Navigating Challenges and Opportunities in the Payments Landscape
How to plot a course for your organization through tumult in both the banking sector and the economy.
Looking back on the past three quarters, it is clear that 2023 has been a year of upheaval for the banking sector. We have experienced several significant bank failures, and the global economy has been struggling all year. A series of crises—including the escalating conflict in Ukraine, supply-chain disruptions around the world, and the tightening of monetary policies—has forced corporate banking to evolve.
This environment has had considerable implications for corporate treasurers and risk managers, particularly in the realm of payments. That is because the macroeconomic challenges have created both unique pressures on banks’ payments operations teams and opportunities for transformation.
The Payments Landscape in Corporate Banking
Payments have traditionally been seen as a steady, reliable source of revenue for corporate banks. However, the economic upheavals of 2023 have complicated that understanding. On the one hand, the higher interest rates which have persisted all year have the potential to boost banks’ net interest margins. On the other hand, the potential for a broad economic slowdown amid persistent inflation might challenge corporate clients’ ability to meet their financial obligations, which would impact banking revenues from payments.
These near-term challenges are thrown into further relief against the backdrop of multiyear trends in the growth of payments volumes versus their corresponding revenues. The 2023 World Payments Report from Capgemini projects that noncash payments volumes will grow a healthy 15 percent year-over-year for the next five years. However, annual payments reports from BCG and McKinsey indicate that transaction revenues will grow at only half that rate, about 7 percent. The clear trend is toward per-transaction revenues continuing to fall in a “race to the bottom,” placing further pressure on margins and profitability.
The rapid shift toward digital payments is compounding these complications for both banks and corporate treasury teams. Financial-services businesses poised to seize the opportunity might find that the rise of digital payments presents a chance to streamline operations, reduce costs, and provide more efficient services. Likewise, corporate banking clients would likely see benefits from a transition to digital payments, including increased convenience, speed, and transparency.
At the same time, the digitalization of payments brings new risks, particularly around fraud. For example, real-time, 24×7 payments are a boon for payers and payees chafing against the speed and availability of traditional payment methods, but they raise the specter of real-time, 24×7 fraud. When new payment methods allow the transfer of funds to an email address or social media handle, strategies like email phishing and social media account takeover become more effective instruments of payment fraud.
As increasing numbers of transactions move online and accelerate, financial institutions and their corporate treasury customers need to become ever more vigilant. Digital identity-verification methods are expected to evolve as a counterbalancing force to risks associated with fraud, ensuring that both sender and receiver can be verified using the most advanced authentication methods possible. One-time passwords, facial recognition, voice signatures, and fingerprint validation are all familiar elements of an increasingly complex security apparatus around even the simplest transactions.
Artificial Intelligence—No Longer Science Fiction
This year has also seen artificial intelligence (AI) move out of the realm of the experimental and into a role as a valuable enabler for those organizations which understand that the most effective use of AI is not to replace human beings, but to complement human creativity. For example, AI can automate repetitive customer service tasks so that service representatives need to get involved only when customer queries are sufficiently complex. AI can also enable bank staff and customers to extract greater insights from ever-increasing streams of data, so credit applications can be scored faster and with greater reliability.
Indeed, top-performing financial-services businesses are seeing 20 percent or more of their earnings before interest and taxes (EBIT) coming from AI use. They view AI as an enabler for driving revenue, not for cutting costs (though they report cost reduction as a beneficial secondary effect). And many are backing up that view by investing more than 20 percent of their enterprisewide revenue into AI technologies.
The downstream impacts of the way leading financial-services businesses are investing in and strategically focusing on AI is profound. Enterprises can become ‘AI leaders’ by applying AI to the extended data available in the new ISO 20022-based payment messages. Consider the procedure of matching receivables, invoices, purchase orders, and remittances, a staple of corporate finance teams’ late nights and a source of downstream cost due to the manual nature of the task and its tight deadlines. A single ISO 20022 payment message can contain all the information needed to match the payment to its associated supply-chain documentation, eliminating the need for manual reconciliation if AI is applied effectively to analysis of the data. The insights available for the corporate treasurers and risk managers who can harness ISO 20022 payment messages is unprecedented and will certainly give the savvy enterprise a competitive edge.
The Path Forward
Despite the challenges that 2023 has brought, it has also offered an opportunity for financial-services businesses to redefine their approach to payments and better serve corporate treasurers. These firms need to continue investing in digital transformation, enhancing security measures to protect against fraud, and providing innovative services that meet the evolving needs of their corporate clients.
The potential for digital currencies and blockchain technology to revolutionize payment services should also be top of mind. As the way money is created, stored, valued, and exchanged evolves, corporations should consider whether their financial institutions are staying at the forefront of these changes. Those that do are more likely to continue serving corporate clients effectively as payment technologies continue to evolve.
Ultimately, the future of corporate banking lies in the adoption of digital technologies. Corporate treasurers and risk managers should encourage their financial institutions to explore and invest in artificial intelligence, and to take full advantage of the richer data packaged in ISO 20022–based payment messages. Enterprises whose banks don’t utilize these technologies will not have the financial flexibility or the insight necessary to evolve with the changing landscape.