This year’s Business Payments Barometer surveyed financial decision-makers in Great Britain to gain insights on the payment industry and examine the next 12 months.

This episode on the Payments Podcast featured Marcus Hughes, Head of Strategic Business Development, analyzing what this year’s results mean in the Payment insights: Driving payment efficiency section of the report.


Podcast Transcript:

Rich Williams: Making payments isn’t as simple as you might think, with late payments, international payments, real-time payments; where do you begin? Hello, I’m Rich Williams, host of the Payments Podcast. Today we’re going to talk about Bottomline’s recent survey, our 2019 Business Payments Barometer, which is now in its fourth year. In particular, we’re going to focus on the second section of the Barometer, which is entitled ‘Payment Insights’. I’m delighted to be joined again by my colleague Marcus Hughes, Head of Strategic Business Development, and the face behind this section of the Barometer.

Hi, Marcus.

Marcus Hughes: Hello Rich, good to be back.

Rich Williams: The Bottomline 2019 Business Payments Barometer contains loads of insightful material on the UK payments landscape. We hope it will be useful not only to our customers, but also the payments industry in general and to Bottomline staff itself of course. I’d like to extend my thanks again to all of those 400 businesses who responded to the survey.

Now, Marcus, before we dive into the real detail of the report, could you tell us what the main highlights of the Barometer were for you?

Marcus Hughes: Okay, yes, with pleasure. I think the first thing that the Barometer achieves is that it’s a really great reminder that there is so much going on in the payments industry, and that we’re going through a period of really unprecedented change in payments. What’s more, never before has there really been a greater need for a trusted technology adviser who can help customers to navigate their way through these times of rapid change, and with so many competing demands on their time and budgets. In terms of highlights, I’d say it’s always likely that the survey was going to confirm there are different levels of understanding and preparedness regarding these numerous industry changes.

This varies according to the size of business responding, but it’s great feedback for us that a significant percentage of respondents report that their do rely on their banks on their fintech solution providers to offer them guidance on these changes, and specifically to explain the benefits. These benefits are not always obvious, especially if you don’t spend all day, every day, working on payments. It’s a big area where we at Bottomline can help.

Although it may seem obvious, I think this is a healthy reminder that we do need to address our customer pain points, and also talk in a language which is clear and understandable to them. But banks and fintech providers really should avoid using all these many three and four letter acronyms, which the industry so loves. Instead, we really should talk in common sense terms. We should be articulating the benefits simply, like improving a business’s cashflow, or making it easier to access credit facilities, or making payments more secure by automatically checking in advance that a payment is going to the person that is intended and not to some fraudster or criminal.

Ultimately many of the changes and innovations over the next two to five years are really aimed at making payments easier, faster and more secure, and we can help customers to capture the benefits of these new schemes and payment instruments in a simple and cost-effective way.

Rich Williams: Thanks Marcus. Are there any other highlights regarding market trends that we should be aware of?

Marcus Hughes: Yes, for me, there was another very important point in the survey. Unfortunately, it is no surprise that payment fraud remains a really hot topic, not only was there a big increase in the values being lost by businesses, but worse still, the recovery rate was lower than the previous year. As we know, cyber fraudsters are increasingly sophisticated, and businesses really have to constantly up their game to keep pace with these criminals. Fortunately, there have been many significant improvements in technology, such as systems which monitor transactions and user behaviour, and use profiling and machine learning to identify abnormal activity and to prevent fraudulent transactions.

Rich Williams: Okay, that’s a great overview Marcus, but let’s go into some detail, if we may. Moving onto the section on payment insights, I can see that in the survey 92% of financial decision makers admit that they pay suppliers late. Now, that is an extremely high percentage. What do you make of that and does it shock you?

Marcus Hughes: Yes, so this is a big problem. Unfortunately, the late payment of invoices, especially those invoices from small businesses, this is really such a widespread problem, and in many countries, not just the UK. Governments and trade associations have been trying to change this bad business practice for many years and with only limited success. Across Europe we have got various directives and rules known as the ‘late payment of commercial debt regulation’ here in the UK. These set out maximum periods within which invoices drawn on the public sector and private sector are expected to be paid.

What is more, the law lays down penalty interest that can be charged by a supplier for late payments, but the problem is that many small business suppliers simply don’t dare to apply these penalty rates. This is basically because they’re afraid of losing valuable contracts with their large customers. Even the ‘duty to report regulation’, which requires businesses to publish their payment terms and their actual performance, this has done very little to improve payment delays. The 92% stat in our survey does worry me, of course, but I have to confess it doesn’t altogether surprise me. The reality of the situation is that many financial decision-makers apply what are well established working capital guidelines. This means a business should manage its cashflow carefully and focus on getting paid as soon as possible. This is known, to use the business term, as reducing days sales outstanding. Of course, this greatly helps the business’s inbound cashflow.

Now on the other hand, the same financial decision-maker will follow working capital practice, which is to deter paying invoices as long as he or she can. That is basically because this extension of days payable outstanding has a positive impact on a business’s cashflow. This avoids any additional borrowing, which might be drawn down by paying suppliers earlier. By deferring paying invoices, a business actually reduces its overdraft costs and delays funds leaving the business. These two principles of reducing days sales outstanding and extending days payables outstanding are two sides of the same coin and are widely used in many businesses.

Rich Williams: With these regulations and directives making seemingly little impact, Marcus, is there anything that can be done to improve the situation, to help suppliers get paid more quickly?

Marcus Hughes: I agree, Rich, that is really the key question. Now, the good news is that there are a range of ways of solving a number of the explanations for late payments that were given in the survey. Let’s start with accounts receivable, where you want to get paid as soon as possible. Here it is vital to prepare and send out your invoices quickly and accurately. It may sound obvious, but you should use technology to ensure your invoices contain all the necessary information for your customers, so they can understand what you’re asking to be paid for and how and where to pay you in a timely manner.

It is therefore important to include all your bank account details and all your customer’s references to help them reconcile the invoices. Any omissions or errors will simply give your customer an excuse to delay paying you.

It can also prove very helpful to use a Cloud based solution to distribute your invoices electronically and to track them and check that they’ve been received, opened and approved by your customers. This allows an accounts receivable team to focus their efforts on chasing those invoices which have not yet been downloaded, as these are the ones with the highest risk of late payment.

It’s also helpful to provide your customers with an automated system, which makes it easy for them to raise any queries, to request any additional information, and in general to help your customer to approve the invoices more efficiently and make payment in a timely way.

Rich Williams: Okay, so that’s accounts receivable dealt with. Is there anything that can be done to improve payment terms on the accounts payable side?

Marcus Hughes: Yes, there is and in fact I think this is the area where a finance team can have the biggest impact in improving things. In the survey, the biggest reason given by the finance decision makers for paying late was that our AP processes hamper our ability to pay online. From an operational point of view, to make this process seem more efficient, solutions like inbound e-invoicing and AP, or accounts payable, automation software can be used to make it easier to validate and approve invoices in a timely manner.

What is perhaps more important from a strategic point of view is that fast approval of invoices puts the buyer in a good position to offer an early payment programme to their suppliers. This can be a highly collaborative way to strengthen a supply chain, with benefits both for the buyers and suppliers.

Rich Williams: That is really interesting. Could you tell us a bit more about how that works in practice?

Marcus Hughes: As soon as invoices are approved, the buyer gives the supplier the option to get paid early, minus a small interest charge or discount. This information and workflow is made available to suppliers on a Cloud based portal. This platform shows the supplier all the invoices which have been approved by one or more of his big customers and the supplier can see the normal invoice maturity dates and how much the interest charge would be deducted from the invoice’s face value to get one or more of those invoices paid early. The supplier then selects the approved invoices for which he or she wants to get paid early and the funding for this early payment programme can be either the buyer’s own surplus cash or external funding provided by finance providers.

At the invoice maturity, the buyer then settles the invoice by paying the full amount to the finance provider. If this is well structured, these early payment programmes offer great incentives and benefits for both the buyer and the supplier. The supplier improves cashflow by getting paid early at a rate of interest, which is generally better than that which can be achieved by direct bank borrowing. Meanwhile, the buyer can either receive a revenue share from the finance provider, which effectively reduces the cost of goods for that buyer, or alternatively, in some cases, buyers can extend their own payment terms further. This has a positive impact on that important working capital metric, which I mentioned earlier. Days payable outstanding is that key measure.

But even in these situations, the supplier still gets early payment, with the finance provider bridging this funding gap and earning interest for this early payment service.

Rich Williams: Very good, so that sounds like a win win situation for the buyer and the supplier.

Okay, moving onto another interesting finding in the survey, what did you think about the response that 90% of financial decision-makers expect to be using faster payments in 2020?

Marcus Hughes: Yes, this is certainly an impressively high response, suggesting a big increase in faster payments. I do think we need to be slightly careful in our interpretation. I take this to mean that 90% of financial decision-makers expect to be using faster payments somewhere in the business and for some of their payments, and not all of their payments, of course. The growth in faster payments is because there are a growing range of use cases, so for example, things like customer refunds, online lender dispersements, settling insurance claims, and payroll for contractors.

Looking ahead, I expect we’ll see more business to business payments using faster payments, for example, as an incentive for just in time supply chain management. This means your supplier holds your stock but agrees to deliver it rapidly as soon as you need it, so the supplier will deserve an instant payment to compensate them for this rapid service. Another example might be paying a supplier immediately via faster payments if they want to get paid quickly under an early payment programme.

I think the fact that the UK faster payments transaction limit is usually £250,000 for many reasonably sized and credit worthy businesses, this does open up the opportunity for greater usage of faster payments for business to business payments. A number of other new real-time payment systems, for example, in the US and the European Union, have imposed rather low transaction limits, 15,000 Euros and $25,000 US dollars. These low transaction limits might restrict usage of these new real-time payment systems to person to person payments and consumer payments to businesses. I’d also mention that a couple of countries, like the Netherlands and Australia, have taken the bold step of not setting up a transaction limit to their real-time payment systems, and this could be the way forward, providing we get the fraud and risk management framework sorted out.

It’s worth noting that actually the UK faster payments service and the payment systems regulator are actually considering raising the limit of our faster payments to 20 million pounds, which would certainly encourage more B2B usage.

Rich Williams: Wow, so that increased upper limit for faster payments could be a real game changer for anyone trying to adopt it. Now, tell me Marcus, can you foresee a time when all of our payments will be real-time or near real-time payments?

Marcus Hughes: Well, yes, I can and quite soon actually. A key element of the UK’s plans to create a new payments architecture is the replacement of all of our BACS, direct credits and direct debits, as well as existing faster payments, with a new real-time credit transfer. Now, timelines are slightly fluid at present, but the intention is to migrate to the new simplified payments platform by 2023. Now, this is a major initiative to modernise UK payments and make them more secure, and to make sure they’re more resilient and simpler. It is also to provide a better customer experience.

There will be important changes to the way direct debits are processed and paid. At Bottomline, we are already providing guidance to customers and prospects on how we can help them with this new system. In particular, we’re planning to use our PTX platform to insulate businesses from complexity, while helping them to get the benefits of this new payments architecture. We’ve also got important discussions underway with our partner banks on how we can help them with our deep experience of direct debits and expertise in ISO 20022. This is the same data rich format which is being adopted across the UK’s payments systems over the next few years. Many other countries will also adopt this format in a similar timeframe, so it will be very widely used in the payments industry within the next three to four years.

Rich Williams: Are there any risks you foresee with this market wide adoption of real-time payments?

Marcus Hughes: Yes, I agree there are definitely risks. The greatest risk is that in the worst-case scenario, faster payments can equal faster problems with fraud risk. This risk exists already of course, and we’ve seen a high level of fraudulent payments is being reported in our survey. That is why businesses do need multiple layers of defence against fraud, including training and well documented fraud prevention policies and procedures. But technology of course has a really big role to play here, and that is why we have made a big investment to create a set of Cloud based solutions to detect and prevent fraud in real-time, as well as reducing the risk of anti-money laundering breaches.

Rich Williams: Great, thanks, Marcus. Let’s move onto the next set of survey responses relating to international payments. I note that over half of respondents are concerned about the changes in the trading environment; what conclusions do you draw from that?

Marcus Hughes: Well, I think the main point made here is that financial decision makers are concerned about the high level of uncertainty in the business world today. This is affected by increased political tensions around the world. Unfortunately, we’ve got a whole range of examples: Iran, Syria, Hong Kong and the US Chinese trade war, just to name but a few, and last but not least, I can’t avoid mentioning the dreaded B word, Brexit, of course.

Despite this worrying and complex background, most businesses do recognise that they will continue to make and to receive international payments. We found in the survey that a further 10% say they will start to make international payments. I take this last point to mean that businesses will start to expand their trade to new international markets after Brexit. But I have to admit, there was one surprising statistic that 25% of respondents plan to stop or reduce international payments. This was particularly the case for larger corporations. My interpretation here is that at least some of these larger corporates are planning to put into practice what is considered good practice for a business trading globally. By that, I mean that large treasuries often convert cross-border payments into domestic payments, in geographies where they’ve got a concentration of payments. This relates both to inbound and outbound payments.

Rich Williams: Now, that’s an interesting strategy. How exactly does that work?

Marcus Hughes: The basic technique is to open dispersement and collection accounts in country, so that the treasury team can remotely manage local domestic payments or collections. These accounts might be in the name of the head office or in the name of a local subsidiary. That decision would depend on the physical presence in the country where a business is concentrated. Under this model, the only cross-border payments are minimised to a single occasional international payment for an amount equal to or slightly above the total value of all local payments to be made in one or more batches during the course of a week or two.

Once this single cross-border payment has reached the overseas dispersement account, the treasury team can send instructions to the local bank to initiate a whole mass of local bulk ACH payments. This approach is way cheaper than making multiple cross-border payments.

Conversely, if a business has lots of customers in a single country, they can issue multiple direct debits locally. Alternatively, they can invoice their customers to make local domestic payments into the biller’s in country bank account. Once this bank balance reaches a target credit balance, any surplus funds not needed locally can then be repatriated to the UK head office, or to any other country.

The growing adoption of Cloud based multibank payment and cash management solutions makes this model easier and faster to put in place, and it can be highly cost-effective in cutting bank fees, while keeping a close control over cash balances and a whole range of payment types. This localising of payments, where there are significant concentrations, as I’ve just described, this can work hand in hand with cross-border payments.

These should be used in other international markets where a business has a low volume of payments or collections, and there are many new techniques, which Bottomline can help with, which make it easier and faster to streamline cross-border payments. This includes getting advance information on bank fees, tracking that payments reach their final destination, and providing your supplier with more remittance advice information to make their reconciliation easier. We’re also developing ways to make it easier for businesses to access an international payments service, which ensures competitive foreign exchange pricing for those cross-border payments.

Another interesting new initiative is Visa’s B2B Connect service, on which we’re partnering with Visa. This innovative new service is designed to make it easier and more secure for businesses to make cross-border payments, and it’s going to provide our customers with more choice, which we think is very important, of course.

Rich Williams: Thank you. That’s a really helpful explanation and should give listeners food for thought about how to optimise their international payments and cash management strategy. As a final question, Marcus, could you share any insights on financial decision-makers responses to the question, “What is your company’s top priority relating to payments in the next 12 months?”

Marcus Hughes: Yes, of course. Sadly, it was no surprise that the top two priorities were mitigating fraud risk and compliance. This was to be expected, with so many organisations falling victim to cyber-attacks, and the growing need for businesses to comply with a heavy burden of regulations. For me, it was also very interesting to note that the next four highest scores all related to closely connected activities, like better cashflow forecasting, improved cash collections, cash concentration and easier cash visibility across multiple bank accounts.

All of these priorities reflect the importance of effective accounts receivable processes and having flexible cash management. That is in organisations of all sizes. These are also areas where at Bottomline we’re working hard to deliver an enhanced set of Cloud based products, so we can make it easier and more secure for our customers both to pay and to get paid.

Rich Williams: Fantastic, and thank you once again, Marcus, for sharing your insights. This time on our Business Payments Barometer and the fast-changing payments landscape in general.

Marcus Hughes: Thanks Rich, always a pleasure to share a few thoughts.

Rich Williams: Well, that’s all we have time for today. In the meantime, you can listen to more episodes on all things payments at the touch of a button using your preferred provider, and we’ll see you all next time.


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