Transaction services: Keeping up with the internet giants

From the moment their website goes live, many e-commerce companies are operating across borders and in multiple currencies. The expectations of consumers mean the process of buying and receiving payment needs to be faultless from the outset. For their banks, this requires providing multiple payment options, straight-through processing and highly sophisticated treasury services. 

The numbers involved are growing fast. Deloitte’s ‘Global powers of retailing 2016’ report found Amazon to be the world’s most profitable online-only retailer, recording a retail revenue of $70 billion. The report also found that 11 of the top 50 e-commerce sites were operated by online-only companies. These companies are transacting huge volumes of payments across borders and need their transaction banks to make their business work. 

E-commerce companies operate with a radically different mind-set from traditional multinationals, which have progressed to global scale over many years. They are also businesses that do not just understand technology, they have the latest tech at the heart of their business. They are not going to be easily impressed by a bank’s latest systems offering. 

It is a complex challenge, one that spans the full spectrum, from the internet giants to smaller startups selling apps that have only a handful of employees but many millions in revenues in dozens of different countries and currencies. This new breed of company is forcing transaction banks to create a new blueprint of how to do business. 

Unique challenges

For a start, banks need to look at how they categorize companies that sit beneath the digital umbrella – internet companies are not a homogenous group.

“There is a tendency to view fintechs, e-commerce companies and startups all in the same way. They are actually three distinct businesses, with different needs. Trying to implement one solution for them all will not work,” says David Watson, global head of product development at Deutsche Bank.

He explains that a fintech will provide software; a startup is a small company looking to accelerate its growth; while an e-commerce company is a retailer selling directly to consumers. Under the definition of e-commerce, the structure can be broken down further, from focused e-commerce companies selling their own products direct to consumers, to online marketplaces with a complex structure aggregating smaller traders.

These marketplace companies create an additional level of complexity. Nick Howden, Asia Pacific technology, media and telecom sector head, treasury and trade solutions, at Citi, explains: “Marketplaces create some unique challenges as regulators often regard the flow of funds between parties as client monies, which have special reporting and fiduciary requirements on the banks that process the payments in the background.” 

Where revenues are accrued and kept is an increasingly political subject: the €13 billion fine levied against Apple by the EU recently is just one example of the sensitivities involved. It is also an example of how complex these businesses can be. 

Howden explains that the process of supporting just marketplace companies runs into a whole new way of working that can span many markets and currencies.

“Client money often needs to be segregated from corporate profits and attracts more regulatory considerations on a cross-border trade basis. Marketplaces are usually licensed to sell goods and services on behalf of merchants and may require regulatory approval to operate in certain countries,” says Howden.

“Often these regulatory approvals need to be supported by a bank with the requisite local experience. The bank seeking the approval needs to understand the end-to-end trading model and funds flow as well as the AML [anti-money laundering] monitoring on transactions, and KYC [know-your-client] processes for on-boarding sellers across the marketplace.” 

The cross-border nature of e-commerce gives the potential for huge volumes. Accenture’s ‘Cross-border B2C e-commerce market trends’ report forecasts that cross-border e-commerce payments will reach $1 trillion in 2020. The casual request for multi-regional and currency capabilities from a company may prove to be a big task for the bank receiving it. 

Paula da Silva, head of transaction services at SEB, explains: “These companies need an agile cash pooling structure that takes into account their multi-country operations, since they are often operating with a number of foreign currencies. We recently worked with a company that needed to set up business in 10 countries at the same time.” 

It is up to the bank to get a true understanding of the business and the company specifically to engineer the best solutions. Liz Minick, global head of corporate sales, Bank of America Merrill Lynch, says: “These companies do not interact with a bank in the traditional manner of sending requests for proposals every set number of years. From a relationship management standpoint, the teams are getting used to the fact that the traditional bid cycles do not hold true in this space, and reaction time is key.” 

Despite their scale and turnover, resources can be scarce. While the biggest traditional companies may have at least two or three dedicated staff in their treasury team, at an e-commerce platform that could represent their entire workforce. Their treasury functions need to be simple, despite their inherent complexity.

“E-commerce companies are very lean. We are often asked why these companies aren’t present at more events and conferences – the simple answer is they do not have the headcount to be out of the office,” says Minick.

Companies offering a multi-device, 24/7 service to their customers expect the same level of access back from their banks. Joanne Scheier, corporate segment market manager for BNY Mellon Treasury Services, says companies expect the consistency of service they provide for their own customers: “The impact of e-commerce on banks has far more to do with how e-commerce has changed societal expectations regarding the speed, efficiency and user-friendliness of transactions.” 

Speed and transparency

Compared with traditional companies, online retailers are not as willing to wait for a solution. 

Leda Glyptis, director at consultant Sapient, says: “E-commerce companies are more impatient. They build businesses with low friction and expect the same in their banking relationships. Their tolerance for slow or cumbersome methods is very low. Their willingness to indulge their bank and input the same information three times into a banking system will be very low.” 

Liz Minick, Bank of America Merrill Lynch

John Campbell, head of regional and FI sales, transaction banking at ANZ, comments: “Technology has been available for many years allowing logistics companies such as Fedex to help customers track where their parcel is, yet banks can’t tell our customers where their payment is. 

“E-commerce companies like Amazon want speed and transparency and hence will only work with banks that are capable of helping them to deliver this consistent client experience.” 

The needs of companies are further dictated by what their own customers expect. “E-commerce companies demand speed and access. They need services to be up and running quickly, and the demands of their clients influence their expectations on banks,” says Da Silva. 

Consumers are no longer happy to wait days for a refund if their payment has left their account within hours. This puts further pressure on banks serving e-commerce clients to be nimble.

For the fast-paced e-commerce companies, the reality of what their banks can do for them – and how long it will take to complete – can be very different from what they expect. A successful relationship partly comes down to finding a way to manage expectations. What they have experienced from consumer banking will be very different when cross-border payments, AML regulation and fluctuating FX rates are all taken into account.

“There are expectations that a corporate bank will be the same as a consumer bank. That’s where the need for education comes in, to explain that sending a payment within the US is not using the same architecture as sending funds to India, as an example,” says Minick.

Cindy Murray, head of platform transformation, digital channels and client experience at BAML, adds that the lack of homogenization across banking platforms between countries could be a culture shock to the corporates: “E-commerce companies look for global consistency, but there is no such thing. For the banks, this means trying to smooth out the experience. The ISO standards have certainly helped with this and can be leveraged to have a consistent experience in how payments are sent.” 

The payment method the company accepts itself can vary wildly and the processes available differ hugely between countries. PayPal operates across 202 countries, but does not include Pakistan, Bangladesh and Ghana. Even apparently universal payment methods have their blind spots. 

Sanjeet Rao, software development vice-president for Oracle Financial Services, says: “E-commerce companies may want to offer multiple choices for payments and financing that banks should have the necessary technology to integrate into the e-commerce experience. PayPal, wallets, debit cards, cash on delivery – even a six month payment plan in instalments. E-commerce companies may also want to offer closed-loop stored-value wallets and loyalty that can be hosted by the bank.” 

SEB’s Da Silva adds: “E-commerce retailers need a wide range of payment options, including cards, and are dependent on each country’s standards and practices. Accessible payment options are often a more pressing issue than speed.” 

Even the most common payment methods create difficulties for end-to-end processing across borders.

“The great majority of payments are being completed through credit cards, and their biggest pain is reliance on cards because there is no truly global player in the merchant acquiring space – it’s country-by-country,” says BAML’s Minick.

In some jurisdictions, the need to process cash payments is also necessary, as consumers either prefer or do not have the banking facilities to make a payment through another method. In India, for example, Amazon takes payments for around half of its transactions in cash. 

This creates a further layer of complexity in reconciliation. 

Rao says: “A traditional payment method like cash is not easy to handle. In the case of cash on delivery, banks will need to work with the courier company to facilitate the quick settlement cycles. Needless to say, any APIs [application programming interfaces] that the banks use to support e-commerce need to provide quick responses and be highly scalable.” 

With all these payments, a huge amount of data is produced. Tapping into these data flows is the next challenge for banks. BAML’s Murray says corporates are looking for more granular detail: “They are frustrated that the data doesn’t automatically come with the payment, they prefer the information to flow through.” 

Murray adds e-commerce companies want to be able to treat their downstream clients in the same way as they expect to receive their payments. This information is available, but is not being provided in a timely way: “There is a greater degree of urgency with payments. They want to pay customers within 24 hours, and the data involved is critical.” 

The nature of the people who run the companies is also dictating this desire for information. Cyrus Daftary, managing director and CEO of Markit CTI Tax Solutions, says: “This new generation of innovators are very technology orientated. They are more astute and comfortable with collecting data and analysis and running queries. These needs are underserved, and in the next few years there are opportunities for FIs to capitalize and turn this into a revenue opportunity.” 

To provide this efficiency, banks may need to overhaul their approach to the online community.

“Banks are still lagging behind, the experience is geared towards the needs of individuals and not corporations. There has to be a paradigm shift, taking into account all of the regulatory pressures from Mifid II, Basel III, BEPs, Fatca and more. Everyone tackles the regulations in a silo. They need to think more about the strategy,” adds Daftary. 

Deutsche Bank’s Watson adds that there needs to be a more collaborative approach to creating the network these companies need to make the most of what the technology can do: “There is not enough being done to service this sector. There is a need to accelerate the speed of progress, and this means engaging clients, the tech providers and the banking industry directly.” 

With so much change on the horizon, banks may find themselves in an unstable position. Future regulation may well change the face of e-commerce banking further. The implementation of the EU’s revised Payment Services Directive (PSD2) could have a big impact, opening up the payments space to third-party providers. 

There is a possibility e-commerce companies will look to skip the banks and card vendors entirely, obtaining funds directly from accounts themselves. Lu Zurawski, solutions practice lead, consumer payments EMEA, at ACI Worldwide, says companies are demanding more and looking at how they can achieve it themselves: “The arrival of PSD2 will open up the API interface mechanism. It will open up online payments to both corporates and newcomers, responding to changing global payments needs.” 

The benefits of this on the end user could make it very appealing to customer-driven e-commerce platforms. Says Zurawski: “Payments will not be issued through a card and will happen much faster than at the present time. Why shouldn’t the consumer have access to both of these benefits?” 

The arrival of online-based payment methods could even further remove the need for banks. But it isn’t clear yet if corporates have an appetite for this. 

Rao says: “Alternate payments in e-commerce, like cryptocurrencies or direct carrier billing, could move the entire payments cycle away from the banks. Companies need to think about either partnering with the banks, or doing it on their own. But are they looking to set up on their own? Do they have the competencies of running a bank? Do they want that additional undertaking?” 

The appetite for innovation extends beyond their technology. If companies find they are not receiving the support of traditional banks, they will not hesitate to look for support elsewhere. 

Sapient’s Glyptis says: “These companies are willing to crowdfund, they are willing to look for novel ways of raising capital. They will negotiate the traditional elements of banking relationships. I don’t think banks have given these changes enough attention. It is not prevalent enough right now to worry the banks, but when it is it will be too late.”