As Business Payments Go Digital, Banks Must Keep Up with Fintechs

The good news: Business payments represent a major growth area for banks of all sizes willing to enhance their offerings, according to the latest Capgemini World Payments Report. The bad news: Fintechs are gaining ground with business customers, and a demand for better cash management services could give them even more of an advantage, especially if banks move too slowly.

From digital wallets to palm payments, glitzy retail payment innovations often grab headlines. But a new study from Capgemini suggests an even bigger revenue opportunity for the banking industry can be found in commercial payments.

The study urges banks to offer enhanced cash management services and put more emphasis on how they can help businesses with all things payments.

Businesses are dealing with inflation and higher interest rates — and many have a much greater need than they did before to know their precise cash position all the time. Stale information is no longer acceptable.

All of this will further accelerate the digitization of business banking and payment services, Capgemini says.

The timing benefits banks that take initiative, as many businesses around the world still handle payments and reconciliations with paper checks and Excel spreadsheets. They’ll need help to make the transition.

Here’s what bankers should be thinking about amid the growing demand for improvements in payments services.

The Profit Potential Is There … and the Clock Is Ticking

Capgemini surveyed both payment executives and corporate customers for its 2023 World Payments Report. The consulting firm found that commercial transactions make up 56% of total payments globally, when measured by dollar value, and 41% when measured by number — “high value, low volume.”

Retail payments are the reverse, accounting for 44% of the dollar value and 59% of the number of transactions — “low value, high volume.”

“Globally, more than one in two payment executives agreed that commercial payments offer better profit potential than retail payments,” the report said.

In the Americas, the split between commercial and retail is a little more balanced than it is globally, when measured by number of payments transactions. Commercial makes up 54% of the volume, with retail at 46%.

The demand on the commercial side is very diversified, as it runs the gamut from large corporations to small businesses. Though large players in the banking industry handle the majority of commercial payments, the report stresses that size is not a pre-requisite for finding revenue opportunities in this sector.

Capgemini singled out Starling Bank — which many think of solely as a retail banking innovator — as an example of how smaller institutions can capitalize. The U.K. digital bank has put in place a marketplace of third-party services that can be integrated with Starling commercial services to help small and medium-size businesses. These range from payments to insurance to human resources to an app that helps firms find the best deals on energy.

Starling resembles a fintech in many ways, so it also illustrates the growing threat banks face in business payments and cash management from fintech competitors. It is also a strong example of how open banking works in the U.K.

Read more: How a Community Bank Helps Business Borrowers Cope with Rising Rates

Be Ready for Commercial Payment Trends to Speed Up

Business payments dipped during the pandemic, then rebounded. Now the shift toward digital options is accelerating.

“Commercial payments are fast catching up with the overall digital payments trend — borrowing innovation from retail to meet evolving corporate client demands,” the Capgemini report says.

At a minimum, more business customers want to adopt corporate credit cards, to obtain the comparative simplicity of card-rail payments over older payment channels, according to the report.

“High inflation makes money less worthwhile over time,” says the report. “As a result, traditional payment instruments, such as paper checks, become less effective for all value-chain stakeholders, making commercial cards a preferred choice.”

But the report gives the impression that credit cards will merely be a way station on the path towards faster options, such as bank-to-bank. The launch of the FedNow instant payments service, which follows the private sector’s Real-Time Payments service, brings tech capabilities to the United States that businesses in other parts of the world have already had available.

And 45% of the corporate executives in the survey favor business-side digital wallets as one of their top three preferred payment instruments.

Overall, businesses are tired of seeing payments get “stuck” in both directions. Nearly three-quarters of corporate treasurers said that payments get bogged down. Many would like to see greater integration of invoices and payments, to speed things along.

“Banks and payment firms must shift from current batch processing cycles to year-round, always-on, continuous transaction processing.”

—Capgemini World Payments Report

Banks and payment providers aren’t the only ones holding up the works, according to the report. Many treasurers complain that missing invoices can cause delays.

Read more: Killer Small Business Banking: What Fintechs Do That Banks Ought To

Make Cash Management More Efficient for Businesses

Many businesses, especially larger ones, are constantly using credit. To the extent they can reduce that, the more profitable their operations are. Rising rates resemble an increasing tax on operations.

“Corporate treasurers must focus on working capital management,” the report says. “Freeing up operational cash is cheaper than seeking external credit!”

Businesses don’t make and receive payments in a vacuum, especially amid increasing globalization. Being able to know exactly how much money the business has to work with is critical when dealing with potential supply chain disruptions and political instability around the world.

But investing in improved business payment services and cash management doesn’t just help customers but also banks, according to Capgemini.

“Cash management can be at the heart of banker and enterprise client relationships,” the report says. “It can be an engine to drive broader banking growth.”

As financial institutions determine how much and how fast to invest in such improvements, they have to take into account that fintechs are encroaching in this space. They are coming in both as cash management competitors but also as partners, the report says.

This duality isn’t lost on payment executives: “71% of respondents said they prioritize collaboration with fintechs to create and offer innovative cash management service.”

Nearly as many seek out fintech partnerships to obtain new technology, increase speed to market and control IT expenses.

Read more:

Be a Strategic Partner to Business Customers

Business banking can be very sticky, but the adhesive isn’t as strong as it once was, especially when fintechs and other nonbank competitors can cherry-pick aspects of payments and cash management.

History has shown that fintechs often start out with one service and keep adding — as Square did — expanding their relationships with business customers along the way.

In any case, inertia on the part of customers isn’t as reliable a friend anymore.

Capgemini says that the key to holding onto relationships is not only improving offerings but embedding them within business activities as much as possible. The idea is to make more seamless connections between bank provider and business user. One example cited in the report is Goldman Sachs’ TxB service. This combines banking as a service and application programming interfaces to embed enhanced treasury management services from the bank into client firm’s operations.

“There is a sizeable opportunity for banks to step up as strategic partners at the domestic and regional level,” the report says.

This approach pays off on two fronts. One is deeper engagement with business clients. The other is the potential for growth. (Or, as the report phrases it: “Strategic banking partners could increase cross- and upselling opportunities.”)

The payments executives in the survey agreed on the potential for an advantage, with 67% of them saying bank and payment companies that partner with corporate clients have a greater chance of retaining those relationships, in spite of the competition from fintech and banking competitors.

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