Craig Ramsey has his finger on the pulse of how new payment types are transforming the business of banking. Recently, I recently spoke to Craig, ACI’s head of real-time payments – banking, to get his insights on how these trends will impact B2B payments specifically.
Adam: Where do real-time payments fit in relation to B2B transactions?
Craig: Consumer-centric P2P (person-to-person) “retail” payments often capture the headlines when it comes to real time. But these P2P use cases are still underpinned by an account-to-account transaction in real time, which could also be between two businesses (B2B). Traditionally, these B2B transactions have been referred to as high-value or high-care payments and have been processed as real-time gross settlement (RTGS) or cross-border transactions. However, despite the “real-time” in RTGS, these are not what we would consider modern real-time or instant payments. But the rise of modern real-time payments is now creating new customer expectations when it comes to B2B transactions.
Adam: What makes it a high value real-time payment, as opposed to a low value real-time payment?
Craig: It’s mostly about the workflow of the payment. For example, you wouldn’t be doing repair processing on a consumer payment unless they were a higher net worth individual, but you would be doing it for a smaller enterprise or a large corporate. High value payments, although nominally focused on the transaction value, actually refer to the use of those high value RTGS systems and cross-border payments. However, with many new instant payments schemes supporting higher value or even unlimited transaction values, and new ISO 20022 standards providing greater interoperability between schemes, high and low value real-time payments are converging.
ACI is unique in that we have a long history of supporting the workflows for both high and low value payments: both the corporate and retail sides of the house for financial institutions. In fact, every day we process about $14 trillion worth of payments and securities and about $13 and a half trillion of that occurs within our high value payment segment. So these are B2B, or corporate-based instructions.
Adam: How do banks serve both smaller and larger corporates’ payment needs? Can it be done with a single solution?
Craig: Usually banks will make decisions about the service level agreements (SLAs) they offer to different types of customers and then implement workflows to support those SLAs. With a solution that does both high value and low value payments processing, they can create those workflows in a single solution. Additionally, they create workflows that process the payments via high or low value rules based on agreements with customers, as well as variable rules. In this way, a single solution can leverage connections to cross-border payments such as SWIFT, as well as local RTGS systems such as TARGET2 in Europe, CHAPS in the U.K., FedWire or CHIPS in the U.S., RITS in Australia, etc. Payments can be processed to meet the rules for the local RTGS as well as for international payments and correspondent banking relationships. These solutions can even support new services such as Visa B2B Connect, which is based on distributed ledger technology.
Adam: How is demand for new services presenting itself?
Craig: While there’s definitely a lot of interest amongst financial institutions, we’re yet to see blockchain adoption for B2B payments. But the conversation is happening in earnest, and we are confident it will happen. I think there’s going to be certain use cases for which blockchain is well suited and can add significant value, and there’s others for which it adds complexity to the situation. I envisage that banks will need a hybrid model of choice, but that the end customer needs to be protected from that choice, though not hidden from it. Least-cost routing is going to be a crucial part of that choice model, but the choice to route by cost may be made by the customer or the bank. We are now shifting to a model where the choice is even more in the hands of the business customer. Large corporations have their own treasury departments that are as well educated in the financial systems of the world as any bank. The choice to leverage that expertise is manifesting itself as a major customer demand.
Adam: How can corporate banks differentiate their B2B payments services from the competition?
Craig: The high value payments space – RTGS and SWIFT – is so well established that at this point, RTGS payment processing has essentially become a commodity. Differentiation comes from the value-added capabilities of the payments hub and the speed of adding new settlement methods as they come to market. Modernizing payment systems includes re-architecting to onboard customers and banks onto new settlement payments much faster so banks are not faced with 18-month projects to roll out a new product to meet customer needs. With the right solutions, banks are able to roll out new products in days.
The speed of payments processing and settlement is well established in consumer payments, but in the B2B space, there is much to be done to bring the benefits of real-time payments to customers.
Whether high value or low value, ultimately, they’re all real-time payments. For banks, B2B payments will often be at a lower volume of transactions than P2P, but there are many common requirements around efficiency, infallibility of transaction flows, etc. However, RTGS systems have not historically been needed to operate 24/7, unlike modern real-time payments.
Banks should not simply try to shoehorn modern digital payments into old legacy platforms when they look to bring real-time payments into their B2B operations. They need to be able to support sub-200 millisecond transactions per second (TPS) latency, which is not going to be possible with legacy technology. But it is not just the speed of settlement – there are other processes and services that need to operate in real time around the payment. For example, high value payments repair and exception processing.
Banks need to invest in a B2B payments platform that can handle the speed of change in the ecosystem. In the past, they might have upgraded their B2B payments technology once every twenty years, but in modern payments and financial services it’s a continuous process.
Adam: What have you seen in terms of the evolution of revenue pools in B2B payments? Where is the growth, in transaction-based fees, cash flows, or something else?
Craig: The COVID-19 pandemic has had a significant impact on B2B payments. Previously, the industry was still essentially running the 80:20 rule with corporate customers: around twenty percent of income from the relationship came from transaction fees and eighty percent from higher value services such as account management, foreign exchange rates, lending, etc. We don’t yet know exactly what the full impact on B2B payments will be in the long run, but one of the trends we’ve seen emerge in consumer payments is that a lot of individuals have become more positive liquidity rich as a result of restricted consumer spending. That liquidity is now being applied to accelerated mortgage repayments or increased pension deposits.
These changes in consumer financial patterns will be positive for some corporate customers but will create challenges for others. Consumers depositing more of their income into savings may positively impact investment companies, insurance companies and other corporates that will have more funds with which to work. But for large merchants in specific sectors, they may see reduced purchases from consumers and seek new financial services and payments support from their B2B banking and payment providers.
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