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Do companies understand the benefits and how prepared are they? The ’21 Payments Barometer reveals that 20% of small businesses claiming they haven't heard of many of the upcoming payment regulations, while large and enterprise companies indicate a lack of preparedness around Open Banking. Join Marcus Hughes as he offers insights into the results.
Andrew Davidson: The ‘2021 Business Payments Barometer’ surveys 800 businesses to find out what the priorities over the next 12 months will be, as well as highlighting insights into the past year.
Today's episode is focused on the regulation and payment initiatives, revealing why there is still so much uncertainty around regulations, as well as how longer-term regulations are failing to materialize in a meaningful way.
I'm Andrew Davidson, and I'm host of today's Payment Podcast. I'm joined by Marcus Hughes, Head of Strategic Business Development at Bottomline, to review why exactly we're seeing uncertainty and lack of urgency in payment regulations and initiatives, and what impact this has on businesses.
This year, we've continued to see a drop in preparedness of upcoming payment initiatives, like open banking, adoption of ISO 20022, with a drop of only 60% of businesses feeling prepared. What's the reason for this lack of preparedness across the board?
Marcus Hughes: Yes, it is striking that, in the ‘Drivers for Change’ section at the start of the Payments Barometer, the businesses that were surveyed have demoted regulatory change from the fourth most important driver in 2019, to the seventh most important in 2021.
But, frankly, when we think back to the context of last year, the world has been experiencing the most deadly and disruptive pandemic in more than 100 years. So, it's entirely understandable that businesses responding to our survey were far more focused, quite literally, on survival and improving their inbound cash flow in any way they could.
They were also busy trying to prevent fraud, which has continued to rise during COVID-19. Many businesses have been working hard to ensure everyone in the team has the right technology to work from home – or, indeed, to work from anywhere – and, of course, to continue interacting with their customers as best they could.
This, in turn, has been driving a big increase in digital payments, in which we've all participated. So, I think, in these desperate circumstances, the question of regulatory change is perceived by many as simply less important than it might normally be.
It’s not surprising that in this year's barometer the number one driver for change was, of course, the impact of COVID-19. No surprise there, but, quite apart from last year’s special circumstances, I think that some businesses’ lack of preparedness for regulatory change and for new payment initiatives can be explained by the possibility, and maybe even the reality, that many businesses are suffering from a degree of regulation fatigue.
This is probably not dissimilar to the project overload which many banks appear to be experiencing at present. The payments industry today is undoubtedly going through a period of unprecedented change, and it faces many challenges in terms of prioritizing where banks and businesses should spend their time and limited budgets.
Usually, mandatory changes, such as compliance with new regulations, command the lion's share of a bank’s and a business's budget. This leaves relatively limited funding and human resources for discretionary and innovative, new programs.
Only recently, we saw a number of large UK banks complain that they've been forced to shoulder much of the cost and systems change required by open banking, which ironically has the stated intention of helping smaller banks and FinTechs to win business from these incumbent banks, with their shiny, new, and innovative solutions.
These large UK banks are unhappy that the costs of these regulations have escalated, turning out to be way higher than originally forecast by the Competition and Markets Authority. So, there's a lot of pressure out there, both on businesses and on banks.
There are also a few isolated cases where new payment initiatives are experiencing significant delays. An important example of a stalled payment initiative is the major UK infrastructure change program called ‘New Payments Architecture’.
Back in 2017, the Payment Strategy Forum published its blueprint for radically modernizing the UK payment systems. The industry at that time braced itself for an ambitious but exciting change program, but so far there have been a series of delays. Now we have fresh discussions about possible reductions in scope in order to de-risk the project and at least get something new into the market.
As a result, there is still much uncertainty about what will be delivered, and when. This unfortunate situation can have the unintended consequence of leading businesses of all sizes to take regulatory change less seriously, on the assumption that some deadlines might be subject to slippage, or, indeed, never materialize.
Another example of deferred regulations is the repeated delays in enforcing strong customer authentication on online card purchases. This improved security feature is required by open banking and PSD2 across Europe, and will, frankly, make credit cards and debit cards safer to use, albeit with more friction, as some will argue.
But the introduction of strong customer authentication, which essentially involves mandating multifactor authentication, with only a few exceptions, that has been deferred in the UK now until March 2022, thanks to the Financial Conduct Authority's intervention.
This was due to the lack of industry preparedness, and deep concerns among retailers, especially, to minimize the risk of any disruption of merchants’ cash flow during the pandemic, given the deep economic crisis which we've all been experiencing.
To be practical, I think it's very important for businesses to categorize and prioritize all change programs. They need to clearly distinguish between, on the one hand, the importance of complying with, for example, the General Data Protection Regulation, and avoiding breaching anti-money-laundering requirements in order to escape large fines, or even being sent to prison.
Then, on the other hand, you compare that with adopting a new payment instrument or scheme, which might bring valuable business benefits, like faster cash flow or, indeed, easier reconciliation. But one is mandatory in order to avoid breaking the law, while the other is of course optional, despite potentially having compelling commercial reasons for doing it.
Andrew Davidson: Thanks, Marcus. You talked quite a bit about the large banks there. What about the preparedness by size of organization? Do you see significant differences by the size of the business?
Marcus Hughes: Not surprisingly, it's the small and medium-sized businesses which are the least prepared for any regulatory change and for new payment initiatives. This is because large corporates have more resources, which can be specialized and focused on such matters.
We all know that introducing change in a large organization can be slow and expensive, but they do have the resources to ensure compliance with regulatory change, and to selectively manage change processes to take advantage of new payment instruments and ways of getting paid more efficiently.
If we take Brexit, since the beginning of the year, it has been evident that leaving the Single Market has been particularly tough on small businesses which are still trying to do business in the European Union. Unfortunately, though, they've been confronted by unexpected red tape and new taxes, as well as transport and customs delays.
These small businesses simply cannot afford to follow the path that's taken by larger corporates with greater resources. Larger organizations often have resorted to setting up subsidiaries in Europe to manufacture their goods and to distribute those goods within the Single Market.
This means they can arrange to send around their goods with less friction and fewer delays, and avoiding some of the taxes that have been hitting the smaller businesses. But for smaller businesses, they face the bleak prospect of abandoning those existing markets and changing their business model completely.
So, COVID-19, Brexit, and even the political tensions and sanctions involving China, Russia, Iran and the US, have all acted as a brake on international trade, creating new barriers in the movement of goods between countries. This uncertainty has placed tremendous strain on global supply chains.
One of the lessons learned here is that many businesses are now trying to make their supply chains more robust and less reliant on techniques like just-in-time delivery. Instead, they may conclude they need to maintain higher stock levels to avoid running short of essential components, but this is more expensive for the importer, of course.
One obvious way to strengthen supply chains is to bring them closer to home so they are less impacted by any future disruptions and volatility in world markets. All this is, of course, quite negative when considered in the context of aspirations such as globalization and international markets.
Problems doing business cross-border with the European Union could lead to a reduction in the volume of cross-border payments, but if businesses do venture into new markets, as proposed by those advocates of Brexit, then they'll find that when trading with, say, Asia or the Americas, they're going to need new bank relationships. They’re going to have to get used to new payment instruments, so it's a tough period for exporters and importers.
The situation could get more complex, but I would say businesses exploring these opportunities should also be aware that there is a continuing flow of innovation, which is making cross-border payments more transparent in terms of speed, tracking, cost. Even being able to receive confirmation that the payment has reached the end beneficiary, and without unexpected fee deductions.
‘SWIFT gpi’, which has been adopted by many banks around the world, has made significant progress in making cross-border payments faster and more cost-effective. Other cross-border payment initiatives which have potential, and which are aimed at providing businesses with more choice, include Visa B2B Connect. This relatively new cross-border payment scheme for businesses has integrated foreign exchange settlement, which provides greater predictability and efficiency, especially in those exotic currencies, the smaller currencies.
Andrew Davidson: You've talked a lot about some of the reasons why you think preparedness is not happening. What reasons do you think the businesses are highlighting in this report?
Marcus Hughes: Quite apart from the big impact of COVID-19, there are other practical reasons why businesses feel unprepared for new regulations and for new payment initiatives. A perfectly logical explanation for this admission is that a number of these new initiatives are not fully understood, since the benefits might not have been explained clearly.
It could be argued that some new regulations and payment initiatives haven't been communicated in the best possible way. There's probably too much industry jargon and banking terminology for the preferences of many businesses.
Let's also bear in mind that some new regulations, like open banking, are only mandatory for banks. It's the banks which are required to share customer data with FinTechs or other banks, provided that the end customer authorizes this data sharing, or maybe payment initiation, but businesses and consumers are not actually obliged to use open banking. It's entirely optional for them.
If some new payment instrument or a way of sharing data is not explained to a business or consumer in a way which solves a particular pain point, with a compelling value proposition, then it's likely that these organizations will not be interested in using it. That's no matter how much a FinTech or a challenger bank bangs on about its new, shiny, open banking solution, which is simply the wrong approach.
So, although open banking is now in its fourth year, many businesses actually don't see any urgency to adopt it, despite all the hype surrounding this initiative. In some cases, I can't say I blame them. That's possibly because FinTechs and banks have not developed their market messaging sufficiently to convert it into robust solutions which solve specific pain points to which a targeted business can actually relate.
I think businesses might be more interested if they realize that there are new techniques which can help merchants to reduce their card fees and get paid immediately, 24/7, while offering their end customers a secure and frictionless payment experience. Frankly, when describing such a solution, it's of very limited relevance to mention open banking at all.
If we take another example, regarding new payment formats which are being introduced around the world, I think a better way to explain why a business might benefit from adopting a new payment format would be to describe how the ability to carry more structured data in a payment which is machine readable will help significantly to reduce errors and delays on outbound and inbound payments, especially cross-border transactions.
This new payment format will also make it easier to reconcile payments because more information is available in a machine-readable way, to make cash allocation quicker, more automated, and with less manual intervention.
For me, highlighting these tangible benefits is more useful than leading with the fact that this payment format has the strange name ‘ISO 20022’, which actually many smaller businesses would probably not even know how to pronounce when confronted by such a string of strange letters and numbers. Why should they, since they're not expected to be specialists in this subject?
Andrew Davidson: No, they're fantastic insights. Thank you, Marcus. It's really interesting to hear your opinion of what is happening and why those responses are coming back in that same way. Given what you've said, and given the feedback from these businesses, what do you think the future of payments looks like?
Marcus Hughes: That's a great question, Andrew, and thanks for asking. The digitalization of payments is definitely accelerating at pace, along with the digitalization of many other associated processes in the order-to-cash and the purchase-to-pay cycles.
For example, e-invoicing is increasingly replacing paper invoices. Many countries are mandating the use of e-invoicing for all business-to-government, and even for business-to-business, invoicing. This opens up a world of opportunity in terms of better use of data and faster processing.
The importance of data has risen very high on the business agenda in recent times. That's because it has been used – it can be used – to power higher performance across interrelated areas, like payables, treasury, and receivables.
These three units have historically worked in silos, despite being highly interdependent on each other, but, with new cloud-based technologies and better use of data, these units can be truly interconnected, allowing a flow of data between these systems, as well, of course, the ERP.
Data analytics, and techniques like machine learning and predictive analytics, are becoming essential tools for treasurers and other financial decision-makers, whether they be in Accounts Payable or Accounts Receivable teams.
Data can be obtained from multiple sources from within a business, and from outside the business as well, such as multiple bank accounts, and in real time. Inside a business, there's a wealth of data in corporate systems like the ERP, the treasury management system, as well as Accounts Payable and Accounts Receivable, and the CRM, the Customer Relationship Management system.
But the real value lies in combining enterprise data with banking data and getting a single view of a summary of all this data, using dashboards, which show a business's key performance indicators.
This means that financial decision-makers can greatly benefit from analytical tools which enable them to not only measure their KPIs, like day sales outstanding, day payables outstanding, cash conversion cycles, etc., but they can also improve these metrics. Therefore, they can have a positive effect on the organization's overall financial performance.
So, data analytics can be used in a whole series of activities across payables, treasury, and receivables. For example, improving spend management to reduce costs, making cash-flow forecasting quicker and more accurate, and improving working capital by managing debtors and collections more efficiently.
The analysis of this rich combination of data leads to greater insights and better decision-making. Advanced techniques, like artificial intelligence and predictive analytics, can be applied to historic performance and used to improve the accuracy of new forecasts.
This approach means an integrated system can generate actionable suggestions for improving financial performance. So, for me, the future of payments is more about data than ever before, and using data to power stronger businesses.
Andrew Davidson: That's fantastic, Marcus. Thank you for that insight. It's really, really good to hear that. Again, you're right on point. It's about the benefits selling, once again. Explaining the benefits will more than happily drive the adoption of these new systems and regulations.
Thank you for joining me again today, Marcus, really great to see you. For any of the listeners wanting to read the full ‘2021 Business Payments Barometer’ from Bottomline, it's available and downloadable from ‘bottomline.com’. 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. See you next time.
Listen to the Payments Podcast episode on Better Cash Management and Forecasting, for SMEs through to Enterprise Treasury teams.
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