And the Tesla Group, owned by pioneering entrepreneur Elon Musk, has just invested USD 1.5 billion of its cash reserves in bitcoin and plans to accept it as a means of payment for car purchases.

So where does all of this leave corporations?

A company will respond to these diverse changes by looking at cost, risk, and efficiency. Some corporations would like to avoid becoming overly dependent on a single payment service provider (PSPs), be it because of default risks and the level of transaction costs, or due to the complex process when integrating PSPs as well as in operating such systems. Such retailers outsource their PSP management, integrate aggregation layers (payment orchestrators) or become payment providers themselves (for example, Otto, MediaSaturn).

Other retailers and multinationals have recognized that establishing licensed entities themselves as an opportunity for new business models and revenue streams. However, given the technology-driven market potential, strategic business considerations will not automatically result in becoming a licensed payment provider, in fact, most corporations want to avoid that. Instead, they use technologies such as crypto, cloud or Internet-of-Things ("machine to machine") for their own business processes as well as new products and services, or they outsource payment services for B2B supply and sales chains to marketplaces.

It' s the human touch that does the trick – but not always

These processes, products, and services require suitable payment methods that can satisfy the respective requirements. In comparison to processes performed entirely by machines without any human intervention, the transaction costs of traditional payment methods are simply too expensive. The IOTA Foundation, for instance, is developing a platform for machine-to-machine payments – all without transaction costs. 

For end customers in D2C (customer buys directly from the manufacturer) and B2C (intermediary retailer) settings, the offering also calls for other billing systems. Pay-per-use or subscription models like those used by Netflix and Amazon Prime are obvious options. Traditional systems are not geared to such flexible rate models (usage intensity and thresholds, discounts, etc.), either in terms of handling or due to the sheer volume of data. 

New organizations are needed

Naturally, the plethora of different innovations, new developments and resulting requirements also impact the corporate organization. At first glance, the inclined Corporate Treasury News reader will associate all of this with the corporate division of the same name. However, most treasury functions are characterized by operational excellence and not by supporting the business, much less in roles that assess or promote anything, despite the fact that this has been proclaimed time and again in the trade journals over the years.

This is because those roles require different professional skills and experience, in-depth knowledge of the business models, technologies and processes described above. However, not everything needs to be done in-house. Partnering with banks, FinTechs, PSPs, payment orchestrators and others may make sense, depending on the design and maturity of the business and the company's own organization.

Internally, staff departments (e.g., finance and treasury, legal, IT) will have to work closely with the corporate units on the requirements and processes in the new areas. Market, competition and customer dynamics may favor agile forms of work and organization for faster and better delivery. This will result in new job profiles such as IT security or AI experts, cloud architects, customer experience managers, data scientists or blockchain developers. This poses a major challenge for established companies, as the current study by the Institute for Management and Innovation (IMI) at the Ludwigshafen University of Applied Sciences (HWG LU) points out.

Conclusion

Overall, we do not foresee the job profile of payment and cash manager to disappear any time soon; however, in the broad environment of digital payments, a far-reaching change is picking up speed that will reshape organizations, processes and roles, entailing a need for considerable adaptation.

Source: KPMG Corporate Treasury News, Edition 108, January-February 2021

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