The Future Of B2B Banking

Although the changing nature of B2B transactions today is certainly forcing banks to rethink B2B services, U.S. offerings are generally much less robust than in other countries and there are two reasons. First is the U.S.’s continued reliance on paper checks—to a far greater degree than elsewhere—but the second issue is complacency. Put another way, financial players won’t make major changes to B2B payment systems until companies demand it. As long as B2B payers and buyers continue to work with the status quot, it’s likely what they’ll have for some time.

These are some of the thoughts from a new B2B payments white paper from Lipis Advisors and the Payments Innovation Alliance, a NACHA program.

But the endresult of B2B buyer complacency is not necessarily that buyers will eventually insist on more complex services and banks will then comply. This lack of movement may also push non-traditional companies to launch such services, potentially bypassing traditional banks entirely. Some of this has already started to happen.

“Non-bank payment processors have expanded their offerings to compete with banks and are having considerable success in this arena due to their flexibility and use of technological trends. The attitude of corporates is converging with that of modern consumers. In order for banks to maintain relationships beyond the corporate settlement account to a broader service offering, they will have to bridge the gap between old practices and new technologies,” the report said. “Today however, corporate customers are aligning their retail expectations with corporate banking and are increasingly selecting individual services from multiple banks and providers to suit their needs. This behavior will become more pronounced as the next generation of corporate treasurers—those that were born with smart phones in their pockets—move into senior roles.”

The reports also speaks to the potential advantages of mobile systems, but questions whether smartphones can display enough screen real-estate to deliver enough of the critical B2B details.

“Security is not the only reason that mobile banking at a corporate level is lagging. Many corporate transactions require more information and interaction with other systems than a mobile device can provide. Unlike consumers, corporates cannot simply click ‘approve or deny’ when it comes to most payment files. For this reason, tablet devices are favored over mobile phones. Tablets provide screens that are large enough to convey more information and the computing power and technical interfaces for appropriate security measures, making them more suited to the functions useful to corporate treasurers,” the report said.

This may not necessarily play out, as smartphone screens are getting larger, now that Apple has relented and has started shipping much larger screens on its smartphones.

“Despite reports that corporate mobile banking is gaining momentum, adoption among corporates is not happening as quickly as it has on the consumer side. Security concerns are the main hurdle that corporates (of all sizes) face as they consider the value of mobile technology. A 2013 survey by Greenwich Associates for Capital One Bank, addressed the question of how corporates use mobile payments,” the white paper noted. “The sample of respondents was pooled from the AFP (Association for Financial Professionals) and broken down into two distinct brackets; lower-end middle market businesses, those with a revenue ranging from $10 million to $100 million and large middle market businesses, those with a revenue ranging from $100 million to $500 million. According to the study, ‘More than a third of lower-end middle market businesses and over half of large middle market businesses use at least one type of mobile banking and/or payments service.’ Mobile banking is the more prevalent use case and it is driven by information rather than transactions.”

Some of this, the report said, involves banking IT history.

“Banks face a legacy of having chosen silos over integrated solutions, and integrating in half measures using strung-together platforms across payment types. Additionally, regulation is a double-edged sword. On the one hand, it plays a role in preventing banks from offering a wider, more innovative range of services. On the other hand, regulatory compliance is one of the major strengths that banks bring to corporates,” the white paper said. “As corporates and banks face more regulations across all regions, banks have the opportunity to utilize their reputations as trusted institutions; ensuring corporate payments are in good hands. This task is more important than ever, and requires farther-reaching regulatory compliance than ever before as corporates seek out international partners. It is paramount that banks keep up to date on all major regulations impacting payments.”

Another issue addressed are the very real concerns about realtime payments. Despite the inherent realtime advantages—simplicity, better transparency, processing cost reductions—its adoption had been slow.

“All of these advantages are significant but the business case for many banks and corporates to invest in real-time still lacks clarity. The cost of implementing real-time IT is significant and although B2B and C2B use cases are evident, they are not the most frequently cited use cases for real-time payments. In many countries, corporates have other methods in place to facilitate faster payments, such as card-based transactions and RTGS payments,” the white paper said. “Moreover, the majority of payments are scheduled and do not require real-time execution. Innovation is required in order to move the current applications for real-time payments away from P2P toward a business landscape. However, there are a number of developments that indicate that real-time payments will succeed for corporates, when the right tools are in place within corporate’s own IT billing, and invoice systems to post, receive and report the payments, as well as in banks integrated systems that surround payments. The integration of online banking and real-time payments is key for enabling account holders to pay for goods from their bank account. Models exist already for offering payment guarantees in real-time, such as iDeal in the Netherlands, the Euro Banking Association’s (EBA) MyBank, and Secure Vault Payments in the United States.”

The report also argued that realtime systems vary globally, which is a challenging for multi-national companies. “In Singapore, the introduction included the 14 major financial institutions from the outset. In Poland and Sweden, change is happening more slowly. Banks need to be prepared and remain flexible to upcoming changes no matter how real-time develops globally,” the white paper said. “Banks may also need to find an outsourcer for stand-in processing if their current systems are not capable of 24/7 operation. Corporates also have to be ready to make and receive and account for payments in real-time if expected to do so by their trading partners or customers.”

There’s also the matter of adding data to transactions—lots of data—but that is running into logistical issues. “The real challenge in corporate connectivity is enabling trade and increasing efficiency, not just facilitating payments. According to a survey in 31 countries completed by Lipis Advisors in early 2014, 47 percent of respondents reported significant pressure to increase the amount of remittance data that a payment can carry,” the report said. “Although the ISO 20022 standard allows for theoretically unlimited amounts of remittance data, nearly all the interbank payment systems that have implemented it have limited the amount of data that can be transmitted, and have done so in different ways by country. In doing so, banks lose the opportunity to help corporates connect to each other and risk relegating themselves to simply moving money, which is far less valuable than moving information.”