Ask an average person on the street what they think of when you say “payments” and they’ll likely respond with something around paying for goods. Or if they are particularly savvy, they may reference an app they use to pay their friends, such as Venmo.
That is because these payment interactions are quite visible to their daily lives. To the average person, the payment begins and ends around the time money is debited, or credited, to the personal bank account.
These payments are also where the innovations and investment have been concentrated in the industry. Venture capital, private equity and investor money have been pouring in to seamlessly connect the consumer, the bank and the merchant to make paying for goods and services as easy as possible.
To the payment professional that spends most of their day facilitating payments between institutions, such a world seems far off. Why can it be so innovative to pay for groceries yet so arcane to send money from New York to London?
According to the keynote address delivered by Celent’s Patricia Hines at the PayCommerce Customer Conference, the gap between the personal and institutional experience may soon be closing.
That is because of the demographic megatrends driving change in virtually every large enterprise in every industry:
- Aging of the population in North America and Europe
- High rates of population growth in certain emerging markets, especially Africa
- Massive migration from rural areas to cities across all emerging markets
- Migration of workers from emerging markets to the advanced economies
- The coming of age of “digital natives”
These trends in turn are driving wholesale changes in the way we deliver money across the world. What was once an industry dominated by large banks, and a bank supported utility, is now quickly being disrupted by any number of nimble technology companies that promise to quickly deliver funds at low- or no-cost.
But this has primarily happened on the consumer side in the rise of P2P payment platforms such as Venmo and Xoom. What appears to be lacking are similar innovations in the B2B payments space, despite the relatively larger size of the B2B market side. According to the McKinsey Global Payments Map, B2B accounts for the majority of cross-border volume and revenue. In 2015, $135 trillion was transacted cross-border B2B flows, compared to $980 billionB2C; $765 billionC2B and only $405 billion C2C.
So why the disconnect between innovation in the relatively small C2C cross border payments transactions and the gigantic B2B space?
One word: inertia.
As Newton’s First Law of Motion teaches: An object at rest stays at rest and an object in motion stays in motion with the same speed and in the same direction, unless acted upon by an unbalanced force.
Bankers, their customers and corporate treasurers are quite happy doing business the way they’ve always done business. They can rely on sending payment instructions over the SWIFT network and those instructions being received. The payment will arrive in a specific timeframe (anywhere from one to three days) and they have the reassurances of the receipt.
Until now, there has not been an unbalanced force exerting pressure on this mechanism for change.
But recently the landscape has shifted and the future demographic trends, as Hines highlighted above, show a future in which the large cumbersome payments mechanism may not be able to keep up with change.
Let’s begin with the change in emerging markets. We’re seeing high rates of population growth in certain emerging markets, especially Africa, where massive migration from rural areas to cities is taking place across all emerging markets. This in turn creates more productivity for companies than those that may be headquartered in North America or Europe.
How are the large multi-national corporations going to allocate funds to these markets?
If they are using SWIFT, they are limited. SWIFT connects to 11,000 banks globally, and in a world in which there are more than 50,000 banks, corporations will need even greater penetration into these emerging markets.
Typically, this leads to expensive payment transactions as money is originated in a place like New York, transferred to a counterparty in London, where is it is finally routed through a network to an agent bank in the emerging market. All along the way, each counterparty charges a fee for accepting and disbursing the payment, and any associated FX transaction.
However, the rise of technologies such as PayCommerce's Federated Ledger(TM) are shortening the steps required to send and receive payments around the world. Using the foundation of blockchain, PayCommerce’s Federated Ledger is a hybrid integrating both distributed and centralized ledgers. This model enables faster payments across networks, combing the foundation of blockchain technology with PayCommerce’s messaging platform. The federation of compliance and business rules are combined with the consortium model. By leveraging the blockchain foundation, PayCommerce ensures it is compliant and accommodates business rules in a heterogeneous network environment. In turn, these innovations are driving down the costs of the transaction.
The result is a B2B payment that will soon resemble a P2P payment. In the future, the payments professional may one day have an app to handle large volumes of payments from Singapore to London in real-time, all in the palm of their hand.
That’s the sort of innovation I’m excited about driving in the industry.