The many paths forward for B2B payments
CHICAGO — In any other setting, describing something as "business class" makes it sound premium. But in payments, the opposite is true.
Making a domestic or cross-border B2B payment should be as easy as a consumer making a payment at a retailer's point of sale. There are plenty of obstacles toward this goal, but also plenty of paths to success.
The technology, messaging standards and guidelines for B2B payments are top of mind in many banking circles. And they are definitely a focus of those providing newer technology or stressing common messaging and guidelines as they prepare to make B2B payments as straightforward as a Venmo or Zelle transaction.
A person or company making a cross-border payment years ago "would send the payment out into the ether and then just pray (it would reach its destination), and then you try to track down the funds and you call the first bank, and then the second bank in the chain," said Ryan Masters, executive director of strategic relationships at Swift. "Needless to say, this was a really painful experience."
That type of controlled chaos was the impetus for the Swift messaging standards body to create the Global Payments Innovation initiative, a system to provide tracking, transparency, speed and efficiency throughout the entire B2B payment process. The GPI system for banks was formed in 2016 and expanded to include corporations this year.
"You don't have to guess where the payment is, you look at the corporate tracker and know where it is," Masters said Tuesday at the annual payments symposium at the Federal Reserve Bank of Chicago. Masters was part of a panel of executives involved in the delivery of B2B payments technology discussing the challenges of the industry.
As such, it is a step toward converging wholesale and retail payments, in essence "baking consumer retail experiences into high-value expenditures," Masters said. "Part of the vision is how to make international payments as seamless as domestic ones" in a real-time payments world.
Masters also cites the importance of the ISO 20022 messaging standard that provides significant details about a payment that has not been attached to all cross-border transactions in the past.
"It is not the payments rails that are the problem," he said. "The number of straight-through transactions is extremely high. The challenge is when the data is not good enough, so we need to bring in the tools that have message validation that the information with the payment is correct."
Similarly, providers like the Ripple blockchain network and token payment system continue to focus on bringing speed and transparency to cross-border payments.
"The progress is being made, but if the infrastructure can exist to have pre-validation and two-way communication, then the capability to build not just messaging, but settlement and other capabilities that hang off of that," said Pat Thelen, vice president of global account management at Ripple. "That is the vision we see our clients telling us to go after in meaningful ways."
The major card brands sit in a position to have a significant impact on any future cross-border payments improvements and technology advancements. After all, they operate through a massive network of banks.
"Given the feedback from our financial institutions, how could we help address helping cross-border payments and looked at the value of moving from a bilateral relationship to multi-lateral relationship," said Kevin Phalen, head of global business solutions at Visa.
If Visa could connect that many financial institutions in the card-based world utilizing new technology and new ISO messaging, Phalen said the company envisioned building it out in a way in which a bank in Kansas City could send a payment directly to Africa without having to hit every correspondent bank along the way.
"There was a value in that," Phalen said. The result has been Visa B2B Connect blockchain for cross-border payments, a system the card brand has been expanding with various technology and market partners.
"There are places where we can embed our solution and bring down aspects of that correspondent banking network on a point-to-point basis," Phelan added.
Another factor that has come to light in the age of Uber and other gig economy businesses is the emergence of micro payments in the B2B sector.
"You have this whole concept of a B2B payment that is a small dollar amount, from $1 to $100," said David Tao, head of payments and treasury at Gusto, a digital payments service for payroll, employee benefits and other payments.
A demand for so many payments to freelancers or employees at small businesses creates a strain on traditional B2B business models, Tao said.
"Uber is a great example of this, when all of the sudden they changed the number of payments and frequency of payments being made," Tao added. "The majority of businesses in the U.S. are small businesses with less than 100 employees, and they all have different payment needs."
As businesses change right along with consumers in terms of how they pay and want to be paid, the cry from emerging payments technology providers will become louder in the coming years.
Steve Kirsch, CEO of Token, an open-banking technology provider, said he was encouraged when Esther George, president and CEO of the Federal Reserve Bank of Kansas City, told conference attendees the Fed would like to see its FedNow real-time settlement service in place before the estimated 2024 launch.
"That's what we need," Kirsch said. "The U.S. is always behind and if we implement a faster payments system five years from now, and we are almost 10 years behind when the U.K. did it, and all of the sudden we are 15 years behind."
Any new technology in digital payments would not always have to replace traditional systems, as they could co-exist, Kirsch added. "Creating a faster payments system is not going to be good enough, because we will still be 15 years behind," Kirsch said.