This episode on the payments podcast is focused on the payment insight section in this year's 2020 Payments Barometer.

Reviewing why 89% of businesses are still paying suppliers late, will this be sustainable in a post COVID landscape? Focusing on changing priorities and industry regulations will be key for organisations looking to stay one step ahead of competition.

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Podcast Transcript

Rich Williams: Arguably, we have never seen such a complex rate of change in the way the payments industry is evolving over the last few years. This is our second episode, reviewing the findings of the 2020 Business Payments Barometer, having surveyed 800 financial decision-makers, who have contributed their insight, and predicting the key industry trends over the next 12 months.
Hello, I’m Rich Williams, the host of the Payments Podcast, and in today’s episode we will be looking ahead at the changing payments landscape. I am joined once again by Gareth Priest, Chief Platform Officer at Bottomline, and the face behind the Changing Payment Landscape section itself. Hi Gareth, and welcome back to the podcast.

Gareth Priest: Hi Rich. Thanks very much for having me back.

Rich Williams: No problem, very welcome. Let’s start by looking at some of the upcoming payment initiatives. There has been a lot of these around. In fact, we’ve had 5 new initiatives introduced since 2018. So how are companies preparing for these?

Gareth Priest: Well the barometer and subsequent discussions show a few things that are happening. Some people will term it ‘fatigue’, that there is so much happening that people are getting fatigued. I think you have to dig in below that. The percentage is definitely dropping off, in terms of people who feel they’re prepared, or are getting prepared. And I think there are a couple of pieces, that are interesting, beneath that. First off, is that larger businesses and larger corporates are better prepared, but that is sort of to be expected. They have more staff. They have dedicated teams to deal with this. I think if you take a big step back, there are few things that are happening. One is that there is a lot. As you say, there are 5. There are a lot of seemingly complicated acronyms and so on that fly around with this. So I think people then have to kind of unpack it all and understand what it is. This is just a natural way. I think whenever we’ve had payments innovations, particularly in the UK, which is a very innovative market for payments, you have this wave at the beginning of all the stuff comes out. There is lots of noise and interest.
There is a certain amount of things that people have to do to be compliant, and then it kind of plateaus. I think we’re in that plateau. And that plateau is normally, “We’ve done what we need to do. We need to understand a little bit more.” This is what businesses will say. Actually, what needs to happen is the market needs to pick up innovations that sit around those initiatives and regulations. So new applications, new ways of working. And then they will kick-start again. There will be new product innovations that come out from financial technology companies. Banks will offer new things. And that will be another spur. So I think we’ll see that little pop of growth which we saw. The plateau which we’re in now. And then I think it will grow again as people get used to it. Any of the delays have been gotten through and actually real, useful business applications come to light.

Rich Williams: I think it would be safe to say that not everyone is responding to the intense new regulations as rapidly as perhaps they could do. What do you think, Gareth, are some of the causes of this inaction amongst businesses?

Gareth Priest: I think two things really. One is understanding it. And also, some of the delays. So it probably doesn’t help when people think that, “We don’t really need to do anything now, because there is going to be a delay.” Because there has been lots of delays. Whether it’s the new payments architecture. Real-time requests to pay, and other initiatives like that, that are being delayed and pushed out. I think that naturally gives businesses an excuse not to do things.
I think the other piece is the adoption would be different by different types of company. And I think you can split them really into two. If you’re a company that has to make payments just because you’re in business, so you’re a manufacturing company and what-not, you’re going to be a laggard of adopter. Because until somebody has really spent the time to commercialise what the benefit to you is of using these new payment initiatives, why would you do it? I think if your business is based around making payments, there are some that are obvious. So banks and payment companies. Some businesses a little bit less.
But insurance companies, loan companies, payday loan companies etc, where actually a big chunk of what you do is take money in and put money out. I think they’re going to be the faster adopters, as they look at how these new payment initiatives actually are not just things they do to make payments, they actually become part of a compelling customer proposition for them. We know of at least one example where insurance companies are looking to adopt real-time payments, because their boast is that by the time you’ve left the office with a claim, or by the time you’ve finished going through the application online for a claim, they can have the money in your account. So it becomes a value proposition. And I think we’ll see a faster adoption of companies like that, using these new initiatives, versus perhaps those that payments are a thing they have to do as part of business, not the core part of their business.

Rich Williams: So sticking to that theme then and looking at real-time payments alone, in the 2019 Barometer, we noted that about 53% of businesses were already making real-time payments. With a further 37% planning to take advantage of them in the following 12 months. Now have we seen that 90% adoption rate come to fruition? Or is adoption still somewhat muted?

Gareth Priest: We have not seen it come to fruition. The barometer, and also the volumes that we’ve seen going through Faster Payments, both through our system and through the overall UK system, have shown that that adoption is relatively flat. The actual volume of payments has gone up. So Faster Payments are increasing in volume across the UK. But that’s not really being driven by individual businesses adopting it. That’s actually being driven by existing users of Faster Payments, putting more and more volume through and increasing consumer adoption, particularly in the gig economy and in the subscription economy. And perhaps even more so with COVID, where more and more transactions are moving away from cash. That has driven an increase in volume. It hasn’t driven a massive increase in business adoption at this point.

Rich Williams: So considering the impact of COVID-19, do you think that that’s likely to cause an increase in the adoption or use of real-time payments?

Gareth Priest: Possibly, is the answer. There is a thought perhaps that as people look to manage and hold on to cash for longer, they might use real-time payments. I know we’ll perhaps talk about that in a while, but I’m not sure that’s really panning out. I think what we might see is an increase in real-time payment volumes. I go back to this, if people are already doing it, and particularly if you’re perhaps an online or e-commerce store or something, that offers or leverages real-time payments as part of that, because more and more people are having to move to online commerce during COVID-19, that might see an uplift.
I think what we’ll see more of, if we try and forecast forward, and certainly my part of the barometer was thinking about what this looks like over the next 12 to 18 months, I actually think we might see real-time payments start to really become even more interesting when it’s linked to some of the other initiatives. So when it’s linked to things like Request to Pay, or it’s linked to things like the Open Banking initiative. So I think when we think about initiatives overall, whilst they are all individual, you have to look at them in the composite to see how they might change the UK economy or the UK payments way of working. And I think when you start to see those things knitted together, when you can actually request a payment with your invoice and somebody say, “Yes, I want to pay that and I need to pay it now,” or, “Part pay it now,” that’s more likely to be moving towards more of a real-time payment, because the whole transaction becomes more conversation in real time, as opposed to perhaps in a business-to-business role at the moment. You send a paper invoice. Then it’s keyed in somewhere. And then somebody will approve a payment. And then it’s sent through BACS three days later on, and so on. That’s a very offline, asynchronous process. I think when we start seeing more of that synchronous, real-time process, that’s when we’ll start to see that next wave of growth of real-time payments.

Rich Williams: Now we’ve spoken in the past, and I’m sure we’ll continue to do so long into the future, about late payments and some of the initiatives to resolve that. Now have we seen any improvements there, Gareth? I believe it was in 2019, 92% of businesses opening admitted to paying some suppliers late, perhaps deliberately, for strategic reasons. So what’s the trend looking like now?

Gareth Priest: Not great, is the honest answer. It’s marginally better. It looks like it’s dropped this year to 89%, but really, we’re still talking a very high percentage of businesses saying they pay suppliers late. You’ve got to remember, this survey was done pre-COVID, so we can only assume. And frankly, we know from working with industry, that that has got worse, certainly in the opening stanza of COVID, where everybody tried to hold on to cash during those opening months, few weeks, and people were trying to work out what it was going to look like. So I’m sure it’s got considerably worse over a short period. But yes, so if I look at year on year, 92% to 89%. Obviously, the bigger impact, I think it’s intuitive and that the numbers show that. The bigger impact is in the small businesses. Small and medium-sized businesses. And I think there are a few reasons for that, which we’ve been able to dig into. So the first one is, there are more small and medium-sized businesses. The second one is actually to do with supply chain and power dynamics. The Small Business Administration has backed this up. They have a choice between either losing the business, and not being on the preferred list of a large company, or living with the fact that things come a little later.
The other side of that coin is if you talk to the Treasury Groups, who typically are more in those larger businesses, sometimes those are negotiated. So actually, in that 89%, there will be a tranche of those that are actually negotiated, so that they are paying later, but that’s part of the deal. The other one probably, is less about somebody sitting there, making hard decisions about not paying things. I’m unsure that happens. It’s more about process inefficiency. So it’s more about the invoice getting lost in amongst the big business and people not approving it. So it’s almost everything leading up to the payment that sometimes causes that delay. I think there is a lot to fix in that, and I’m not sure that the current tools that are being used, either the actual process automation tools, or, more importantly, the legislative tools, are actually having the effect that they want them to have at the moment.

Rich Williams: Now, as you said, the research was actually compiled and collected before COVID, but we can’t avoid the elephant in the room. And we know that it has impacted some businesses significantly more than others. So how can those organisations in, for want of a better term, ‘survival mode’ right now, manage their cash flow, given what we can see in the data?

Gareth Priest: Well it’s a tough answer, because I think there are some technical things you can do. There are actually some payment initiatives that are coming up that will aid, and potentially aid, smaller businesses. Let’s link those two things together perhaps. So the previous question about late payment and processing efficiency, and then how cash affects. I think there are two things happening, or can happen. One is that the supply chains, the overall and twin supply chains, need to work together. So those large businesses- and it’s kind of easy to demonise them and think they sit there bullying their supply chains, the reality is, whilst they are going to be very commercial and hard-nosed, it’s actually in their interests for their supply chain to survive and thrive. There is more money lost for a large corporation if their supply chain breaks down and they have to stop manufacturing or stop building or stop doing something, versus the money they might save by holding on to cash for an extra 30 days. So there is a balance to be struck there.
A good example would be Taylor Wimpey. So they have decided that they’re going to come out of COVID, building will start up again. They’ve realised that their supply chain was actually at risk, because they had obviously a lot of smaller businesses in that supply chain. They’ve actually established a Pay-it-Forward approach, where they are working with their suppliers to actually continue to bill and pay them as if they were doing work, kind of pre-pay them for work, in order to make sure that when they do start up again that these supply chains exist. So I think that is one which it would be nice to say there is a simple, technical solution. Some of it is maybe more the supply chains having to work together and come up with the right kind of modus operandi to get through this. There are, however, some technical initiatives that are happening now, and actually launched in May 2020. One of those I mentioned a little earlier on is this Request to Pay. Request to Pay is a service where you literally can, as the name suggests, request to pay. You can send a bill and ask specifically for a payment, or a part payment, for that. And it actually makes it more of a real-time. Rather an invoice as a piece of paper, an invoice is more almost like having a WhatsApp conversation, is the way of thinking about it, between the two organisations. And I think that can do a few things. One is, it will give a lot of visibility to the billers, and particularly in the SMB market, as we want to see the bills that are going out.
Two is, if you think about one of the causes of the late payment is processing efficiency at the payer end. Well actually, having that synchronous view, being able to say, “This bill has gone to the wrong person. We need to send it to somebody else. I’m not the right guy for it. This is when I’m going to pay it.” I think it becomes a lot more transparent and it will allow the billers to a, have a view of that, but b, if there are things, they’ve got the bill wrong, or there is going to be a part-pay, or something like that, they can see that problem and fix it real time. I think those two things together, they kind of link in. If you’ve got a better, almost conversational or electronic relationship, that will help improve the supply chain relationship. And then actually, the importance of supply chain and making sure that if you’re a large business, your supply chain is intact. Moving forward, I think those two things together will go some way to perhaps starting to point to a way to alleviate the cash crunch.

Rich Williams: Thanks Gareth, a really interesting response there. Now finally, let’s look at the adoption of international payments. An area of interest that’s dropped off from 2019. In fact, this year’s report predicts a further drop, in terms of prioritisation of future adoption of international payments in 2021. So what do you think might be accounting for that?

Gareth Priest: Yes, that’s kind of interesting, because you would expect, and I think we did expect, and have seen overall, international trade increasing. It’s a secular trend towards a more globalised economy over the last 20, 30 years. I think there are 2 or 3 things that are happening, that have probably caused a little bit of a pause. So, just to get the numbers right, the pause we are seeing is the uptake of new international, so it’s new businesses deciding they are going to make international payments. Not necessarily the overall volume. The overall volume of international payments I think continues to grow, certainly on a trended basis. But I do think there are a few headwinds that are out there at the moment.
One is over the last two years, there has been continued pressure on global trade. More protectionism, more trade wars and so on. Those overall, obviously, have a dampening effect, just on the volume of trade that’s going on, which has obviously a dampening effect on international payments. So I think that’s one. I think Brexit, as far as the UK is concerned, definitely had an impact. People are not sure about what their international supply chains might look like. I think the lack of clarity around customs, customs unions and so on and so forth, and what that would all look like, has probably impacted, certainly, people setting up new, more complicated international supply chains. And then the third is probably less to do with the macroeconomic environment and more to do with just the fact that the actual process of making international payments is still pretty inefficient. It’s still pretty clunky. There is still FX risk and so on and so forth around it. So the smoothing effect that needs to happen from a solution provider, whether it’s a financial services solution provider or a technology solution provider, still needs to go some way.
We’ve seen advances of that, particularly in the consumer world. Banks, or pseudo banks, like Revolut, who launched, particularly around being able to make really easy international payments as a consumer, have created that kind of façade, if you like, over the complexity and made it much, much simpler. And there are others out there that have done that, so it’s clearly an area still of great interest. And I think there will continue to be innovations in and around that area to make it simpler. There is one that we’ve been working on with Visa, Visa B2B. Swift themselves have been working on ways to make international payments simpler. So I think the whole approach to how we make international payments is going to get better over the next coming couple of years. I think it’s going to get simpler, cheaper, more transparent. And I think also, we’ll need to see the macro environment, whether it’s sorting out what Brexit really looks like, and also the trade wars and everything settling down. I think we’ll see that come back up again and tip back up.

Rich Williams: Gareth, thanks so much for joining us again today and taking us through another very interesting section in this year’s report. And I hope you will come back and contribute again at some point in the near future.

Gareth Priest: I’d love to. Thanks very much for having me.

Rich Williams: So we’ll be releasing a final episode from the Fraud section of the 2020 Business Payments Barometer very soon, but if you just can’t wait until then, you can download this year’s full report on the all-new Bottomline.com website. Unfortunately, that’s all we have time for today, but in the meantime, you can listen to more episode on all things payments at the touch of a button using your preferred provide, and we’ll see you all next time.

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