As global commerce expands, so does payments complexity: How should banks respond?

Written by FinTech Futures
3rd September 2014

Sarah Billings is director and executive responsible for global payment and deposit platform in the Global Transaction Services group at Bank of America Merrill Lynch

Payments are at the heart of global commerce, and with annual global flows of goods, services and finance expected to reach $85 trillion by 2025¹, companies and banks must be prepared to function in this environment. Businesses will operate in more countries than ever before, and will be required to manage their growing global payment volumes, which are forecast to grow 9% per year through 2020².

As one could expect, the growth in payments is acting as a catalyst to spur payment-related innovation around the globe, writes Sarah Billings.

New benefits in terms of settlement speed, standards adoption, and risk mitigation are available today or in development in many countries. Yet this increasing number of payment options introduces a new set of dynamics to navigate. For example, developments like real-time, low-value payment-clearing systems introduced in the United Kingdom enable beneficiaries to receive funds in near real time. Additional innovations around accelerated payments rolling out in Singapore (Fast and Secure Transfers – FAST) and Australia (New Payments Platform) in the next two years, will also impact the payments landscape.

While these new clearing systems, as well as many legacy clearings, have increasingly adopted the ISO 20022 XML standard, it is expected that organisations will continue to leverage a wide range of past standards and proprietary formats for some time. Innovation has also enabled new mobile payment systems especially in emerging economies such as the Interbank Mobile Payment System (IMPS) in India. Often coupled with “alias based processing”, where consumers can use an email address or mobile phone number to route a payment to a beneficiary, these new approaches need to be factored into any company’s global payment strategy.

Given the expected growth in global payments, organisations must also consider their current practices. Whether supporting their international cash management functions locally, regionally, or globally, all companies are dependent on local payment clearing systems to some extent, even if it is only for local payroll or collections. As a result, a significant amount of variability may be introduced based on country-specific payment practices, including formats, regulations, and indigenous processes.

Additional complexity centres around global risk management which has risen to new levels of importance due to changes in the geopolitical and financial landscape. For example, the European Debt Crisis, as well as turmoil in the Middle East and Eastern Europe, necessitates that companies have the ability to respond quickly to these disruptive market forces. On top of all of these considerations, government regulation permeates the discussions about global business challenges. In the aftermath of the global financial crisis, the banking industry is experiencing one of the most dynamic regulatory periods since the 1930s. New regulations have emerged that will affect both banks and their clients – with some key notable reforms being the Dodd-Frank Act, BASEL III and the Foreign Account Tax Compliance Act (FATCA).

What companies should look for

In light of the dynamic global business environment and the complexities discussed above, organisations are looking to their banks for guidance in navigating the global frontier, and for innovative solutions to enable them to meet their current and future business goals:

Global Consistency. To minimise the differences in transacting business around the globe, harmonised and consistent information should be present from payment initiation through reporting, regardless of region, currency, platform or channel.
Bank-agnostic solutions. Adoption of global standards, such as ISO 20022 and SWIFT Corporate Access, has increasingly helped companies reduce integration costs, interact more efficiently with multiple banks, and better leverage data to run their businesses. Banks and their clients may look to invest in robust ISO 20022 and SWIFT integration solutions that support global implementations.
Diverse payments capabilities. As businesses expand their geographic reach, many need access to global payment options that can support a wide range of functionality such as country specific value added services, mandate management services, and payment providers that can process large volumes of payments through local clearings.
Agile risk management. Organisations need the tools and resources to enable them to respond quickly and with flexibility to new geo-political and financial risks emerging in the countries where they are doing business.

How can banks deliver on these expectations?

As banks take up the question of how to lead in today’s payment environment and stay at the heart of global payments, it is critical that they don’t just plan for today’s challenges. Anticipating corporate needs five, 10, and even 20 years out can enable them to bring innovative solutions to their clients to help them compete in this new environment.

Seizing the moment of opportunity

Bank of America Merrill Lynch is working to meet these challenges by investing in the platforms and technology to help its clients be successful in the constantly evolving global payments environment. It is also looking at innovation more holistically. The end game should be to drive towards greater support for businesses and make commerce easier for all parties. In 2013, the bank initiated a large-scale, multi-year initiative to transform its core global banking platform. A major focus to date has been enhancing its global payments and reporting capabilities. Improving and modernising its core banking platform represents one of the biggest technology investments the bank is making and will ultimately impact more than 40 countries where the bank has a local presence or strategic bank relationship. This enhanced platform looks to offer a consistent information experience wherever clients make payments around the world, and minimise the differences between clearing systems in mature and developing markets. “As we embarked on this significant commitment,” says Sarah Billings, Global Payment and Deposit Platforms Executive, “it was important to first consider the current needs of our clients and look at how we could develop an infrastructure that would carry them into the future.” For example, the connection between payments processing and transaction information has never been more important, particularly as companies seek transparency, straight-through processing, and efficiencies in working capital management. The bank is tailoring its payment processing to meet the requirements of multiple industries across geographies. In addition, to make sure that all investment is deployed to create maximum value for businesses and commerce, the bank is widening it innovation approach. “It is critical that the concept of innovation be far reaching and focused on solving the evolving needs of our clients,” states Ather Williams, III, head of Global Payments and Global Strategy, Global Transactions Services. “It is indeed new technology, but it is also new ways of looking at and solving problems.” The value that global banks can offer extends beyond the relationship with each individual organisation. As an example, inefficient processes and disconnects between supply chain participants can have a considerable impact on the supply chain, not only by increasing internal costs, but also by impeding decision-making. The bank sees opportunities to harness its existing network to connect businesses with their suppliers and end customers to build intelligence, strengthen the supply chain and ultimately benefit every participant within it. Key to this strategy is creating marketplace synergies with third party payment providers to deliver expanded and more flexible payment solutions and overall to advance commerce. Investing to develop a state of the art banking platform to deliver payment consistency and efficiency, while assisting in solving global commerce problems in new and better ways, illustrates the commitment that Bank of America Merrill Lynch is making to solve the global payments challenges-now and in the future.

Clearly, it is incumbent on banks to invest and innovate wisely to keep up with the rapid pace of change and growth in commerce and payments. But it has to be the right investment and the right innovations that will mark the successful financial provider in the years to come. Targeted innovation coupled with long-term investment in their global payments infrastructure will enable banks to respond nimbly to the new dynamics and meet evolving client needs. Banks that expect to thrive in the midst of growing market complexities around global commerce must make sure their platforms use the latest technology. That technology must be designed to allow for maximum flexibility under a myriad of potential changing conditions. As an example, rules-based engines enable financial providers to meet unique processing requirements for a wide variety of clients in multiple industries, geographies and sizes without requiring time-consuming development for each configuration. Additionally, with the rapid adoption of ISO 20022 XML standards across corporates and clearings alike, employing a native XML platform can help banks leverage the robust structure of data elements and information in both processing payments and providing comprehensive and consistent information about transactions. The consistency achieved with more widespread adoption of the ISO standard reduces the challenge of converting to multiple payment formats. A decreased need for data transformation as transactions travel from the originator to the payment provider to the clearing and ultimately to the beneficiary significantly streamlines end-to-end flows. Often a critical pain point, banks should focus on improving payment reconcilement processes for their clients by providing enhanced reporting solutions that are flexible and client configurable, thereby reducing the need for costly development within a company’s enterprise resource planning (ERP) system. In addition, ongoing improvements may extend to provide greater visibility into and tracking of the end-to-end payment lifecycle and improved information for managing exceptions.

“Bank of America Merrill Lynch” is the marketing name for the global banking and global markets businesses of Bank of America Corporation. Lending, derivatives, and other commercial banking activities are performed globally by banking affiliates of Bank of America Corporation, including Bank of America, N.A., member FDIC. Securities, strategic advisory, and other investment banking activities are performed globally by investment banking affiliates of Bank of America Corporation (“Investment Banking Affiliates”), including, in the United States, Merrill Lynch, Pierce, Fenner & Smith Incorporated and Merrill Lynch Professional Clearing Corp., both of which are registered broker-dealers and members of SIPC, and, in other jurisdictions, by locally registered entities. Merrill Lynch, Pierce, Fenner & Smith Incorporated and Merrill Lynch Professional Clearing Corp. are registered as futures commission merchants with the CFTC and are members of the NFA. Investment products offered by Investment Banking Affiliates: Are Not FDIC Insured • May Lose Value • Are Not Bank Guaranteed. ©2014 Bank of America Corporation.

[1] McKinsey 2014.

[2] Boston Consulting Group 2012.