Digital Payments – readily available, easy to use and cost-efficient. Just who stands to benefit from these, what exactly are digital payments and how do they relate to treasury? These and other questions will be discussed by Michael Gerhards (KPMG AG) and Sven Warnke (KPMG AG) in collaboration with our esteemed colleague Martin Kunze (aye4Fin).

Digital Payments & Treasury – Exploring the nexus.

Depending on the player in the market, the term ‘digital payment’ takes on a different meaning. Basically, the payment market does not offer a general description, which is why a "fit-for-purpose" definition is needed. For this reason, in the following, digital payments are understood as the digital transfer of a value from one bank account to another using a digital channel. This can be done, for example, by means of a "Point of Sale - Electronic Fund Transfer Device" (POS-EFT - electronic payment terminal in retail that processes debit cards and credit cards), a mobile end device or a classic PC. Bank transfers, alternative payment methods and card payment including credit, debit or prepaid cards can all be subsumed under the term payment method. "Of course, companies can integrate traditional invoicing into digital back-office processes; however, the focus is increasingly on the use of state-of-the-art digital payment processes. This particularly applies to new alternative sales channels using their own online stores or integrated digital marketplaces," says Martin Kunze, Digital Payment Value Architect at aye4Fin. In other words, in the context of digital payments, it is possible to speak of both fully digital end-to-end solutions and semi-digital approaches capable of bringing together the entire payment world. Furthermore, digital payments are used by companies in both B2C (business-to-consumer payment transactions) and B2B (business-to-business payment transactions). "In this context, a company's particular business case is essential, as parameters such as percentage fee scaling, absolute transaction costs, but also the sequence of settlement processes, such as internal transaction processing, payment reconciliation or reversal, are crucial factors for future efficiency gains," explains Sven Warnke, Lead Manager for Cash Management & Payment Issues (Corporates) at KPMG AG.

As a result, digital payments fall directly under the purview of traditional treasury organizations. "The treasurer's top priority is to ensure the company's solvency at all times. Given that digital payments are part of liquidity planning, by definition there is a direct link to the traditional treasury. In addition, digital payments have an impact on payment transaction partners, communication channels and payment methods, among other things," says Michael Gerhards, Partner for Treasury and Digital Payments (Corporates) at KPMG AG. "This has an impact all the way to back-office reconciliation and, ultimately, on internal reporting and accounting in the ERP system," adds Sven Warnke. "Companies using digital payments strategically will have to ask themselves how they will need to integrate the new providers of modern payment methods alongside the traditional bank partners as part of their future risk & banking strategy. Whereas in the past companies addressed their service requirements with their principal bank, payment service providers such as PayPal, Alipay or even Ayden are increasingly approached for this purpose as well," reports Martin Kunze. "In addition, technical issues arise in processing, such as whether PayPal statements are processed instead of MT940?  Here, too, interesting solutions are already being developed," adds Sven Warnke.

Hence, modern payment processes can be viewed as a digital supplement that provides the treasury or the payment specialist in the corporate organization with modern payment processes and available transfer channels. At the same time, it offers the chance to digitally map and integrate classic payment processes so as to simplify internal and external payment processes as well as increase sales by up to 15% by using the right payment channels.

Acquirer, point of sales and payment gateway – Beg your pardon...?

To understand the overall context of digital payments, it is important to look at the individual components of a digital payment infrastructure. For this purpose, it makes sense to visualize the process flow when a customer places an order. The order can reach the seller (merchant) through a variety of channels, for example on a marketplace (providers such as Amazon, Ebay or Zalando), in a proprietory online shop or in a traditional store called point of sale (POS).

In all cases, the transaction is captured, encrypted and transmitted. A so-called payment gateway may also provide support in the process chain before the transaction data is forwarded to the acquirer. An acquirer is a transaction processor that holds the licenses to process Visa and Mastercard transactions, for instance. Its task is to acquire merchants and hence authorize payments from customers and credit revenues. At the same time, it assumes the transaction risk.

A payment gateway is a software platform that processes finance transactions electronically. This can be managed externally or fully integrated into the company's organization. "In this regard, three key categories can be distinguished in the payment gateway environment: Corporate Fintech as a full-service provider, best-of-breed organization or the maximum outsourcing of relevant services. As a result, all three differ in the level of integration and the degree to which certain process activities are outsourced. There is no right or wrong when it comes to the question which model is the right one, rather it has to be evaluated individually for each company," explains Michael Gerhards. The payment gateway can generate additional value (for example time and costs benefits, full transparency, enhanced user experience and fraud prevention measures) in transaction management (payment orchestration) between the seller and the different payment transaction processors. It thus serves as an integration platform that offers the company different acquirers as well as payment methods, according to previously defined parameters. "Nowadays, most acquirers simultaneously operate a payment gateway, but unlike the free gateway providers, it is usually closed and only allows the services of the processor," adds Martin Kunze. 

In order to achieve the highest possible flexibility with a standardized integration, a free gateway provider such as the German company Computop is also an option. Free or "stand-alone" gateways include a wide variety of acquirers in their portfolio, allowing them to integrate the geographically most important providers for the individual markets with a single integration. 

In this context the term “payment orchestration” is often used. The seller (merchant) controls all digital payment methods through manual or automatic processes to ensure that the most favorable payment method from the company's perspective is selected. "Depending on fee structures, performance or customer demand, these can be completely different orchestrations", reports Sven Warnke. With an optimized payment orchestration, a company is basically able to activate, use simultaneously or block independent and user-defined payment methods as required. In the meantime, a rapid market entry in new regions is possible at any time without major internal expenses for offering local and international providers depending on costs and performance. After all, a payment layer needs to be integrated only once as part of a payment orchestration, saving the high costs and development time for a PSP change, which is more frequent over time.

In the background of payment processing, automated encryption methods (e.g. Secure Locket Layer (SSL)) are used to fully take into account compliance obligations such as PCI-DSS. Simultaneously, XML format is being used to transform the transaction data within the process chain. Depending on the payment method, the acquirer will forward this data to credit card companies such as MasterCard or Visa. In turn, the card-issuing bank, the issuer, checks the authorization requests and either sends them to the gateway or returns them to the merchant via the acquirer. The entire transaction process is completed in about 0.2 to 3 seconds.

Large market environment & many players – The main market players

As a result of historical factors and ongoing advances, the market now differentiates in the systems between five different players. 

  • The issuer (1), who offers a payment method on the market – the pioneers here are Diners, MasterCard, Visa, American Express and Paypal, among others. 
  • The acquirer (2), who collects the money per payment method from the customer bank accounts and periodically transfers it in a pooled form to the seller's house bank account. A variety of national and international players have established themselves as acquirers, with different market shares depending on geography. Famous brands are, among others, Ayden, Concardis, Evo Payments, Chase Payment Tech and AsiaPay.
  • The merchant (3), who offers the goods in a physical store, online shop or on a marketplace, is waiting for payment to clear its open items.
  • Besides the merchant, the customer (4) is of course one of the main players. After they have selected a product to buy, customers usually select the payment method that is most familiar to them. For this reason, the company needs to make the payment process as simple as possible in order to successfully complete the sale.
  • The list of players is rounded off by the payment service providers and also the above-mentioned payment gateway providers (5). Well-known market participants here are Computop, Stripe and ppro, among others. 

Opportunities with Digital Payments – Clear Advantages

From a treasury perspective, digital payments are disruptive in character and can have a lasting impact on the range of treasury tasks. The benefits are particularly felt in these areas: from the internal process landscape to payment transactions and the international roll-out of payment methods all the way to compliance & regulation topics, analytics and ultimately risk & reporting obligations. Thanks to technological advances, complex processes can now be implemented without any problems. "Automated internal front-to-back processes related to the identification, authorization and reconciliation of incoming as well as outgoing payments are typically able to reduce the payment processing time by 75%. In addition, the manual input will be reduced by up to 50% thanks to the complete integration of internal and external interfaces. These include the payment workflow, ERP integration and material & distribution management," explains Sven Warnke. This is regardless of whether the future goal is to connect with new customer groups or to expand internationally into new markets. "Most digital payment methods rely on an easy-to-establish connection between receiver and sender in contrast to the traditional bank transfer or even credit/debit/customer cards," Martin Kunze specifies. 

Depending on the connection, this streamlines the KYC burden and shifts unpopular treasury activities to the payment providers, irrespective of the chosen integration variant of the payment gateway. The technical and process-related connection of the most diverse payment providers is guaranteed at all times and made available to the organization quickly. "In Germany, customers prefer to use bills; in the USD region, PayPal and credit cards; and in China, people often pay with "super apps" like WeChatpay or Alipay that offer a one-stop shopping experience. Following the one-off integration and linking of internal ERP interfaces as part of a digital payment strategy, any future connections will be a much more manageable challenge," adds Michael Gerhards. This allows the company to concentrate fully on its core business and to press ahead with the strategic development of new markets. Back-office processes are constantly being adapted to local needs as well as current requirements in the background.

As opposed to structural optimization, the internal finance department often focuses on quantitative, measurable key figures such as influencing variables on liquidity or working capital management. To achieve this, digital payments enable the efficient management of DSO KPIs (from goods issue to cash receipt) and active management of DPO KPIs (from goods receipt to cash issue) in the supplier relationship. Quite often, it is also referred to as a digital cash discount procedure. Here, the supplier receives the money immediately, even though payment is not due until later. In other words, payment is optimized according to the 3-Way Match (purchase order, goods receipt and invoice), ultimately increasing transparency throughout the company. This also means that payment transactions are managed and evaluated centrally.

In the best practice case, routine tasks such as dispute management are fully automated with direct reference to the original transaction, including the relevant customer data, thereby preventing overpayment. Beyond any internal optimization, inefficient activities such as creditworthiness checks, credit checks, dunning procedures and their follow-up processes can also be avoided by using digital payment processes throughout the company. As a result, this frees up internal resources and reduces the treasury department’s workload.

Business case – Highly relevant for every organization

Based on experience, the reason for considering the implementation of digital payments varies. Some companies are committed to offering digital payment solutions to create a positive customer experience, resulting in lasting customer loyalty. The entire buying experience plays an important role here, in which the payment process is an integral part. The aim is always to achieve the highest possible conversion rate (the number of potential buyers who become paying customers). Other companies intent to push ahead with centralization and transparency, with the added benefit of optimized KPIs. 

Basically, it can be observed that digital payments play the biggest role in the B2C segment. Often these companies have an international footprint, exposing themselves to regional preferences in payments/methods in the US, EMEA, APAC and also LATAM markets. 

In addition, there is a trend among B2B companies, both DAX40 companies and traditional SMEs, to integrate digital payments into their infrastructure. "For example, the goal may be to integrate 22 markets onto one platform and to be able to offer the three most widely used local payment methods in every market in a streamlined and efficient manner," says Sven Warnke. 

Apart from this, large retail companies or even industrial enterprises are setting up their own in-house bank to be able to implement the entire range of payment functionalities independently and under their own control. "We call this establishing the "corporate fintech as a full-service provider" to optimize digital payments and the group cash flow to achieve our own company-wide goals. The focus here is particularly placed on establishing a best-of-breed organization, outsourcing specific services, and uniform governance," explains Sven Warnke.

Outlook on payments – the future 10 years from now

Solutions become more innovative and at the same time more sophisticated. Alongside traditional banks, new players keep emerging as competitors. FinTechs and large industrial companies with large capital reserves are increasingly becoming an alternative to historical banks and credit card providers. "If you look at the former hardware provider Apple, you can clearly see where the journey is going: from Ipod to ApplePay to payment services such as buy now, pay later,” adds Sven Warnke. 

At the same time, the customer will increasingly prioritize companies that have best understood their payment needs. Since the market knows no boundaries, every corporate treasury must at least address the issue of digital payments and their impact on their own processes. "Digital payments can no longer be excluded from the corporate context in the B2C as well as the B2B segment. We believe that in 10 years, B2C payments will have a share of almost 100% and B2B payments of around 75%," says Michael Gerhards. The time is right to embrace digital payments.

Source: KPMG Corporate Treasury News, Edition 123, July 2022
Authors:
Michael Gerhards, Partner, Finance and Treasury Management, Corporate Treasury Advisory, KPMG AG
Sven Warnke, Assistant Manager, Finance and Treasury Management, Corporate Treasury Advisory, KPMG AG