Covid as a catalyst for changing payments

21 January 2021

As the pandemic accelerates the growth of e-commerce, Europe’s CFOs and treasurers are impatient for greater efficiencies in B2B payments, finds a Deutsche Bank Research report and survey

Cash is a dinosaur but doesn’t yet face extinction, while digital payments and payment services will continue growing to steadily displace plastic cards, announced a payments white paper issued at the start of the 2020s.

Covid-19 acceleration

In January 2020 Deutsche Bank Research published analyst Marion Laboure and chief strategist Jim Reid’s three-part report The Future of Payments as the new decade got underway. One year on, their observation that governments, banks and card providers were increasingly keen to see the elimination of cash remains true. What they couldn’t foresee was that the Covid-19 pandemic about to break worldwide would accelerate the move to a cashless society by persuading consumers and businesses to accept contactless payments.

In part 1 of the just-issued 2021 edition – titled Post Covid-19: What Executives are Thinking and Doing – the focus is on European business-to-business (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 business-to-consumer (B2C) efforts,” report Laboure and Reid.

Jim Reid and Marion Laboure, Deutsche Bank Research"B2B innovations and implementations are lagging the business-to-consumer (B2C) efforts"
Jim Reid and Marion Laboure, Deutsche Bank Research

In this year’s edition they reassesses the future of both cash and paper cheques in the wake of the pandemic. Indeed as flow reported in Covid-19’s assault on cash (May 2020) Laboure did so when the virus triggered the first lockdowns. She believes that the pandemic has hastened the decline of cash payments by four or five years, which as Figure 1 suggests European businesses can take in their stride. However the crisis is also accelerating the demise of cheques, which are still used by many B2B companies.

Figure 1: B2B companies that use cash and cheques as methods of payment

 Source: dbDIG Primary Research, Deutsche Bank

Chequing out

“There are good reasons to think cash and cheques will disappear in the medium term, at least for corporate use,” Laboure and Reid comment. “Both means of payment are losing momentum to dematerialised payments. During the last six months, only a fifth of companies used cash, and only two-fifths used cheques.”

This is most evident in data for the UK showing that the number of sellers using digital payments jumping from 8% in February 2020 to 50% in April. By August, the number of UK businesses with digital-only payment systems had stabilised at about 33%, to show “a remarkable overall increase in the adoption rate of digital payments.” CFOs now see cheques disappearing in the medium term, even though 43% of treasurers surveyed still use them for various reasons. Their disadvantages extend beyond the lengthy manual process involved and time needed for cash collections; in 2019 the annual value of cheque fraud losses in the UK reached £53.6m.

The new report reviews the rise of e-commerce helped largely by B2B businesses, which is expected to continue as they seek to bypass wholesalers and reach customers directly. “Selling directly to consumers accentuates the need for reconciliation and collection technologies that can handle large volumes of small payments (rather than larger B2B payments),” the authors note.

Covid-19 has seen the accelerated digitalisation of commerce, which implies future growth in the merchant payments market and “that market appears to be large”. For example about 80% of small European retail businesses lacked online shopping facilities, and some even had no basic informative website. The research team’s
analysis in Western Europe (France, Spain, Italy, and Germany), found that consumers spent on average 30% to 60% more on online retail at year-end 2020 compared to March. The biggest e-commerce sales are in the UK, with 42% of the population buying online, and in the US, where e-commerce rose to 36% in December.

In the new direct-to-consumer era, data is “the new gold” as it becomes part of the service and competitive advantage. Some companies have enthusiastically adopted apps to track personal data in order to provide better and more personalised advice. Some insurance corporations have directly partnered with credit card providers to provide enhanced insurance services in innovative ways. However, Chinese citizens appear most aware of the importance of in-app payments; from a group surveyed 42% described e-wallets as a fad and said that in-app payments will be more widely used in the future.

Changed priorities

The 2021 report includes results from Deutsche Bank Research’s survey of more than 200 CFOs and treasurers across Europe.

Covid-19 disruption to business has reshuffled their priorities for CFOs, note Laboure and Reid. Top of their revised list of issues are how to maintain access to liquidity and credit; implement back-up procedures; create visibility to total cash in global locations; determine cash requirements in the short and medium term; and assess current exposures.

Figure 2: European CFOs and treasurers transforming business models – challenges and potential efficiencies

Source: Deutsche Bank Research’s ‘The Future of Payments, 2021 edition
Fraud and security exposures attaching to B2B payment activity are regarded by European treasury departments as their main challenge, according to the survey and were cited by 59% of respondents. The report notes that business email scams have resulted in losses of over US$12.5bn since 2013, while global losses from all kinds of payment fraud tripled to US$32.39bn in 2020 from US$9.84bn in 2011. The boom in ecommerce created by the pandemic is likely to further increase these totals.

The survey also finds CFOs identifying four major trends that are transforming business models, each evidencing the pandemic’s impact:

  • Traditional B2B businesses entering B2C and growing interest in e-commerce: In Europe e-commerce has risen by 50% in Europe since March sustained online volume growth is expected of more than 50% globally in 2021 and 2022.
  • A move toward real-time treasury: Covid-19 has accelerated the delivery of bottom-up cash info to senior management. CFOs are willing to monitor real-time account balances and receive frequent notifications. They see instant payments, application programming interfaces (APIs) and open banking making the biggest near-term impact on B2B payments.
  • Usage of cash applications: Automated accounting and reconciliations systems, and e-invoicing technologies are expected to increase as fintechs’ solutions join those of banks.
  • Centralisation of cash management: This spans cash position visibility to cash concentration and domestic/country level to central/head office level and goes with centralisation and alignment of processes, tools, and bank account openings. Treasurers are willing to rationalise bank accounts, with many planning to implement virtual accounts.

Another ‘hot topic’ of recent years has been blockchain, but enthusiasm may be cooling off. CFOs and treasurers are “pragmatic people” and most have adopted a wait and see attitude to the technology, the report suggests. “They are currently focused on the longer-term impact of Covid-19 and most only focus on two or three priorities. And only 1% see blockchain technology as a solution right now.” Motivation to use blockchain is likely to stay muted over the next two or three years, due partly to the technology being associated with cryptocurrencies – especially bitcoin – which lack regulation.

Nor are they yet much excited by cryptocurrencies. Around 80% of treasurers said they were unlikely to use or receive them over the next 18 months and only 5% expected to do so despite the growing momentum behind central bank digital currencies (CBDCs).

CFOs and treasurers alike appear more interested in instant payments technology, which they regard as potentially transforming B2B treasury operations in reducing working capital requirements and freeing up cash; increasing transparency on cash flows; reducing counterparty credit risk as well as the need for risk profiling before onboarding new customers; and reducing the complexity associated with cash, cheques and letters of credit.

Figure 3: Europe’s CFOs believe instant payments technology will have the biggest impact on B2B payments over the next 2−3 years (i)

Source: dbDIG Primary Research, Deutsche Bank

First launched across the Eurozone in 2017, instant payments should become mainstream across the region by the end this year and CFOs and treasurers in Spain, Germany, Italy and Benelux appear most bullish about their potential. In the UK, where the Faster Payments Service (FPS) launched back in 2008, fewer of their peers expect the technology to make a significant impact. However, as the report notes “instant payment services are also taking off in major economies, such as in Australia, Japan, and the US; thus, we can expect instant payments to become the norm for domestic B2B and retail payments within two years.”

Figure 4: Europe’s CFOs believe instant payments technology will have the biggest impact on B2B payments over the next 2-3 years (ii)

Source: dbDIG Primary Research, Deutsche Bank

Centralising cash management

The pandemic appears to have also increased treasurers’ enthusiasm for centralising cash management and rationalising bank accounts. The survey that forms part of this year’s report found that half of the treasurers who participated believe that virtual account technology is a game changer for payments, as per Figure 5 between 20% and 50% of them plan to implement virtual accounts or “shadow accounts” in 2021.

Figure 5: Within the next six months, do you plant to implement virtual accounts for your treasury activity?

Source: dbDIG Primary Research, Deutsche Bank

As the authors note, short-term liquidity cash management benefits from the resulting consolidation and centralising corporate cash flows, as the money flowing from previous bank accounts is diverted to fewer accounts. Further advantages include the opportunity to further centralise cash management activity such as account payable and receivable processing and potentially helping to reduce external fraud and harmonise internal controls as a contribution to greater operational resilience.

As has been observed many times in the past year, the pandemic has accelerated trends that were already underway pre- Covid-19. Sweeping away the inefficient processes that still hamper many treasury departments when dealing with B2B payments look certain to be part of that process.

Deutsche Bank Research reports referenced

  • The Future of Payments: Series 2: - Part 1. Post Covid-19: What Executives are Thinking and Doing, 13 January, by Marion Laboure and Jim Reid

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