The largest corporations and financial institutions make payments and transfer funds at a magnitude that far exceeds consumer transactions. However, even many seasoned financial professionals may not fully grasp all the nuances of commercial payments.
Albert Bodine, Director of Commercial and Enterprise Payments at Javelin Strategy & Research, asked the leadership at the foremost banks and corporations about the most pressing topics in the commercial payments industry. Their main request was for a guide detailing the fundamentals of commercial payments which would explain the intricacies of commercial payables and receivables.
Because that training hasn’t been developed, Bodine created A Modern-Day Primer on Commercial and Enterprise Payments to be an introduction to commercial payments for those who are new to the space, whether it be for college grads that have just been hired, seasoned professionals who have moved into commercial banking, or leadership who are looking for ways to pass on knowledge to their staff.
Global Frameworks
In addition to the substantial sums involved, commercial payments also utilize a wider array of instruments.
Corporations use wire transfers, ACH transactions, paper checks, and now even the instant payments systems that have gained traction globally, such as Brazil’s Pix and India’s UPI. Payment methods such as electronic funds transfers (EFTs) and direct digital transfers between banks are also seeing increased use in commercial applications.
Adding another layer of complexity to the commercial payments landscape is the growing demand for cross-border instant payments. In many cases, there is simply no infrastructure to support these transactions. For instance, there is currently no instant payment rail between the United States and India.
“There are several options that could fill that gap and deliver the infrastructure for cross-border payments, but it’s still not clear which one will emerge,” Bodine said. “Visa and Mastercard would be perfect candidates for cross-border payments because they already have an established global highway. It could be a great addition to their business, especially if there’s a reduction in credit card interchange fees.”
Cross-Border Contenders
Beyond credit card companies, Belgium-based Swift is an interbank messaging system that has built a dominant framework for cross-border payments. A constant challenge in global payments is the sheer amount of time it takes to complete a transaction. With Swift’s GPI system, 50% of payments are credited to the beneficiary within 30 minutes.
Another key player in the cross-border payments space is the Bank for International Settlements (BIS), a consortium of the world’s central banks, including the NY Federal Reserve, the Bank of England, and the Bank of Japan. The consortium released Project Agorá, built on a unified ledger model.
The purpose of Project Agorá is to develop a way that tokenized commercial bank deposits can be integrated with tokenized wholesale central bank money on a single platform. In the current system, payments are processed through messages sent to banks, detailing how to credit clients. This means payment communication and fund transfers are two separate actions.
Tokenization technology has the potential to merge these two processes, allowing banks to update their ledgers in real-time. Automated ledger updates not only improve efficiency, but also help institutions remain compliant with Know Your Customer and anti-money laundering regulations.
“As new tech emerges, the further companies move away from the traditional system of correspondent banking that has dominated the industry,” Bodine said. “Global commercial payments used to be the wheelhouse of large commercial banks. With the arrival of fintechs, blockchain, and other innovations, it’s not just the blue bloods who can compete in cross-border payments.”
Eliminating Checks
One of the main issues in the commercial payments space is the continued reliance on legacy payments methods. Globally, roughly 33% of payments are still made using paper checks.
“For over 30 years, I’ve been talking about the elimination of paper checks at every chance I get,” Bodine said. “It’s finally happening, but it might not be for the efficiency reasons you would expect. Believe it or not, it’s more due to environmental, social, and governance (ESG) initiatives.”
“With all the payments alternatives, it’s an easy check box on an ESG initiative to simply get rid of checks,” he said. “You are helping the environment, increasing efficiency in your organization and potentially mitigating fraud.”
A Training Centerpiece
Due to the lack of educational resources in the commercial payments space, many financial professionals seek more thorough solutions. For this reason, Bodine noted that his latest report is just the tip of the iceberg.
“I want the Modern-Day Primer on Commercial and Enterprise Payments to be positioned as the centerpiece of training for those new to the commercial space,” Bodine said. “It would be an excellent addition to a more comprehensive training program that includes seminars and video instruction. Look for that soon.”