Early Days for Internet of Payments – How to Move from Hypothesis to Reality

Roger Bass is Founder, CEO and Principal of Traxiant, providing software and consulting to help banks and fintech providers in the B2B Payments and Financing space. 

Trade finance and commercial payments are converging. In both, inefficient and paper-based processes abound. This is largely due to complex interactions between financial transactions and related business processes. Changing processes is hard and slow. But market participants have under-appreciated the potential for interconnecting buyers’ and sellers’ existing electronic payment processes. Trade finance growth opportunities are fueling this shift; cloud technologies, networks and standards (notably ISO 20022) are enabling it. Standards-based email interoperability between a few leading players triggered the mid-nineties Internet explosion. Similarly here, a few early interconnections based on an emerging standards framework will trigger another massive wave of change: the Internet of Payments.

Trade Finance is in a state of flux. Traditional models, domestically or cross-border, involve complex, paper-centric processes. Products like letters of credit or factoring are thus relatively high cost. Supplier networks have demonstrated more efficient models, where financing is tightly coupled with related interactions on a single platform. This coupling creates both a low-cost channel and a more efficient processing model. Indeed, financing is increasingly the “tail that wags the dog”, becoming ever more central to network business models. Despite all this, massive value is still locked up in financial supply chains: of some $700 trillion of B2B payments globally, only 1% or so is financed. Today’s network models have barely scratched the surface.

At the same time, Global Payments is also being transformed - and aligning more closely with trade finance. The dominant correspondent banking model is also somewhat inefficient and high-cost - not to mention slow and opaque. McKinsey recently noted that: “an alignment of cross-border revenue margins to domestic level, driven by increasing competitive pressure, would cost the industry more than $150 billion revenues and put major cost efficiency pressure on banks’ cross-border payments operations”. Fintech competitors’ operating models vary. Some are blockchain-based, though none yet shows a clear path to mass scale. Cost pressures are fueling a search for operating efficiencies - and new revenue. With forex margins already under pressure, financing offers more upside.

Domestic payments, by contrast, rely on mostly efficient national payments infrastructures. But even here, end-to-end process inefficiencies abound between buyers, sellers and providers. Price and cost pressures again drive a search for efficiencies and new revenue. Again, solutions with a financing component - including card - are part of the answer. But businesses also care about process efficiencies, notably in receivables. Work has been done on standardization for ACH. But there’s a problem: in commodity payments, it’s hard to build a business case for innovation. And that is precisely what is needed to overcome the “chicken-and-egg” issues inherent in early-stage standards efforts. Process and interoperability innovations are thus likely to arise first in higher value payments scenarios. Once again, this points to a key role for payments-plus-financing solutions.

These pressures are driving new alignment across these areas and between banks and fintech. Offerings are proliferating. Some entail shifting third party processes from paper to electronic. In isolation though, process change friction likely dooms such solutions to slow adoption. The proven, faster path to mass adoption minimizes friction, delivering such solutions as a new network “layer” on top of one already widely adopted. Paypal did this early on, as an eBay payment solution. Ariba and Taulia have built payment and financing solutions that leverage their e-invoicing networks and an ERP software integration layer. AP Finance scenarios, in particular, more easily “piggy-back” on existing payables and payment processes.

Such networks today connect a few million buyers and sellers and a few trillion dollars of commerce volume - impressive both in absolute terms and in growth. But here again, this is small compared to total users and volumes of business payments globally. Many leading banks see standards as key to achieving broader interoperability. But leading networks have so far mostly opted for closed network strategies. However, a global, standards-based interoperability framework, aligning trade finance and payments as network layers, and spanning businesses, banks and networks - that would be transformational, an Internet of Payments worthy of the name.

An Internet of Payments explosion, however, requires some other elements:

  1. Business model: basis point revenue
  2. Zero Change (or close): electronic process mix shift. Easy activation.
  3. Technology Solution: tactical - deliver early value.
  4. Partner Alignment: between buyer-side and seller-side provider(s)
  5. Standards Framework: ISO-20022-based, simplest cases first, but extensible.
  6. Platform(s): standards-based technologies - permissionless access for new providers.

Within the broader IoP Framework, use cases include e-checks, card epayables, global payments, BPO, and blockchain.

It is, of course, early days. For now, the Internet of Payments is still more hypothesis than reality. But such a shift, once begun, may surprise by its speed and scale. To emerge as winners, market actors should consider soon how best to test, learn about and shape the emerging Internet of Payments.

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