Capgemini has today released its highly anticipated World Payments Report 2023, just in time for Sibos. This year, the report has taken a slightly different tack, shifting from its historical focus purely on retail payments, to explore the significant opportunities for banks and payment service providers (PSPs) to support corporate treasuries and commercial enterprises. These topics are all set to prominently feature across Sibos’ four day agenda.

Since 2022, the report cites macro factors such as inflation, rising interest rates, uncertainty across markets, waning consumer confidence, supply chain disruptions and escalating geopolitical crises as key issues affecting global commerce. Capgemini states that innovation, regulation and profit dynamics are three core areas which continue to shape the status quo of payments. In fact, according to the global consulting firm, non-cash transaction volume across the globe will reach 1.3 trillion by 2023, an almost 16.6% year-on-year growth rate. Furthermore, non-cash transaction volumes are anticipated to reach 2.3 trillion by 2027.

These volumes are a highly relevant consideration for financial institutions, not only as they continue efforts to cater to customers’ high expectations around experience, but also the impact they bear on firms’ balance sheets at an already complex point in their digital transformation journeys.

To better understand why cash management featured so notably in the report, Finextra sat down with Capgemini’s Jeroen Hölscher, global head of payment services.  

As highlighted in the report, Hölscher explains that there remains a sense of dissatisfaction, especially with the large corporates, multinationals, and cash management services providers, around efforts to implement a single customer experience which allows for a clear and holistic cash management perspective.

He explains that this frustration is felt across the entire value chain; from onboarding to reporting to processing, reconciliation and so on, multinationals are often working across many countries and regions. This means they’re obliged to not only provide a single customer experience across a myriad of banking relationships, but also a complex web of (often) conflicting standards and regulation.

“In the face of these challenges, corporates are expected to meet the same speed and experience levels as those experienced by retail customers,” says Hölscher. “Everything needs to be digital, everything needs to be instant, and everything needs to available instantly through mobile or online.”

Naturally, cash management is a profitable area for banks, and it is becoming increasingly important for banks to tighten their oversight and better understand their overall banking revenue. Hölscher continues that “payments revenue is growing for banks, and while volume is lower, the value is higher – meaning that the stakes are yet higher for financial institutions. On top of this, the uncertain market we are currently experiencing is likely to make this even more important.”

The report notes that cash management remains a constant and important challenge for corporations facing macroeconomic headwinds and uncertain growth. Yet, inefficient working capital management can trap cash within the enterprise banking value chain. The report found that as businesses struggle to access a holistic view of their cash, 79% of corporate treasurers experience lengthy cash conversion cycles. What’s more, despite having multiple banking relationships, 70% of corporate treasurers say banks’ cash management services are underwhelming.*

56% of total global payments value is attributable to commercial payments, according to Capgemini, outpacing the retail payments at a total of 44%. Further, over one in two respondents agreed that commercial payments offer better profit potential than retail payments. In Europe, this perspective is even more pronounced as nearly 56% of executives believe commercial payments have more high-profit potential than retail. With commercial payments catching up with retail digital payments trends, it is becoming apparent that banks and payment firms need to engage and keep up with the expectations of their enterprise clients.

The report quotes Marc Andrews, vice president, financial services and insurance industry market leader from Pega, who explained: “Commercial banking has been slower to implement digital automation and engagement capabilities in general. However, things are beginning to change as their clients seek real time transparency into payment status and faster response to requests, especially when there is a processing problem or need to make a change, which can significantly impact corporate cash management.”

Will the focus on protecting profit margin ever end or plateau?

The report explains that capital had been easy for large enterprises to access for over a decade, but pressure has ratcheted up since March 2022 as central banks began increasing interest rates. As a consequence, the cost of debt has climbed and firms are now refinancing and trying to manage growing interest expenses. This results in less available cash for strategic initiatives and drives the push toward optimising working capital management. “Freeing up operational cash is cheaper than seeking external credit,” the report states.

Hölscher believes that while it feels like there is a particularly strong focus on protecting profit margin where possible, he doesn’t see this changing or plateauing any time soon.

“If you look at the client facing part of the value chain which includes cash management overlay services and other client facing areas, that’s where you see the most competition and innovation. That is where the digital journeys are and where we see fintechs disrupting.”

He adds that because this is where banks can charge customers for additional services, this is a very profitable part of the business. “There is a need to be more efficient and flexible to leverage the value information from the back-end, and so this is where transformation is happening. If this doesn’t happen, banks will miss a significant opportunity to create new revenue streams and cost-saving levers.”

However, the challenge of optimising a bank’s back-end is not a short term play, but a fundamental part of long term transformation.

Capgemini found that a large number of respondents reported that over 90% of their budget is spent on business-as-usual process - just keeping the lights on. This means only a very small portion can be dedicated to innovation for transformation.

“This presents a foundational struggle for the industry which is trying to manage innovation, competition and back-end optimisation against the background of a highly-regulated environment,” Hölscher explains.

How are ongoing regulatory changes impacting the bottom line for institutions?

In tandem with the continued innovation being experienced, the payments industry is also being battered by a barrage of rules and regulations they must adhere to – an effort which comes at a significant financial cost. Those surveyed said that managing risk, regulatory compliance, and scheme compliance (such as SWIFT ISO 20022 migration) comprises 36% of total payment business costs.

In response to this barrage of new rules, Hölscher believes that we will see more radical standardisation on certain parts of the value chain, “because you simply have to in order to keep up with the requirements on cost and the provisioning of services to the end customer. There needs to be a much higher level of standardisation.”

He notes that while Europe is quite active in terms of allowing competition on all levels and splitting out what is really core processing, there is a dire need to harmonise, across the industry.

“There is still a lot of backlog, especially for banks operating across regions and countries to standardise within themselves and then also with the market. I don't see a plateau coming very quickly, it needs quite a lot of transformation.”

Other key findings from the report:

• Non-cash transaction volume globally will reach almost 1.3 trillion by 2023, a nearly 16.6% year-over-year growth rate. By 2027, noncash transaction volumes are expected to reach about 2.3 trillion, doubling since 2022.
• Respondents stated that nearly 80% of traditional payment revenue sources (fee, fund, and float income) are stressed.
• Globally, the overall value of commercial payment transactions surpasses that of retail payments – 56% versus 44% of total transaction value.
• As businesses struggle to access a 360-degree view of their cash, 79% of corporate treasurers complain about lengthy cash conversion cycles. Despite having multiple banking relationships, 70% of corporate treasurers say banks’ cash management services are underwhelming.

* Data referred to in the World Payments Report 2023 comes from two key surveys carried out by Capgemini; the Global Large Businesses Survey 2023 and the Global Banking and Payments Executive Surveys and Interviews 2023. These surveys cover insights from 17 markets across the globe.