4 discernible trends of business models transformation in the payments market — according to Deutsche Bank Research

The analytical center Deutsche Bank Research published a report based on the survey of more than two hundred executives (CFOs and treasurers) across Europe. Covid-19 disruption to business has reshuffled priorities for CFOs and treasurers. It’s necessary to address how to maintain access to liquidity/credit, determine the cash requirements in the short and medium term, assess current risks, etc.

The focus is on European b2b companies and their payment needs. The satisfaction of current CFOs and treasurers is at a low of 50%, and b2b innovations and implementations are lagging the b2c efforts. The DB Research analysts explore the avenues to better use technology to reduce the complexity of b2b payments.

This article examines the past, present, and future of the payments industry and provides a forecast of trends in cash management, digitalization, mobile payments, cryptocurrencies, and blockchain. The key theme emerging from the survey is the transforming business models, which I would like to discuss in more detail in this blog.

CFOs defined 4 discernible trends in business models transformation.

  1. Traditional B2B businesses entering B2C and a growing interest in e-commerce.

E-commerce has risen by 50% in Europe since March, and a sustained online volume growth of more than 50% globally is expected in 2021 and 2022, that will trigger the need for innovative solutions.

Among all b2b businesses, a third plan to sell online and another third are working on “some” implementation. Only 1% have not started to work on any e-commerce solution. The rise of e-commerce will continue to be fueled by traditional b2b business looking to disintermediate their wholesalers and to reach end consumers directly. Selling directly to consumers highlights the need for technologies that can handle large volumes of small payments (rather than larger b2b payments).

During the pandemic, there has been the accelerated digitalisation of commerce, which implies the future growth in the payments market, and that market appears to be large. For example, approximately 80% of small European retail businesses didn’t have any online shopping capabilities, and some didn’t even have a basic website.

At the same time, according to the analysis of DB Research, consumers in Western Europe (France, Spain, Italy and Germany) spent an average between 30–60% more on online retail at the end of 2020 compared to March. The largest e-commerce markets are in the UK, with 42% of the population buying online, and the US, where e-commerce rose to 36% in December. In order to meet the demand, it’s necessary to develop API and in-app payments, offer loyalty programs, implement seamless solutions, and larger brands need their own payment tools. The data analysis is also becoming crucial. In the direct-to-consumer era, data becomes part of the service and competitive advantage. Some businesses use third-party apps or services to track personal data to provide better and more personalised advice. A fifth of CFOs and treasurers believe that mobile banking applications will have the biggest impact on B2B payments over the next two or three years.

2. Real-time treasury

CFOs and treasurers are willing to monitor real-time account balances and receive frequent notifications. Amid the crisis, top management need to be updated on their cash position 24/7, and real-time has become even more important. Instant payments, application programming interface (APIs) and open banking are the technologies and services with the greatest impact on b2b payments over the next two to three years.

Study participants believe that instant payments will have the greatest impact compared to other b2b payment technologies and services. This is especially true in Spain, Germany, Italy, where more than 40% of surveyed executives believe this. The UK is an exception, as instant payments — Faster Payments Service (FPS) — have been available there since 2008. In the Eurozone, instant payments started to be used in 2017 and they should become mainstream by the end of 2021.

Instant cross-border payments for businesses are also on track to become mainstream in the medium term. One of the most significant developments for that will occur when major market infrastructures adopt a common ISO 20022 financial messaging approach.

CFOs and treasurers believe that development of APIs is crucial for instant information (47%), automation (46%), reconciliation and system integration (41%), data analytics (38%), and payment execution (31%).

3. Usage of cash applications

Cash applications include automated accounting, reconciliation, and e-invoicing.

Digitized B2B payments offer a remarkable opportunity for optimisation. The transition of payments from cheques (or cash) to wire transfers provides a far better tracking method.

Indeed, digitising payments is the first step toward automation. Billing software is already widespread, but when combined with direct debit (or at least bank transfers), it allows companies to track and automate the entire back office. The software can automatically handle direct debits, track on-time (or late) payments, automatically remind customers to pay, and confirm that payments were made.

Here we have a triple advantage: lower costs; reduced complexity and coordination, which also lowers costs; time saving.

Many governments globally are implementing e-invoicing to track and ensure indirect taxes and customs regulations, which in turn helps companies with reliable audits and secure payments. In 2019, Italy became the first country in Europe to introduce mandatory e-invoicing for all b2b and b2c transactions. The harmonized environment for e-invoicing across the EU has also led to increased supplier competitiveness. Further regulatory changes such as PSD2 have enabled banks like Fidor, N26, Revolut and Starling to offer better digital services to business customers through quick digital onboarding with user-friendly customer interfaces, online/in-app commercial cards, and account management features. Many regulators have established “sandboxes” to develop new disruptive technologies.

4. The centralisation of cash management

The centralisation of cash management is supported by treasurers who are willing to centralise their cash positions, which often goes with rationalising and reduction of the existing bank accounts. This benefits the short-term liquidity cash management as it results in the consolidation and centralising corporate cash flows, diverting the money flows to fewer bank accounts. In addition, it creates the opportunity to further centralise the cash management activity such as account payable and receivable processing. To a certain extent, it helps to reduce external fraud, harmonise internal controls thereby contributing to greater operational resilience.

Half of the treasurers believe virtual account technology will change the world of payments.

Between 20% and 50% of those surveyed plan to implement virtual accounts. According to the survey, more than two-thirds of executives believe that virtual accounts would better integrate payments into financial systems and ERPs, reduce fees for suppliers, etc.

As for cryptocurrencies, treasurers are unlikely to adopt them in the near future. In the next eighteen months, only 5% are likely to use or receive cryptocurrencies, and approximately 80% are unlikely to use them. Also, only 2% of surveyed CFOs and treasurers use blockchain technology. Only 1% is planning to use it within six months, but 13% believe that the technology will have a big impact over the next two to three years.

Since in Ukraine the market participants, together with the government regulators, are distributing and investing heavily in the payment technologies, all four trends are relevant to our realities. The processes and trends launched in 2020 will be transforming the payment market for quite some time, and will impact all other business processes.

CEO of the international payment system LEO, the shareholder of IBOX Bank