Corporates - the power house of Payments

Welcome back to Bitesize Payments, in this episode we are going to discuss a Major Stakeholder that is not always discussed as much as they should have.  As an example, when the EU asked for feedback in preparation for PSD2 the “corporates” gave more feedback than all the other groups put together, yet we seem to put them in a distant place. 

While we think of us citizens as the super user, as we discussed in episode 8, but much of the tools or networks, have been set up specifically for Corporates. 

Corporates they are the big boys or girls of payments they move the real bucks around and as you will see they have the most complex requirements of all the stakeholders.  So much so that generally banks have a whole division set up to service their needs.

Today I am joined by my good friend Roy Marsh to help walk through Corporates and understand their history, how they work and who does what.   

So let dive into their history, how they work and who does what. Buckle up here we go. Let go all corporate…..

Payments Industry Insights

History of Payments

Payment System Explained

Corporate Payments Strategy

Payment Regulations Impact

ISO20022 Standard

Digital Payments Evolution

CBDC Advancements

Cryptocurrency in Payments

Financial Technology Education

Transcript

SPEAKER_00: 0:00

Welcome back to Bite Size Payments. In this episode, we're going to discuss a major stakeholder and frankly, one that's not always discussed halfway as much as they should do. I'll give you an example. When the EU asked for feedback in preparation for PSD2, corporates gave more feedback than any other group. And yet, you would think it was all about the citizens. While we think of ourselves as super users, and certainly in episode eight, I discussed us the super user, the truth of the matter is that much of the tools or the network effects have been set up explicitly for corporates. So let's dive in. Let's understand the history, how they work, and of course, who does what. Okay, so let's buckle up. Let's all go corporate. Corporates, they are the big boys of payments. They move the real bucks around. And as you'll see, they probably have the most complex requirements of all of the stakeholders. So much so that generally banks have a whole division set up just to service their needs. Today, I'm joined by my good friend Roy Marsh, who is an ex-banker, to help us walk through corporates and understand their history, how they work, and of course, who does what. Welcome back, Roy. Thanks, Paul. Great to be back here. Roy, I really need your help here to talk through corporates. I know that your experience on the payment side and of the bank side, I'm sure we'll get through a bit of that, that this is a really big subject. So when we discussed networks in episode three, we talked about the Silk Road, the Knights Templar and wires. And they're all focused on corporates and their needs. That was the change that was being forced through. When we discussed central banks, we talked about the Bank of England, which was literally the bank for the King of England. And frankly, that's about as corporate as it gets. We also discussed the needs when people were moving from coins to paper. And that was because corporates wanted to move large amounts of funds around that frankly were too heavy. to be easily moved around, and because of their bulk made it so obvious for thieves to come and steal them. They needed a change. So the pressure from this particular user group that we roughly call corporates was to move from coins and gold and what have you to paper money, etc. So in many ways, we could argue that corporates have been the key driver of change in the payment industry. And corporates as we know them now really started roughly about the 17th century. And with that, guess what, came regulation and oversight on how they operated. In the 19th century, they became much more complex. And latterly, and frankly, they've become the most complex stakeholder in the payments ecosystem. But who are they?

SPEAKER_01: 3:22

Yeah, so I mean, you know, basically, these are all either businesses or governments. A bank will generally look at dividing up this area of their business into four kinds of corporates. You could say they're the local corporates. These are companies that might be still large, but domestic. There are the very large corporates that have an international play. There are governments which a bank regards as a corporate, largely because of the size and complexity of dealing with them. And then further down, perhaps in terms of size, there is a category called SMEs, or small and medium, small-medium enterprises. And they're not small companies. They could be companies up to, say, about 5,000 people. but they don't go down as low as the local shops and local businesses. Typically, organisations like this get to a certain size. If you grow an SME, you will eventually need a finance department and then you'll need a financial controller and a finance director. As you get bigger and bigger, you start having finance directors will actually have treasuries. So, Moving up into the very large organizations, you'll have a treasury department. Governments run treasuries, of course, typically more or less the same way as banks

SPEAKER_00: 5:06

do. While they want to do similar things in some ways as we do, as citizens, they want to get paid, they want to pay, the scale of these transactions is very different, isn't

SPEAKER_01: 5:19

it?

UNKNOWN: 5:19

Yes.

SPEAKER_01: 5:20

So typically, you know, you think of a very large organization. First of all, staying with the kind of the corporate side rather than the government side. Many of them will have tens of thousands of employees. So these tens of thousands of employees need to be paid usually every month. Sometimes they're paid monthly. every week, depending on what your business is. And sometimes if you're something of the size of an Uber or an Amazon, they will be paid every time a job is done. So there's a lot of, a very large number of payments being made, sometimes with a requirement to be made immediately. So there we take advantage of immediate payment capabilities. And others are moving money over real-time gross settlement systems and automated clearinghouses. Equally, those corporates are paying their bills. So they're going to be paying their suppliers and they're going to be receiving money. So we should also remember that payments are two ways. So corporates receive money from their suppliers from the people that they supply to and from governments in other places. In the world of the governments, you're looking at governments providing services to populations. So just in the UK alone, there is 60 million people. If you go to the States, it's 350 or something and so on. So, you know, some of these have very, very large payments that need to be made and need to be made with certainty.

SPEAKER_00: 7:16

Yeah, and when we talk about large, we mean billions, don't we? We don't just mean millions quite often. Some of these things can be billions of pounds or dollars or whichever it is. Yes. Unless you've changed the income of the Marsh household, I think that's a little bit above what we're normally spending most weeks. Sometimes the outgoing seem like it in the Marsh household. But I think that's the most obvious thing, isn't it? The value here is absolutely ginormous to what we would consider. Yes. however you get paid or how many it's your gas bill, your electricity bill. This is just at a different scale and therefore a different set of needs.

SPEAKER_01: 8:01

Yes, absolutely.

SPEAKER_00: 8:11

So we can joke about them being similar to us with just bigger scales, etc., which is partially true. But beyond just paying the day-to-day bills, what have you, What else do they really need?

SPEAKER_01: 8:25

So, you know, you mentioned earlier, we talked about the history of where payments for corporates began life. And a lot of it was to facilitate trade between corporates. So you can go all the way back to the Lombards in Italy in the 12th century, where... trade was being facilitated by, as we described earlier, the notes and coins, which then became paper money and so on. And in actual fact, that really hasn't changed. The way in which a corporate will move its products and services around the world is often through something called trade finance. And behind that trade finance, there will be foreign exchange requirements. And then when as money is flowing backwards and forwards, there'll be cash management needs. So they will receive and pay out large amounts of cash. They as organizations will typically have ERP systems to help with the accounts, with the receivables and payables, with their payroll accounts. these accounts will be often actually linked directly to a bank so that payments can flow and end up in the systems of the bank to execute, process those payments. There's one way in which, one of the ways in which a bank helps large corporates to move these kinds of very large flows around the world.

UNKNOWN: 10:07

Yeah.

SPEAKER_00: 10:08

But things really start to ramp up when the corporates have international flows. That is to say, they have companies in several countries. They have several, often literally hundreds and thousands of accounts. And of course, in several currencies. So they need to have the right amount of money in the right place, in the right currency, at the right time. That's pretty complex. And it's not something we talk about very often, but it is. key to this segment of the industry, right?

SPEAKER_01: 10:40

Yeah, very much. So there's a very standard way of managing this that's been in play for probably 100, 150 years. And that is that a bank acts as a middleman between two corporates. And in particular, this works especially well such that if one corporate wants to pay another, then it does it through the medium of a bank. And that bank then can be a trusted flow of paying money, taking money in and paying it out. Now, when it comes to being international in this, of course, the biggest problem that a corporate will have is if you, let's say if you're manufacturing BMWs and you want to send them to a BMW franchise in maybe Australia, but you manufacture them in Europe somewhere, then somehow you've got to set up the ability to release a container load of BMWs all the way to Australia. But the franchise in Australia needs to pay for those. So there's a There's a problem here. Who does this first? Do you release the cars before you get the money or do you take the money such that if you've paid for them, you don't know whether you're going to get your goods? So this is called a chain of trust. And it's the same with the currencies as well. So the chain of trust is provided by two banks, one on each side of that trade. So let's say BMW is being, for argument's sake, made in Germany, a German bank that they bank with, will form a relationship with an Australian bank who has the relationship with the BMW franchise. And then each bank opens accounts with each other. So banks, bank, banks, if you take my meaning. Sorry, that's what happens. And the terms that are used are Latin terms called Nostro accounts and Vostro accounts. And a Nostro account is the account that you, as the German bank, holds with the Australian bank in this example. And a Vostro account is the account that the Australian bank holds with the German bank. And between those two accounts, money can flow safely because these two banks have agreed a correspondent relationship. Now, so during the process of the delivery of the BMWs, the requirement is that the bank, one bank on one side can say, I've seen all of the trade documents and the other bank on the other side will say, I have the monies available and I'll release the monies in return for receiving properly constructed trade documents. So this chain of trust then happens between two banks, and it incorporates all of the foreign exchange necessary between the two currencies. It incorporates the currency flows and the actual execution of the cross-border payment and the final settlement. So it's a complicated process, but it has been in existence for a very, very long time because it establishes Trust between BMW exists with the banker. Trust is between the banker, between the two banks. And the trust is between the Australian bank and the BMW franchise. So this is how the flow of these things.

SPEAKER_00: 14:38

And these can be, you know, if it's a large international firm, these can be very complex. And frankly, a lot of them are. If you're dealing in many countries, many currencies, many suppliers, etc., this can be extraordinarily complex.

SPEAKER_01: 14:56

Every customer or every type of business has a different shape. Banks provide working capital, which is another way of saying we will help you manage any excess cash that you have and we'll help you by lending you money where you need it. Obviously, banks provide investment banking and merchant banking capabilities for capital structure. If you think about how... different types of businesses have a working capital need. So one of the companies that I worked with for a while, a very, very well-known soft drinks beverage, which I don't know whether we're allowed. Are we allowed to have the term? So take an organization like Coca-Cola, which is globally everywhere and sells its products through lots of small little shops and wholesalers, it helps a lot of its small retailers and wholesalers with cash, almost like a bank. We're going to come on to a little bit of that a bit later on as well. So let's say everybody drinks Coca-Cola in the summertime, but less so in the winter. Then a business that is running, still receiving Coca-Cola from Coca-Cola, will sell more in the summer, so they'll have more cash in the summer. They'll sell less in the winter, so they may need to borrow cash against that future cash that comes in. So one of the balances that the bank could make here is a management and a business call around how you manage that particular type of flow. And interestingly, as we move into the world, the much more modern world of things like ISO 20022, There are some proposals that are being considered right now as to whether we can use the much more enriched data within that world to proactively assess what a working capital management of a company needs will be. And that's a major step forward. I don't think at the moment any banks have really got their heads around how to do this. But imagine if you could say to a Coca-Cola franchise somewhere, well, you know what, every year in the summer, you need to borrow money from us because you don't have the sales of Coca-Cola and then we get it back again in the winter. If you could now say, we've now seen this flow of information over your account and we've looked at all your invoicing because we've got the information within the ISO message, you can now proactively go and say, here is your working capital package for the next year year, or the next two years, or whatever it may be. So there's lots and lots of ways in here that the complexity of this money movement is dealt with by the banks. And it completely changes if you're a manufacturer of airplanes, for instance. And

SPEAKER_00: 17:57

I think the thing that strikes me is, at some level, it's all the same thing. If I think about it as a citizen, I can't really afford all my bills for this month, but I know I'm going to get paid on the first or the second. I need a bit of money to tide me over. Well, that's kind of the same sort of thing at some level, but This is really at such a different level and such a level of complexity. The needs, it's not just about the needs of the corporate. It's often the needs of the corporate's supply chain and the various banks that they will talk to around the world. So this is much more complex. And the needs then of a bank is very different to the type of relationship that you and I would have with our clients. household banks.

SPEAKER_01: 18:44

Yeah, absolutely. So banks gear themselves. They charge, they make money from this, a lot of money from these services that they provide. So this is a very key part of any major bank's business. They therefore build relationships with the treasurers. And it's fair to say that the treasurers of the very large organisations pretty much have their pick of who they deal with. So there's a lot of competition to solve a treasurer's problems. And each bank is in the business of demonstrating how they're better than their competitor. So it's quite a market there that goes on. You don't see that. You don't see these things going on in your day-to-day life when you're on the train or the bus or popping into the hospital or local shop or whatever, but this is what's happening.

SPEAKER_00: 19:58

We also need to discuss governments who are a very special case of a corporate. And in some countries, they can make the most of payments, certainly by value, In the UK, over 52% by value of pounds, in this case, of all the money moved is moved by the government. By the way, that's a higher rate in the US, but it's typically that sort of number around the world. And that's just because moving tax and benefits and all those good things is a complex job. And as you said, you know, the 60 million people in the UK, 300, 400 million people in the US, etc., but they're also businesses in their own right governments, aren't they?

SPEAKER_01: 20:39

Yeah, they are. So banks have to figure out how best to deal with governments, but they regard them as a corporate, largely because they are so big. So as you rightly say, we as the men on the street, as it were, we see the things that are obvious to us. Social security benefits are very obvious. Typically, in most countries, government and government-related businesses probably are as much as 40% or 50% of the employment. So the salary payments that governments make are huge. The governments will also run state pension schemes. So if you can imagine, in the UK, there's probably, I don't know, maybe... 15, 20 million people taking state pension payments every four weeks or whatever it is. They pay out grants for people. They pay out grants and loans for farmers and for students and for all kinds of different things that we're aware of. They are very large payers. But each of us also pays our taxes. Most of us pay our taxes. So, of course, they are also massive receivers of funds. And these two things have to balance out. Tax receipts are what helps people to make those other payments. But in terms of how you see governments as corporates... Of course, they are extremely active in the world of procurement spending for things like the defence of the country, the health service, schools, education, infrastructure. Most of a country's infrastructure ends up being railways, roads, airports, shipping, those kinds of things. Although there is a certain amount of company ownership of that thing the majority of the majority of countries still run these things as government things so they always these things have to be funded and paid for typically central governments banks will what they will do is that they will actually bid for parts of this business so government every so for instance HMRC in the UK the tax the tax collector in the UK every two or three years, will go to the banking industry and say, who wants to pitch to pay and receive tax monies? And the banks will line up, they'll issue RFPs, and the banks will line up and get... And one will be chosen, or one or two will be chosen every now and again. And so governments do this all the time, and banks have to be organised around relationships and... to have their account teams managing that kind of process because this is obviously to win or lose this scale of payments would typically make a big impact on the performance of a bank and its profit. The other thing that people probably don't quite realize so much is exactly what what other role the governments have. I mean, they run foreign currency accounts, for instance, because the international flows between countries, they can make those, they manage those foreign currency accounts through the Bank of England and the UK and through their central banks. But also they act there as the regulator. So they also have this oversight where they're looking at payments infrastructure, resiliency for the country's payment mechanisms. There's lots and lots of angles to how a government is viewed.

SPEAKER_00: 25:02

One of the things that we saw 10, 20 years ago was a lot of merchants decided to create their own banks like Tesco Bank and what have you. But why don't corporates do that sort of thing? Because some of them are as large as banks, if not larger in some cases.

SPEAKER_01: 25:25

Yeah, in

SPEAKER_00: 25:26

fact, I

SPEAKER_01: 25:26

mean, I suppose people will remember 10 or 20 years ago when names like Tesco, Sainsbury's and others set up their own banks. This was at a time when the Competition and Markets Authority in the UK had encouraged other people to set different banks up so smaller banks were encouraged to challenger banks we call them challenger banks so fintechs some of these other so the big retail players like Sainsbury's and Tesco decided well we've got a very large retail presence so why don't we it would surely suit us to be able to capture our our customers as they're coming through and to sell them financial products, offer them accounts, give them the ability to take cards and credit and so on and so forth. But actually this trend, I suppose it seems like a recent-ish trend alongside the advent of fintechs. But in fact, it's been around for a long time. Over maybe 100, 150 years ago, Very, very large organizations like P&O, for instance, when they were a very large trading house, the largest in the world. They would run their own banking. They almost didn't need their own bank. I had experience in my life of working for organizations like the Salvation Army, for instance, has its own bank because it's making money. It's making payments to Salvation Army members in all kinds of places all around the world. I've worked with large, Continental Grain had its own, the CNA group, Ford Motor Company, all of these people at one time or another had their own bank. It's not to say that they didn't actually bank with another bank, but they could use these kinds of things. So It's a bit like a kind of extension of the company store idea, really. I think they could give their own staff banking facilities and make their staff's life easier. As time has gone on, and in particular as regulation has got so much worse, worse or tighter or harder, choose your adjective, it's become much more onerous to... to own and manage a bank. A bank is a special entity in any market. We can't just go to set up Portamala Bank or Roy Marsh Bank without having to go to the regulator. And in the UK, you're not allowed to use the word bank in your title without having a license. a proper license, which requires a whole bunch of capital and other constraints. I'm not quite sure what Mr. Banks does when he wants to set his own business up, but that's another question. So if you think about it, if you've got to go to the Bank of England to go get a license to do this, you have to have a license to be able to accept people's money, to be the custodian of people's deposits. That's what this license is about. But then you have to say, how are you going to protect that money and what capital do you hold and what reserves do you hold in order to ensure that you're looking after your money and that if anything happens to you as a bank, you're going to be able to not cause harm to your customers. So what you end up with over the years is that the risk profile of doing this banking is distinctly different counter to the risk profile of the supermarket, which has a whole different style of business. So they don't mesh very well. And one of the tricks that the banks have to play all the time is to manage their capital and reserves well so that they can release capital to be to be lent because that's how they make money, right? But if you don't manage that well and you tie up your capital in your reserves, you lose money. Well, supermarkets can't afford to do that kind of thing and they have a much different approach to how they manage that. So it's not their focus. It requires a completely different set of skills and the regulation now is onerous. And so it's no surprise to see just this last couple of weeks that... Tesco Bank has just sold out its business and was just taken over by Barclays. Yeah. And everyone is looking at Sainsbury's as being the next one off the stocks in the same way. So chances are that this... I mentioned a number of names at the beginning. These came from a long way ago in my earlier... earlier days, it's highly likely, I haven't checked, but it's highly likely that those other names don't run their own banks much anymore either.

SPEAKER_00: 30:50

If you're a large international corporate, you will have all the skills, all the knowledge, all the understanding of how, but the execution and the regulation and all the things you need to do to operate your bank can become both expensive, time-consuming, and actually, frankly, deflective of the actual business you're trying to run.

SPEAKER_01: 31:12

Yeah.

SPEAKER_00: 31:31

So I wanted to just talk a little bit about SMEs because, frankly, I always feel SMEs get a bit of a raw deal. They seem to have, you know, all the needs of a large corporate, but just not the scale. And frankly, therefore, from a bank's point of view, not so much the business opportunity. But, you know. Sometimes they're treated as large citizens. Sometimes they're seen as smaller corporates. And depending on what bank you're banking with, they can be on the retail side of the bank or on the corporate side of the bank. And that's hard for an SME as it grows, because it grew out of being a very large citizen account, if you will, and move over to the corporate side. the bank to deal with. And it's not clear how they should really, how they should work.

SPEAKER_01: 32:29

Yeah, it is very, very typical, this. Because most banks offer a retail version of their services, an SME version of their services, a corporate version, a government version, you can, each has different needs. And the banks have to do that because, you know, particularly if you're running a very, very large, if you're running a large bank, you know, I think of, you know, Think of somebody like, for instance, the Bank of Ireland is running all of these different categories, but because it's the country's largest bank and running about 55% of the country, so you've kind of got to... So you as a small business in the retail world growing into the SME, the SME growing into the larger business and into the corporate, these things can be... painful growing pains. I mentioned earlier that different businesses have different shapes when it comes to cash needs and cash requirements. It's the same for their funding mechanism. If you think, for instance, about a farmer, I had many farming customers at one time. Some of them can be small local people with a small local farm and others can be very large organizations with um uh large land-owning organizations farming over a big area but but one of the things that categorizes um farming needs is that you largely have to follow the growing season um in order to be able to get your money in and out so you might you as a banker might think well farmer Mr. Farmer X is borrowing, spending too much money again this year. But you know, as a banker, you're not going to get any money. You're not going to get anything of that repaid until the harvest season is finished and the wheat has been sold. So you have to offer, as a bank, different sorts of funding mechanisms to, say, a local, to a supermarket chain, as we've been talking about, where You need POS, you need daily point of sale terminals, instant payments, cash collection, if you're still collecting cash. They're managing inventory. And if you can contrast that with, say, an engineering company building, maybe building parts for a Toyota or a Ford, well, they've got a they win their business, they fund their raw materials, they turn those raw materials into product, they sell those products, they get cash in. Sometimes those large companies don't pay them very quickly, so they need working capital help, et cetera, et cetera. So there's lots and lots of different adaptive services that banks have to give at this lower level of SMEs. Whereas I think largely as you get bigger and bigger, you, to the corporate state, the bank's services can be can be a little bit more homogenous because they're dealing with such large organisations.

SPEAKER_00: 35:44

We've walked through local, international, government, now SMEs. We've talked through the needs. They're a key part of the payment industry that often gets overlooked because we talk about cards, we talk about ourselves in current accounts. But these are really the powerhouse of change. But Roy, is there any last points you want to make about corporates here? Yeah,

SPEAKER_01: 36:11

I think the fun thing is going to be how the banks are going to use technology going forward. You know, we see a lot of, you know, there's a huge amount of talk right now about artificial intelligence. You know, we spoke, you know, I mentioned earlier about ISO 20022 and the much more data enriched capability. But what can artificial intelligence bring to these things if you allow machine learning across a large data set of payment data, especially if it gets detailed, gets into such levels of detail? I was asking this question of a finance director just recently, just happens to be my daughter, actually. She's a finance director of a company. And I said... I'm working with Paula this, and I'm talking about SMEs. What would you most benefit from? And she said, wouldn't it be great if they could just reconcile my payments against the invoices? If they could just do that for me and tell me when the money that I'm due is actually going to arrive and into which account, that would be a game changer for me. So it's interesting, isn't it? That sounds like a really simple business case for people to solve. And here she is as a finance director in 2024. And she doesn't know which account the bank is going to pay the money for the business that she's the finance director of. It's a reasonably large SME, I would say, rather than a corporate. Fascinating conversation.

SPEAKER_00: 37:52

Well, I think it's... Look, I think corporates are the extraordinarily interesting part of the business. But, Roy... Thank you for your help and support to take us through what they do, how they work, and who does what. Roy, as ever, thanks so very much for your insight here.

SPEAKER_01: 38:12

It's been great, Paul, as always. And thanks a lot. Thanks very much for having me on.

SPEAKER_00: 38:17

It's an absolute pleasure, my friend. Take care. Well, there you go. Corporates. The powerhouse of the industry, the most profitable part of the industry, certainly the most complex part of the industry. Their needs have driven change throughout decades and decades, whether it's going back, as we said, from coins to paper, or whether it's the complexities of real-time gross settlement. They are really the powerhouse of change, as I say. However, with the digital age, becomes another wave. And I think that's what is really fascinating to see. We probably see payment systems embedded in ERP systems. We'll probably see corporates and the boundaries between themselves and banks being extraordinarily blurred. Either way, corporates, they're going to be the powerhouse now. They'll probably be the powerhouse in the future. If you want to get in contact with me, you know how to do it, bitesizepayments at gmail.com. Oh, and if you could, tell a friend. Thanks now. Cheers.