Among the favourite stories of editors and marketing teams is ‘The Future of Payments’, with graphs showing the steady but unstoppable growth in payment volumes, breathless reporting of the meteoric rise of marketing-savvy fintechs, and sci-fi forecasts about how consumers and businesses will behave in the future. Then came 2020. During the first half of the year, global payment revenues plummeted by around 22%, and despite a partial recovery during H2, a US$140bn decline in payments revenue wiped out gains achieved in each of the previous few years.¹

93%
Year-on-year growth in online US consumer spending (May 2020)
(Mastercard SpendingPulse^TM)

But the payments story of 2020 – and equally 2021 – is not that of falling payment volumes. Rather, due to Covid-19, the future of payments as we envisaged it 18 months ago is already here. McKinsey’s Global Payments Report 2020, published in October last year, notes that “the crisis is compressing a half-decade’s worth of change into less than one year”. In May 2020 alone, US online consumer spending grew by 93% year-on-year.² Consumer and business payment preferences, customer engagement models and payment operating models have shifted to a degree barely imagined by even the most visionary future of payments reports.

The question for corporations, banks, fintechs and other payment stakeholders is what this means for them. The answers, however, need to come quickly, in order that each can position for a new, and likely different, future of payments from the one previously imagined. One answer may be the bank-led merchant solutions that are emerging, such as that from Deutsche Bank, which is scheduled for a Q2 2021 launch.

For many corporations, the pandemic affected outgoing payments far less than incoming flows. Those that still used cheques in some markets could generally access an online banking system to switch to electronic payments, with both internal and payee objections quickly swept away by the shift to homeworking. While travel and entertainment expenses spend was decimated as business travel was cancelled, many companies shifted the unused credit limits on their card programmes towards purchasing cards for B2B spend.

The shift in incoming payments, however, has been far more significant given an acceleration in the digitalisation of business models (both B2B and business to consumer). Efficient merchant solutions – whether for cards, digital wallets, QR code-triggered transfers, or buy now pay later – have become a priority. For example, in 2020, 60% of point of sale transactions and 64% of e-commerce transactions in the Europe region were made by credit card, debit card or digital wallets (that are typically linked to cards).³ Today, with the increase in contactless card limits, the rapid shifts in consumer preference towards digital payments is compelling corporations to find ways to manage the payment methods favoured by customers (see Figure 1). At the same time, they need to connect their online and offline businesses in a coherent way, and maintain both cash and working capital efficiency.

A challenge for many companies today, particularly those that operate internationally, is the fragmentation in merchant solutions. Different payment services providers, card acquirers and platforms make it difficult to manage incoming flows in a consistent way, with a high cost of change as new payment methods emerge. Consequently, many companies are turning to their cash management banks for a more integrated, or omnichannel, approach.

Technology is key to banks’ success in driving a compelling merchant services proposition, notes Alexander Knothe, Director, Head of Client Solutions and FX Product, Deutsche Bank Corporate Bank. The bank is responding by creating a platform for e-commerce that connects digital business models with payment processors, banking services and other channels, enabling users to accept and manage online and offline payments.

“This means that we can support customers’ global payment needs from end to end through a ‘one-stop shop’, including card acceptance, digital wallets, bank account-based payments and alternative methods,” says Knothe. He adds that the approach provides a combination of integration, scalability and adaptability that can respond as customers’ needs evolve over time.

The value of the connectivity provided by a platform is not simply the omnichannel approach to payments, but the additional services that can be integrated, such as specific solutions for marketplaces, as well as integrated foreign exchange (FX), liquidity and financing solutions. Companies selling cross-border, dynamic currency conversion in the customer’s home currency create a seamless experience for the customer, without creating an FX exposure.

Companies across industries are also leveraging digital marketplaces more actively. Even before the pandemic, digital marketplaces were forecast to account for 60% of online sales by 2023, an increase of 22% each year compared to 2019 figures,⁴ so solutions that connect buyers and sellers and accelerate flows are becoming essential.

In one example, Thorsten Woelfel, Global Head of Card Acceptance, Deutsche Bank Merchant Solutions, says that “the marketplace owner uses Deutsche Bank’s acceptance payments infrastructure for their platform sellers so they can accelerate and automate cash management processes such as settlement and reconciliation.”

Beyond the additional benefits of a single provider of merchant solutions and wider cash and treasury management services, there are also potential cost advantages where a bank is both card issuer and acquirer.

Woelfel explains, “By acting as both issuer and acquirer, we can deliver substantial savings to clients, and accelerate the flow of funds by avoiding having to route the payment through the cards network or perform additional end-consumer validation. This is also leading to an improved checkout conversion rate.”

“The crisis is compressing a half-decade’s worth of change into less than one year”
McKinsey Global Payments Report 2020

Banks’ moves – such as Deutsche Bank’s expansion into merchant solutions – do not mean that fintech providers are no longer relevant. Instead, it creates the opportunity to connect innovative solutions through a single channel, avoiding the fragmentation associated with multiple providers and platforms. Inevitably, no single provider, whether bank or fintech, and whatever their investment capacity, will seek to develop every element of their solution. Rather, partnerships that leverage the strengths of different parties, but are delivered to customers through a single relationship and platform, are more likely to meet the needs of corporations with complex needs and multinational operations.

The opportunities for integrated merchant solutions that connect buyer and seller will continue to evolve beyond the traditional e-commerce models into wider ecosystem connectivity. Future mobility trends, such as public transport and electric vehicle charging, for example, will increasingly rely on the rapid, convenient exchange of value across multiple counterparties.

However, the pandemic has shown that the future of payments will not be decided by banks, fintechs or governments. Instead, these organisations simply create the conditions and solutions that enable new business models to grow, and consumers and businesses to consume goods and services in a way that best meets their needs. Consequently, a vision of the future as we might envisage it today is unlikely to look the same as the one we had even 12 months ago.

With the development of new, integrated, omnichannel solutions, from card acquiring through to digital wallets and alternative payments, FX and marketplace solutions, however, businesses can build their payments and collections infrastructure in a way that acknowledges that payment methods, and consumer and business preferences, will evolve and reinvent the way we buy, sell and pay.

“The pandemic has triggered exponential growth in corporates’ demand for digital payment solutions”
Ole Matthiessen, Global Head of Cash Management, Deutsche Bank

Sources

¹ See https://mck.co/2ZmacYD at mckinsey.com
² See https://bit.ly/2NucSAW at mastercardservices.com
³ See https.//bit.ly/3xYkUnS at worldpay.globalpaymentsreport.com
⁴ See endnote 1