A recent Instagram shared by one of my friends: “I have not used cash for almost a year with COVID. When the clinic told me they do not accept mobile payment, I told them I don’t have offline money. I forgot the word CASH!”
Isn’t it awakening that digital payment is no longer an optional service, yet a mandate? Or you will lose the whole generation Z as a customer base. No doubt that the electronic payment system has been and will be further disrupted. However some of the finance veterans in B2B world would sneer at the imprudence of the consumers. As security is always the #1 factor in B2B payment. And we will never compromise security for speed of transaction, lower cost, and easier access to financial services. For corporations, fintech companies are risky in security while traditional banks are lacking the customization, speed in transactions; cost efficiency, user friendliness etc. Don’t blame corporate finance function to be old-fashioned. We are just prompted with no good choice. My favorite quote on this is that we are “grappling with a stark disparity between the nimble opportunism of cybercriminals and the lumbering lead times of the security protocols.” We are still waiting for the secure and instant payment solution with robust reconciliation that consumers now take for granted.
"A global infrastructure capable of supporting instant payments will take time to be implemented."
A global infrastructure capable of supporting instant payments will take time to be implemented. While it becomes less remote when we see the possibility of a collaborative platform with traditional bank working on back-end operations with infrastructure security, regulatory compliance etc., and fintech on the front-end with agile data retrieval, personalized services and flexible services. The current scenario amidst Covid-19 has also become a catalyst to drive the cooperative opportunities between banks and fintech companies given the negative interest rate, lots of focus on liquidity, less offline interaction etc. It’s no longer a “To-Be” or “Not-To-Be” question. Corporations just want to be followers, to invest in proven technologies, rather than brand-new ones. When that’s solved, let’s talk about what we could get out of the new payment solutions. Believe me, it’s more than shifting to a new platform:
1) The imminent benefits go beyond speed of transaction. Exponential volume growth and visibility to such transactions will be game-changing in price setting in terms of interest, foreign exchange rate, service fees and any transaction cost. Even more importantly, a more rationalized pricing mechanism will optimize the match of demand and supply, which is the ultimate goal of financing.
2) For renewal of loans, corporation will no longer to submit financial reports at annual basis. The digital payment platform should know better than you whether you meet the covenants. The visibility of cash movement and the network among which it moves will provide enough intelligence to decide when to increase, decrease or revoke credit line for the clients.
3) In a foreseeable future, accounting could be automated in such platform with some of interface for the accountants to select depreciation/amortization transactions and to provide according schedules. Likewise, accounting audit will become just an authorized plug and download of those data to run the data integrity check program. Same applies for tax audit.
4) It’s been long that I envy Germany has the credit bureau like Schufa with credit transparency while there is limited comparable solutions in other regions. With broadly adopted new payment platforms, transaction cost relevant to credit management will be massively reduced as information asymmetry will be vastly improved, which is jolly news especially for SMEs and developing market. Meanwhile the proportional increase of cost will deter companies from delinquency behavior, which will serve as invisible hand in the market.
I just depicted a Eutopia in a consolidated B2B digital payment world. Further consolidation of B2B, B2C and C2C digital payment will make it even more intelligent and versatile. I’m fairly sure it can be realized in the coming 30 years. The fact that certain markets will adopt it 5 or 10 years earlier than the others will put them in advantage in the competition. How do we get ready for it?
A) Understand the risks and mitigations:
• Risk of compliances: after all, it is an uncharted area to navigate. Some of the innovative payment solutions may prove to be too dynamic to the extent that it may outpace financial regulators. A regulatory framework that emerges and evolves with the technology at a global level may mitigate the risk.
• Risk of monopoly: Global transaction banking generates around $1 trillion USD revenues every year. The access to and ownership of the data will be extremely powerful. Certain network topology (technology) may be able to dissipate the power (e.g. blockchain etc.) and form check-balance to prevent the service provider becoming a threat to the eco system itself.
• Risk of barriers between markets: as mentioned before, if certain market lags in this trend, it’ll be like the “primitive” society co-existing with the modern society. The barrier will be very high in cross trading. Furthermore, if these barriers are manually established across political territories, the transaction cost could be manipulated. e.g. It’s very likely that major sovereigns will adopt different cryptocurrency standards, just like what happened in the telecom network standards, which will increase the complexity of international settlements. Global neutral NGOs with technical background like BIS could be leveraged to advocate interchangeable payment systems and harmonize standards across jurisdiction
.B) Align organization for upcoming payment revolution:
• Streamline and automate the internal processes, which eventually turn into cash transaction. Speed is always measured for end-to-end process. Real time payment technology does not add much value if you are still using the paper-based internal payment approval process which takes 10 days to get all the signatures.
• Standardize and consolidate the usage of payment platforms. If you are using 5 different platforms, it might be wise to move to three or two to reduce costs, processing time with standardization. If you are using only one platform, it may make sense to broaden to two by proof-testing some more innovative platforms like Alipay or Paypal. To mitigate the risks, the adventure could start with domestic payment, which technically is a much easier settlement route. It also prepares you for potential transformation needed before future migration.
In the settlement world, the offline payment is a term for transaction processed asynchronously and the most adopted method in B2B world. It might be the right time for corporate finance to challenge our status quo of being “offline”.