Payments industry applies lessons of Brexit to coronavirus crisis
Something as simple as the sale of cheese can show how fear instantly affects the economy, disrupting trade and the transaction fees that processors rely on.
In Italy, one of the centers of the coronavirus crisis, thousands of gallons of milk are being thrown away, for reasons almost entirely unrelated to health — reputable experts are certain the virus can’t be passed through food and the percentage of Italians directly impacted by the virus is well under 1%.
So what’s the problem? Many Italian dairy farms are in the northern, locked-down “red zone,” mostly rural areas that fuel one of Italy’s most important exports. It’s the sort of problem that companies that process payments for farms, shipping companies and stores have to be aware of, since it directly hinders business payments, both locally and internationally.
“I’ve read a few days ago that some buyers in Greece are demanding to have a virus-free certificate for any parmesan cheese,” said Enrico Camerinelli, a senior analyst at Aite Group. “That’s nonsense, because the virus can’t spread through fresh goods, but it could delay the process for shipping, and it also suggests there could be disputes that results in unpredictability for when payments are going to happen.”
Political uncertainties stemming from Brexit and the trade war have prepared companies for this risk. Digital payments, real-time processing and merchant lending from fintechs can’t fully defeat fear, but processors can offer businesses and merchants ways to manage unpredictable cash flows that weren’t available as recently as a few years ago.
The trade war and Brexit have both challenged B2B payment processors over the past two years by introducing instability. Many fintechs tried to take advantage of this by fast-tracking innovations that are designed to reduce reliance on paper checks and manual processing. These strategies are sure to get a workout over the next few months, as fears over the coronavirus lead to rapid corporate investments, projects and large purchases.
Merchant credit could also become a way to help firms manage cash flow problems. The virus has resulted in corporate treasuries building cash reserves, partly as a liquidity hedge and partly because having higher cash reserves protects against stock market selloffs, said Bob Stark, senior strategies at Kyriba, a San Diego-based software company that provides liquidity services for corporates as part of its business lines.
These responsive strategies cause some firms to de-emphasize early payment incentives, which can disrupt B2B payments.
“This is where payments become difficult to manage,” Stark said. “These earlier payments may not happen, so as a supplier you then have a liquidity crunch. So that’s where credit comes into play.”
The difference is the political crisis was incremental and developed slowly. Brexit carried uncertainties but took years to unfold while companies figured out how to game liquidity and supply chains through B2B transactions. It wasn’t an invisible virus, with companies making decisions will scant analysis.
“What we’re seeing now is panic driven. The tightening is more immediate,” Stark said, adding merchant credit products could get a boost but financial decisions made in a panic aren’t always the best decisions.
Camerinelli is based in Milan, where he said there are few obvious signs of the virus — traffic is normal, and mundane activity doesn’t appear obviously hindered in the city. But outside of Milan there are anecdotes such as the parmesan cheese story that speak to a thousand small impacts that remove links from the supply chain in unpredictable ways, threatening fees for financial institutions and payment companies.
Beyond headwinds from travel restrictions on corporate spending, there are other supplies that could become part of supply shock, creating risk for payment firms.
The outbreaks of coronavirus and related fears of the disease have negatively impacted businesses and individuals on a worldwide basis, said Jack Baldwin, CEO of BHMI, adding the lack of understanding of the pathology of the disease has prevented governments and medical authorities from predicting the scope and duration of coronavirus, which has increased uncertainty and prevented planning for a day in which coronavirus is a minor concern.
“Efforts to stop or reduce the spread of the disease have caused commercial activity to shrink on a broad scale,” said Baldwin. This, in turn, has reduced the flow of worldwide B2B payments handled by payments processors, whose internal operations have also been impacted by measures adopted to combat the spread of disease.
“There are some parts of China that are completely closed or isolated, no goods are getting in or out, and we’re seeing that in parts of Europe,” Camerinelli said, adding beyond the predictable reduction in the volume of payments, there will be other challenges as firms try to manage the crisis through direct business action — i.e., the parmesan cheese “certificate.”
Transaction tracking, or placing more information and visibility into business payments, could gain more use as a way to avoid or negotiate virus-related trade and payment disputes.
“You could see what amounts to an invisible tariff, or firms providing an excuse not to pay,” Camerinellii said, adding payment firms or distributed ledgers can provide an “open gate” for B2B supply payments. “In that case a transaction ‘tracking’ capability could help. There will be a protocol that will come about that will give suppliers a way to prove a good was produced in a certain way.”