Competitive or complementary? Banks versus non-banks in payments and receivables
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Competitive or complementary? Banks versus non-banks in payments and receivables

Changes to the regulation of non-bank providers of payables and receivables services could spice up competition with bank providers, but for now the relationship is more complementary than competitive.

Banks and non-banks have traditionally played different roles in their payables and receivables services. Banks have been the masters of the financial flows and custodians of the money, while non-banks have been the tech-savvy innovators, developing intuitive systems to make complex systems easier to navigate.

Similarly, on the client side there is division. While payables and receivables are logically linked, in practice the two are separate within corporates, controlled by different departments, with payments usually associated with procurement and receivables with sales.

However, rapid advances in technology promise to sweep away traditional processes, replacing them with leaner and more efficient systems. Meanwhile, Sepa is reducing the number of banks corporates need to maintain relationships with by making it easier for a single bank to operate across the European market.

The result is less business for the banks and a lot more thought about how they can stay relevant. Taken together, these factors might increase competition between the providers and shake up the traditional roles played by banks and non-banks.

“The future is convergence,” says Steven Murphy, CEB TowerGroup research director.

He believes, ultimately, providers in this business will offer a front-to-back, straight-through-processing (STP) solution to allow procurement departments to click to place an order, with subsequent discounting, delivery, payment and settlement being made without manual intervention.

However, this remains strictly theoretical. “We are nowhere near execution of this stage yet,” says Murphy. “The technology for STP is already here but we are a long way from both clearing away multiple legacy systems and achieving the full standards adoption required for true convergence.”

While Sepa looked like a great opportunity for corporates to sweep away their old processes and implement new and efficient procurement systems, that has not yet happened. The majority are working hard just to meet basic compliance, with the aim of avoiding fines.

STP also requires a level of inter-corporate cooperation that can be difficult to manage, especially in bigger industries where there are more players.

Conversely, the greatest advances towards automation have come in industries, such as automotives, where there are a limited number of players using the same relatively manageable group of suppliers, where it is possible to organize common standards.

There is also considerable variation between corporates in terms of the advances made towards automation, even within the same sectors. Acquisitive companies might have made less progress standardizing and automating their systems, for example.

Most of the innovation seen in payments and receivables is coming from non-banks and technology providers such as Oracle and SAP, which are using their technological sophistication to streamline the procurement process. If competition heats up between the providers, this could be an advantage.

Karin Flinspach, EMEA head of payments and receivables, at Citi

“As regulations like e-money take effect and spread across Europe, non-bank providers will start to become more bank-lite, which will level the playing field,” says Karin Flinspach, EMEA head of payments and receivables as Citi. Yet even with the additional regulation, oversight of non-bank providers is more flexible compared with the requirements financial institutions are subject to, says Flinspach.

“There are still risk considerations,” she says. “Banks participate in real-time settlement systems, so once the payment has been processed there is no risk to the client in case of a bankruptcy. Settlements processed by non-bank providers do not offer this risk mitigation.”

Banks will be wary of losing business to non-bank institutions. Payables and receivables is a fee-based business, so banks will be keen to maintain their presence. How keen they are to expand into other parts of the process is less clear.

“Some banks ventured into enterprise-resource-planning (ERP) services but most found it was too expensive for banks to provide and created unhealthy stickiness between them and the client,” says Flinspach.

“ERP isn’t our core business. But, as an international network bank, it is in our interest to concentrate on the financial flows. For a domestic bank there may be more pressure to compete for that kind of business.”

Murphy adds: “Banks don’t want to provide all the connecting software, but do want to maintain visibility in the whole process, with the ability to deliver value-add services and, of course, create financing opportunities.”

Traditionally, the two sides play to their strengths: banks as guardians of financial flows, subject to greater levels of regulation; and non-banks as innovators, able to harness new technology to streamline systems.

Banks have offered lockbox services – simplifying collection and processing of account receivables – to larger corporates, especially, physically receiving the payments into the corporate account.

“Even here they often use a third-party technology system to handle that process, as most of their legacy systems were built around handling cheques and paper,” says Murphy.

However, while technology firms such as SAP and Oracle manage the payables and receivables systems for large corporates, the settlement always comes back to the bank.

“No matter what system you use to make a payment, eventually the money has to go into an account in some form – there has to be a custodian of the money,” says Flinspach.

Banks might be excluded from some closed loop systems but these tend to be small. Most larger systems require some interoperability, which is usually provided by a payment scheme or a bank account.

Strict regulatory criteria mean financial institutions dominate the payment schemes.

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