BUSINESS PAYMENTS 2022 How Industry 4.0 Is Defining The .
BUSINESS PAYMENTS 2022How Industry 4.0 isdefining the future ofbusiness payments
ContentsExecutive summary. 1Business-to-business payments: legacy and evolution. 2Shaping your company’s future payments capability. 3Not entirely “out with the old,” but definitely “in with the new”. 4Paper checks are going, going, but not gone. 5Digital transformation: acceleration and opportunity. 6The digital transformation has already begun. . 7Large-scale shifts in B2B payments. 8How shifting payments create opportunities. 9Innovation is inevitable.10The real-time payments global landscape.11Real-time payments bring more than just speed.13Increased organizational intelligence through data.16Future state: Business Payments 2022.17Organizations must adapt now to meet the coming demand .18Connecting the processing points.19Meeting business needs with payments excellence.20Mastercard Business Payments: keeping businesses ahead of the curve.21A complete suite of solutions across all payment needs.22Payment platforms and infrastructure.23Conclusions.24Endnotes.26TA B L E O F C O N T E N T S
EXECUTIVE SUMMARYWhat was once an evolution ofcapabilities is now a revolutionof technology and expectationsas we move into the new eracalled Industry 4.0.The financial services sector has come to a critical crossroads. How do we, as an industry, determine ourown future when delivering business payment solutions to customers, regardless of size or complexity?Emerging, rapidly evolving technologies have forever altered the payments landscape. Banks in particular – given thecomplexity of services, global delivery, and intense regulatory scrutiny – must navigate it carefully. It’s a journey that canno longer be successfully travelled alone, instead requiring the inputs of trusted partners and the precise execution ofmodern technology.An age accelerated by real-time expectations is driving worldwide reformWhile traditional payment rails remain reliable solutions, continuing to be at the center of cash cycle management, theshift from paper-based to digital processes is inevitable. The universal desire to improve efficiency, respond to innovationand reduce operational risk is necessitating worldwide reform of payments. Today more than 20 countries possess real-time payment (RTP) systems. Some first-moving markets including the UK, Mexico and Switzerland, adopted RTP due to regulatory pressure. Markets such as South Africa and India, banks proactively (and wisely) responded to the growth of digital and nonfinancial players entering the market.The U.S. has launched its first new payment system in 40 yearsWith data and messaging functionality seen as the most advanced in the world, the U.S. RTP system’s robustnessaccelerates innovation, impacting multiple use cases and flows including P2P, C2B, B2C and B2B. For example, technologypioneered by Vocalink, a Mastercard company, powers the real-time payments (RTP) infrastructure and rails operated byThe Clearing House (TCH). This becomes the foundation for a safer, smarter, faster digital payments system.Innovation is creating new avenues for connectivity and intelligenceThanks to digital innovation, companies can now connect all processing points in the cash cycle digitally, improvingcosts and mitigating risk. But more than that, companies can see the competitive advantage of more broadly availableenterprise intelligence through easier data access and analytics.Banks remain key delivery partners for businesses navigating the new economy created by Industry 4.0. Success will comeby pairing with powerful financial technology providers possessing the vision and global expertise to navigate toward2022 and beyond.EXECUTIVE SUMMARY1
Business-to-businesspayments: legacyand evolution
SHAPING YOUR COMPANY’S FUTURE PAYMENTS CAPABILITYThe rapid pace of technologicaladvancement sees the world changing inprofound ways at an unprecedented rate.In 2016, the World Economic Forum suggested that the Fourth Industrial Revolution,i now heralded as “Industry 4.0”, is officially underway.iiWe are on the cusp of a new industrial revolution, unlike anything we’ve experienced before. While the first two – the mechanization ofproduction followed by the creation of mass production – took place over the course of 150 years, the third, spawned by electronics andinformation technology, commenced a mere 20 years ago.Now a fourth revolution is building on the third: a digital age moving at a speed with no historic precedent – effectively blurring the linesbetween the physical and virtual worlds, utilizing quantum computing, artificial intelligence, distributed ledger, advanced visualization,and other technologies. The cycle of change has become rapid and continuous – keeping up with the pace requires vision andcollaboration. Even global C-level executives see the need for improvement in preparing to manage this convergence of technologies(Figure 1). As companies confront their ability to take on the intricacies of rapidly changing technologies, partnerships will acquireheightened importance. As such, connecting with partners that have proven to be technology savvy will play a huge role in future success.FIGURE 1: THE C-SUITE IS NOT ENTIRELY CONFIDENT ABOUT PREPAREDNESS FOR THE TECHNOLOGY REVOLUTION“Highly prepared”How prepared is yourorganization to addressthese issues?20%Emergence of newbusiness delivery models17%Blurred linesbetween businesses15%Smart and autonomoustechnologies“Highly confident”Extent of agreement withfollowing statements aboutorganizational readinessto benefit smart andautonomous technology:22%A strong understanding ofthe effect on the workforceand organizational structure16%A strong understanding of howto integrate our solutions withinthe external infrastructure8%A strong businesscase for our newtechnology solutionsSource: Deloitte and Forbes, Survey of Global C-Suite, “The Fourth Industrial Revolution is here—are you ready?”, 2018B U S I N E S S -T O - B U S I N E S S PAY M E N T S : L E G AC Y A N D E V O L U T I O N3
NOT ENTIRELY “OUT WITH THE OLD,” BUT DEFINITELY “IN WITH THE NEW”The history of Business Payments is a long one, beginning with central checkclearing through the Federal Reserve about 100 years ago. The 1960s and1970s ushered in the next era of payment systems, with incremental – but notrevolutionary – changes occurring in the ensuing 50 years.Until very recently, there were four basic types of Business Payments systems inthe United States, with similar systems and some variations across the globe:Paper checksCentrally clearedthrough the FederalReserve, with mostchecks today convertedto electronic images.Automated ClearingHouse (ACH)Net electronic settlementsystem with both debit andcredit solutions, including theprivately owned ElectronicPayments Network andthe FedACH system. Eachdeveloped foreign market hasan equivalent system, such asBankserv for electronic fundstransfer (EFT) in South Africaand ACSS in Canada.Card payment systemsCredit, debit, and prepaidcard systems in bothopen- and closed-loopglobal networks, issuedthrough bank and nonbankpayment companies.Real-time grosssettlement (wires)The privately owned ClearingHouse Interbank PaymentsSystem (CHIPS) and thefederally-managed system(Fedwire). The equivalentsystem in the United Kingdomis CHAPS and in Australia RITS.The past ten years saw the development of real-time payment systems, which have been deployed in various internationalmarkets including the United Kingdom, Singapore, Mexico, India, and Taiwan. These are either real-time or near real-timehybrid systems, typically used for consumer and small business purposes. The U.S. has now deployed an upgraded ACH systemcalled Same Day ACH (credit and debit) as well as real-time payments from The Clearing House. It’s important to distinguishbetween these various types, since not all “faster” systems deliver payments in real-time. For example, Same Day ACH is notimmediate but will allow payments posting on the same day (on business days only) if initiated before 2:45 p.m.B U S I N E S S -T O - B U S I N E S S PAY M E N T S : L E G AC Y A N D E V O L U T I O N4
PAPER CHECKS ARE GOING, GOING, BUT NOT GONEThe use of paper checks has been diminishing across developed markets for years. We’re seeing an upward trajectory in electronicpayments, most significantly in the cards space in markets outside of the U.S. Between 2012 and 2016 there was an 18.5% growthin card transactions in non-U.S. markets.iii Yet, the U.S. still remains a heavy user of checks, especially for business transactions. Basedon an analysis of payment flows in the U.S. (Figure 2), Mastercard sees the business-to-business (B2B) payments market in the rangeof 25 trillion per annum, with checks accounting for more than 50% of the overall transaction value.Companies are recognizing the advantages of digitizing payments, which include more data, more control, and more automation.These improvements can substantially reduce the cost and risk associated with paper processes in general, but the greatest benefitslie in business payment inefficiencies and payments fraud risk (Figure 3).FIGURE 2: THE U.S. REMAINS A HEAVY USEROF B2B PAYMENT CHECKSFIGURE 3: CHECKS ARE NOT ONLY COSTLYBUT A RISKIER MEANS OF B2B PAYMENTMarket size by payment flowPayment methods by incidence ofactual/attempted fraud 2017North AmericaVolume in Trillions 141 25 18 5712 of top 5 Mastercard markets4Checks% of global revenues% of total volume1523WiresPCE Growth (2017)U.S.Commercialcards1630%Cash/Check Opportunity(all flows)ACH creditACH Opportunity(all flows)74%48%30%ACH debit248Canada41%35%13%4.1%4.5% 23T 24T13Source: 2018 AFP Payments Fraud and Control Survey156PCECardedB2BP2P/B2CACHTOTALCash & CheckReducing check processing by 10-50% equates to 1.3- 58.3B savings/annumbased on an estimated 5.3B B2B checks processed in 2015Note: Figures may not sum due to rounding.1 Includes approximately 4 trillion in non purchase personal consumptionSources: 2016 - Oxford Economics, Euromonitor international,Kaiser Associates, Mckinsey Payment Data, U.S. Bureau of EconomicsAnalysis; 2017, Statistics Canada; 2017, Mastercard internal analysisSource: 2015 RPMG EAP Benchmark Survey, CSS Survey, Fed Payments Study 2016B U S I N E S S -T O - B U S I N E S S PAY M E N T S : L E G AC Y A N D E V O L U T I O N5
Digitaltransformation:acceleration andopportunity
THE DIGITAL TRANSFORMATION HAS ALREADY BEGUNSeveral trends are redefining Business Payments.The upswing in card payments continues to grow, accelerated by enhanced straight-through-processing capabilities. But the biggestshift is the onset of real-time payments in the U.S., spurring improved customer experiences and new efficiencies for business.According to The Association for Financial Professionals (AFP) 2016 Electronic Payments Survey, business payments continue to skewtoward checks, especially in the U.S., with the use of checks for B2B payments in the U.S. remaining more-or-less flat from 2013to 2015. But that trend is now changing. The Federal Reserve Payments Study 2017 supplement has projected a decline of 3.7%in commercial check usage for the year.iv This raises the question: how quickly will paper be eliminated from business payments? Theanswer lies in a combination of variables driving the rapid trend away from paper-based payments processes in the U.S. – a move that iswell underway in other world markets. he surge of investments in financialTtechnology (fintech) of the past four yearscontinues. Early fintech products andservices were driven primarily by consumerapplications, but now the shift is towardB2B solutions.v These digital solutionsare becoming more familiar to the endusers, who increasingly expect an easierexperience in the workplace. he era of open banking is upon us,Twith the European Union’s revisedPayment Services Directive (PSD2) nowin force and similar regulatory initiativesunderway in Australia, Hong Kong, andSingapore.vi Open banking will providebanks an opportunity to offer nextgeneration services through various3rd party channels. eal-time payment systems areRbecoming more commonplace,helping to drive adoption of globalstandards (ISO 20022). The adoptionof the global messaging and datastandards will unlock new innovations.D I G I TA L T R A N S F O R M AT I O N : AC C E L E R AT I O N A N D O P P O R T U N I T Y7
LARGE-SCALE SHIFTS IN B2B PAYMENTSMastercard estimates that the current global business payments market exceeds 100 trillion, encompassing all forms of payment.That said, the number of B2B noncash transactions continues to grow thanks to two major factors: (1) general economic growth,which varies by region and market, and (2) businesses’ continuing adoption of digital payments. Global B2B noncash payments areexpected to increase at a cumulative average growth rate (CAGR) of 6.5% through 2020, reaching 122.4 billion transactions (Figure4). Because financial institutions rely on transactions to generate noninterest revenues, it is critical for them to deliver modern digitalpayment solutions in order to retain key clients and relationships.FIGURE 4: B2B NONCASH PAYMENTS CONTINUE TO GROW IN VOLUMEGlobal B2B noncash transactionsBillionsRegional % CAGR140Latin 4137.7%Overall30.45.2%CAGR42.94.6%CEMEAEmerging Asia10.46026.1Mature Asia-Pacific40Europe2037.56.5%North America02017E2020ESource: Capgemini, World Payments Report 2017B U S I N E S S PAY M E N T S 2 0 2 28
HOW SHIFTING PAYMENTS CREATE OPPORTUNITIESThe loss of revenue associated with the declining use of checks is a cause for concernfor banks. But a greater concern should be not having a better electronic alternativein place. Displaced B2B check spending can be dispersed among various paymenttypes, including cards – both physical and virtual – and account-based payments.The wise bank will see beyond checks and optimize their ability to capture bothorganic and displaced business payments volume.For commercial card issuers, claiming a higher percentage of this displaced check spending can come via high-growth virtual cardaccounts (also know as single-use accounts), now gaining usage in accounts payable.vii By using innovative virtual card push-paymenttechnology and advanced supplier onboarding capabilities, bank issuers can accelerate the use of virtual cards beyond the alreadyrobust projected growth rates of 20% per annum.viii The latest virtual card capabilities allow for straight-through processing (STP) tosupplier bank accounts, easing the experience and reducing processing costs. Figure 5 illustrates the incremental volume of B2Bpayments that better digital execution can bring to bank issuers through 2021.FIGURE 5: STRAIGHT-THROUGH PROCESSING WILL ACCELERATE THE CONVERSIONOF CHECK TO CARD PAYMENTS IN THE B2B SPACEGrowth of Faster Payments by Segment Updated August 2018 U.S. businesses wantto eliminate checksAdditional Check-to-Card Conversion Represents a 67B Opportunity Current virtual cardmarket captures about6% of check spend shift 350 Opportunity exists for anincremental 2%-5% of checkspend shift through STP 300(Dollars below represented in Billions) 250VirtcarualdmarkeGRt CA19.2% 26 19 13 200Growth projectionincludes checkspend shift 9 150Incrementalopportunity fromstraight-throughprocessing 0 100 124 155 192 240 28620172018201920202021 50 0Projected Virtual Card marketSTP spend shift opportunitySource: Mercator Advisory Group (October 2017) and Mastercard internal analysisD I G I TA L T R A N S F O R M AT I O N : AC C E L E R AT I O N A N D O P P O R T U N I T Y9
INNOVATION IS INEVITABLEThe disruptive nature of Industry 4.0 will inevitably impact financial services sooner than later. Corporate end-users arealready demanding easier navigation of their daily work routines through modern solutions. These expectations coincidewith – and can be driven by – evolving technology, creating massive product growth potential for providers whoproactively capitalize on change.Digital Business Payments capabilities deliver two major benefits: The first is a more seamless experience for end users,who can effortlessly access work routines through multiple devices. The second is overall process efficiency, since digitalcapabilities add scale, reduce errors, and provide ongoing flexibility for growing businesses. Providing access to the mostadvantageous solution to a specific situation benefits both buyers and suppliers.Banks are beginning to deliver on digital advances by partnering with fintechs, which have been responsible for much ofthe disruption in recent years. For decades the industry has been well-served by established fintech partners deliveringcore systems, network access, payments processing, and multiple additional services. More recently, fintech start-upshave been backed by venture capital funding estimated to total 44 billion since 2014.ix Partnerships between maturefintechs and the more recent entrants have proven to be strong combinations. Banks are now seeing the value of utilizingfintech expertise to adapt to the future needs of their business clients (Figure 6).FIGURE 6: BANKS SEE A NEED FOR PARTNERSMost important sources of fintech innovation over the next three years72%Fintech startups53%Current tech giants36%People withinyour companyFIs (Currentcompetitors)FIs (Currentnon-competitors)20%18%Source: KPMG International, Global Fintech Survey 2017D I G I TA L T R A N S F O R M AT I O N : AC C E L E R AT I O N A N D O P
Source: Capgemini, World Payments Report 2017 Global B2B noncash transactions FIGURE 4: B2B NONCASH PAYMENTS CONTINUE TO GROW IN VOLUME LARGE-SCALE SHIFTS IN B2B PAYMENTS Mastercard estimates that the current global business payments market
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3. Payments attributed to medical practitioners. 4. gouvernementauxCombined supplier & grant payments and payments through purchase cards, including payments made by all departments and some government organizations. 5. Supplier & grant payments, loan disbursements and payments through purchase cards for each department. 5.
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A. PAYMENTS ARE REALLY IMPORTANT The Quantity Theory of Money shows the relationship that the payments business has to the economic output of an economy. Without payments, markets would cease to function, production would halt and government would be unable to operate. If individuals have limited access to payments then they are constrained from
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