Bridging the GAAP Podcast Series: Jetsetting cross border payments

Speaker 1

Hello, and welcome to Medius' new podcast series, Bridging the GAAP. Together with Spend Matters, we've put together a podcast series exploring a wide range of topics from the evolution of technology and finance, to tax compliance to sourcing strategies to fraud risk and mitigation.

In today's episode, Jetsetting cross border payments, Xavier Olivera, Procure-to-Pay Analyst and Advisor at Spend Matters, talks to Daniel Ball, SVP of Innovation at Medius, about the landscape of automation and cross border payments today, the complexities and risks involved and how organizations can better manage this process.

Speaker 2

Hello, Daniel. I'm glad to be able to talk with you about this great topic of automated payments and cross border payments for EMEA.

Speaker 3

Great to see you too. Looking forward to the discussion.

Speaker 2

Excellent.

How about, let me introduce myself to our audience. I'm Xavier Olivera. I've been involved in procurement transformation for over twenty years, which includes B2B payments too. I started consulting companies, and now I've been at Spend Matters for eight years as a P2P analyst. Daniel, would you like to introduce yourself?

Speaker 3

Yeah, sure. Thanks a bit. So my name is Daniel Ball. I think I probably match you for being pretty long in the tooth when it comes to the procurement and finance software space. I co founded a company called Wax Digital back in 2001, which was a purchase to pay SAS software business out of The UK and spent the next couple of decades nearly growing that business into an international force to some extent, I would hope in the purchase to pay space, doing everything from sourcing through contract management, procurement, AP automation, and never quite actually getting into the payments arena, although it was something that was always an ambition of mine certainly. And it was one that we were able to realize following the acquisition of Wax by Medius back at the end of 2019. So I joined Medius as a consequence of that acquisition and Medius of course is very much focused on the AP automation space historically.

So the Wax acquisition brought all of the kind of the procurement and P2P capabilities into the Medius suite. But one thing that we still didn't have was a payments capability really, although you know, Medius had done some ad hoc work in that space. There was certainly not a concerted drive towards a really global and thoroughly capable payment solution native within the Medius suite. So I took up the mantle on joining Medius since I've spent the last two years or so really building, delivering, taking to market what we consider to be a really comprehensive global payments capability with Medius that we're now working with many clients around the world on to power their payment capabilities. And it's been a great journey, really exciting, and something that we're really proud to have accomplished and see a huge future in for us and our customers.

Speaker 2

That's great. Great career, Daniel. How about we start with the simple defining the concept of what is cross border and why is this important for payment automation. I know that on your career you mentioned that you have been involved in this and recently you have been involved more. So how about we start with definitions?

Speaker 3

Yeah, for sure. I mean, obviously payments is an inherent part of any business generally, buying things from suppliers and ultimately paying for those things from suppliers is of course, it's the fundamental building blocks of business, is commerce really.

And we have many customers who are doing that just on a domestic basis. They might be based in Sweden and they're only paying companies in Sweden because they're a smaller business. They're not doing any international.

They have no international supply chain and nor particularly any international customers. Same in The US. I mean, The US is obviously, you know, it's a huge domestic market and many very large organizations only pay vendors within their home territory. They do virtually no, or in fact even none at all, in the way of overseas buying and therefore payments.

But I think if we just look at Europe in particular, you know, you have obviously a lot of economies that are very close to one another, lot of economies that share a common currency in the form of the euro. But in our particular homeland in The Nordics, you know we have multiple currencies and we have customers who are really not struggling, but who aren't doing payment automation as efficiently and effectively as they could do. Certainly. So I think you know what we want to look at, I guess in the course of this session is three things.

You know what are companies doing generally with payments and payments automation? So how are they managing today and what challenges do they face when it comes to both domestic payments, but in particular cross border payments, because that's where we see a lot of issues that can really impact on businesses. So what are the particular challenges when it comes to those cross border payments versus domestic payments?

And you know those two are kind of focused on the process side of things. The third is then around security and fraud in the payments process, because when we're talking about payments, we're obviously talking about, you know, moving money from one organization to another. You know, that's really at the sharp end of where any fraudster is going to want to try and get involved and try and get that money deviated from where it's supposed to be going to where it isn't supposed to be going. So looking at security and fraud in what is ironically actually the one leg of the financial life cycle that is often least well engineered to prevent fraud in many companies.

So we see it as kind of a top of mind subject for a lot of chief financial officers, a lot of controllers to address. So I think we're looking at payments. Payments is a question of moving money from one organization to another. What are people doing generally with payments?

What are the particular challenges with cross border? And how are people trying to address fraud and security in that context.

Speaker 2

That's great. Before getting into these challenges and risk and fraud topics, we all know that cross border payments and even payment, B2B payments has evolved a lot in the last five years, and IT has a role here. What would you say how we have evolved in terms of B2B payments in the last five years?

Speaker 3

Okay, well, I mean, yeah, IT technology software has a significant part to pay now, although funny enough, that's not always the case in terms of where we see customers today. There are a lot of actors at play here, so let's try and unpack those and take a look at what they look like for a lot of businesses that we see out in the wild. And that landscape varies quite a lot depending upon where in the world you are, of course. So a territory like The USA, for example, has some very specific features that you tend not to see elsewhere.

We see, you know, the continued widespread use of check payments, and also the prevalence of credit card payments. You know, those are two facets of payables that you tend not to see in very many other territories around the world. So we see a lot of customers in The US market who are paying maybe thirty, forty, 50% of their payments by check, some even, you know, and some very substantial businesses actually that are still paying 100% of their payments by paper checks. So in those kind of environments, you have a very IT light landscape when it comes to the payment process.

They're being processed in the ERP system, they're producing a payment file, but then that is simply going to a print production, either facility locally, in house or externally, and those checks are in some cases even still being manually signed. Now we've seen a lot of forces over the course of the last five years, as you suggested, that have accelerated a move to digital. COVID has actually been a player in that environment where obviously, as I just mentioned, signing a check personally suddenly becomes a very difficult thing to do when there's nobody in the office. Dealing with manual processes when there are no hands around to actually get on those processes becomes extremely difficult.

In Europe, conversely, electronic payments are obviously very much the norm, And we have a pretty efficient banking system, you'd have to say, across Europe, certainly domestically. But even so, we still see customers managing multiple processes and combining some fairly automated and efficient processes alongside some pretty insecure manual ones when it comes to making payments. So you've got IT that's made inroads to some of those payments. So the happy path, if you like, okay, I'm paying domestically in my local currency.

But when you have maybe multiple business units in multiple countries and therefore you've got multiple banking relationships, That can really change. So often you'll see businesses which are integrated with their lead banking partner in their home territory, but they're loading files manually up into banking portals in some of the other countries where they have smaller operations. So we've got customers that have maybe operations in seven countries. They might have six different banks that they work with as a consequence of that, and completely different processes as a consequence of the volumes and just the IT resources that they have available to them.

I think you've also got banking industry initiatives as well, which come into play here. So again, in The Nordics, when there's an initiative, for example, called P27, and that's a joint initiative by half a dozen or so of the region's biggest banks to establish a pan Nordic payment infrastructure for domestic and cross border payments in the Nordic currencies and in the euro. And you know that brings some real upside for businesses in the region, but it also means that a lot of businesses have to update their integrations with those banks to accommodate the new standards. So again, there is a overhead on IT.

There is an IT requirement, and I think that's where organizations like us, for example, can really help businesses by taking away a lot of that IT overhead, taking it on ourselves essentially to act as a sort of a banking connectivity as a service, if you like, where they can plug into a network of banks with single connection for both domestic and cross border without having to maintain and manage multiple relationships from an IT architecture perspective with multiple different banks in multiple different countries.

Speaker 2

Yeah. That's a great explanation of the landscape that B2B payments and cross border are not just cross border, but also domestic payments are today and how IT is supporting that.

If you have to list what challenges do organizations face with cross border payments and what steps can they take to try and address these issues?

Speaker 3

Yeah, sure. Okay, well let's take a step back from that and think about, okay, well first of all, I guess, how do those challenges impact on them? So, you know, where does the impact come on an organisation when it comes to particularly cross border payments? Let's look at that.

So I think there are four key things that organizations really suffer with as a consequence of a lot of the complexity and the inefficiencies that often surround cross border payments, and that's time, it's risk, it's cost and it's visibility. So if you take those individually, you know, if you look at time, when I go to make a cross border payment, first of all, as I just mentioned, you know, there are often separate processes in AP to generate those payments. So I create a different payment file, I export it, I get it reviewed differently to my domestic spend, I have to upload it to a banking portal or to a specialist FX provider portal.

All of that costs me time internally, costs labor overheads internally, and introduces potential for risk and error, which I'll come onto in minute. But also, you know, once you've got through all of that, I've actually initiated the payment at bank. If that is a cross border payment and I'm making a payment from Sweden to The US, I can often expect that to take between three and five working days to actually clear, you know, as it pings between often several banks from leaving my bank to arriving at the payee's bank. So there's a lot of time overhead, both internally and in the process itself.

There's an increased risk because if I'm actually uploading payment files into a banking portal or into an FX provider gateway, then I've got a file which is floating around. Know, that file's open to tampering, it's open to error, it will be often approved off systems, so there'll be limited audit chain behind it. You know, it's a very, really insecure process to be using for, you know, making what is the final stage of the financial process, which should be the most secure really making those payments. You've got cost, you know, very often companies that we talk to have no idea what FX rates, you know, or what FX margin their bank is charging them.

So they're making that payment from Sweden to the US. They know that you know there is a prevailing exchange rate and the bank's probably going to put some money on top of that. I have no idea how much that is. They do know that they'll get fees and they'll get fees on both the payer and the payee side, you know, 15 or $20, or euros quite often per transaction between them and the vendor.

And of course, you've got the, you know, ultimately the exponential cost of fraud if something were to happen to that file relating back to the risks that I just mentioned. And then finally, poor visibility. You know, you've got that limited visibility in the payment process because it takes three or five days. It's very hard to know where your money is when it's in transit and you've got those reconciliation challenges then thanks to the fees and the FX margin.

So you end up with a bucket of banking fees that's charged to dedicated cost center and just kind of written off very often. So you've got a lot of, I think, challenges that really have direct impact back into the business and potentially very serious ones if you look at things like the risk side of things when it comes to fraud. You look at what companies are doing to try and address those issues and many companies where they're not doing too many international payments, they often kind of accept that as the status quo. It's simply a cost of doing that international business.

Often they don't realize quite how much it does cost them. You know, you only have to make maybe a couple of payments a week for the fees to reach 4 figures on an annual basis, and you know a lot of these organizations are doing more than that. But where they try and combat it is, you know, looking at things like holding bank accounts in domestic currencies, which is fine if you have incoming revenues in those currencies and they're being topped up by sales revenues. So you've got a, you know, sales operations in The US as a European company and you've got dollars coming in therefore in order to cover your dollars going out.

But if you don't, if you're just, you know, paying suppliers in The US, then you don't want to pre fund those accounts because you don't want to lock up cash in a foreign currency in your local bank, but in a foreign currency bank account. So as a consequence, people move money from SEC to USD, for example, whenever they need to make a local currency payment. So effectively they're still incurring those cost overheads, even though it's going just to their local account before making payments in USD. But they're also bearing the cost of the management overhead of the local currency account as well.

And as a separate payments provider, could use an FX specialist if you like, but again, it's not an integrated part of the process. You're back to that manual portal based payments handling.

Speaker 2

Yeah. What can be done to better manage cross border payments?

Speaker 3

Okay. Well, I mean, are the sort of the downsides. If you look at then, okay, well, as you say, what can be done to better manage those cross border payments? What are the benefits that people are looking for when they come to an ITP solution like the one that we deliver, where you have a single integrated payments process for both domestic and cross border, then you address each of those items head on.

So you're not logging into separate banking portals or specialist cross border providers. You're taking advantage of a global network that we hold of local currency accounts. You know, we've got 140 currencies in over 200 countries, and you've got that common process therefore. But you go beyond that and, you know, we address the four key issues we just touched on.

Time, you know, the multiple days as payments ping between banks. Well, we make the payments same day. The separate processes in AP to generate the payments file and so on and so on. It's one process.

The risk, you know, uploading it into the banking portal, again, it's a single automated process. There are no uploads. There is no different process for cross border. It's all automated and electronic, so your files aren't flying about open to tampering or error.

You've got that full audit, the approvals with all of the controls and proactive fraud controls, and we'll touch more on that in a minute. You've got the cost issue of, you know, I don't know what FX rate I'm being charged. Well, you get full clarity on your exchange rate, including margin. No fees, so those 15 or €20 per transaction disappear.

And of course, you're combating the cost of fraud by bringing in all of those fraud controls. And then finally visibility, you know, you're not losing sight of these payments for four or five days. They're happening same day, you don't have that visibility issue. But also because there are no fees, you don't have any of those reconciliation issues as to, okay, well what are the fees applying here?

And that's both from your perspective and from the supplier's perspective. So the supplier is getting paid what they expect, not what they expect, less a fee that the bank has charged them.

Speaker 2

And you were was just reading my mind about recent fraud on this payment process. What can Medius do to help with this? You mentioned visibility. That is a key topic here on payments, b to b payments. But also, I think risk and fraud is something that we have seen a lot more.

And maybe you want to talk a little bit more about how AI machine learning and new technologies are being used to identify risks and avoid frauds.

Speaker 3

Yeah, absolutely. No, and I think this is such an important area to be honest because you've got the efficiency, you've got the cost, but of course all of that pales into insignificance against the potential impact of a fraudulent payment, not only financially, but reputationally and in so many ways it's hugely damaging to an organization. And that's why obviously it's a serious focus area for a lot of finance teams and AP teams, and particularly should be in the payments process. So first and foremost, again, what we are able to offer is a single integrated process for all payments.

So you never have any payments that you're having to make in off system, if you like, processes by exporting files and uploading them into portals. Everything is automated and sent through the same process, whether it's a domestic payment or a cross border payment, if it's a check payment in The US or a credit card payment or whatever, all goes via the same channel. It's integrated back down the chain too, so an ITP solution like ours gives you that kind of holistic visibility and data to draw on. So the end to end process lifecycle visibility, you're saying I'm making a payment today for an invoice I received sixty days ago perhaps.

So, you know, as controller, want to be able to easily see at the click of a button or, you know, access that invoice, pull up an image of it, see where it was coded, who approved it, were there any comments? That history and the associated data points, because you have them in one system, you can be much more intelligent about identifying and highlighting potential risks. That's not something that you can do in a banking portal where you're making your approvals for a payment because you don't have any of that legacy data. You know, a lot of our customers are processing payment files with hundreds, sometimes even thousands of payment items a week.

I don't know, if I think of a manufacturing customer in The USA in the HVAC space that uses our payments technology. You know, they're doing $25,000,000 in payments a month and they're processing maybe 300 payment items a week. So, you know, if you as an FDA send a file with 300 or more payment lines on it, how do you really make an informed approval decision?

How do you really try and identify, okay, well, are there any suspect payments in this file? Because you've got 300 lines to look through, and you're relying on your kind of anecdotal knowledge, your inherent knowledge of who those suppliers are and how much they should be being paid and so on. And that's why our customers love our risk factors.

Exactly to your point, Xavier, this is using AI and ML to effectively comb those payment files, draw on the knowledge from other parts of the suite, and pull in that knowledge that we have about the supplier and their history to identify anomalies and potential risks. So, you know, is this a new supplier? Have their details payment details changed since the last time you paid them? Has this invoice previously been approved in our system?

Is this an unusual payment value? So you normally pay this supplier €10,000 a month. Here's a payment for €100,000 That seems unlikely or unusual. Maybe you want to check that out.

The invoice format has changed. Usually the invoice comes in with a particular numbering scheme that it has been for the last three years from this supplier. Suddenly that numbering scheme has changed or the format of the invoice has changed. That doesn't happen very often, but it's something worth looking into.

So we are trying to proactively and intelligently suggest to the key actors in the approvals and review process for payments, you know, which 15 items out of those 300 they should focus their attention on because there are particular facets of those payments that make them more susceptible or more likely to have been at risk of fraud than the other two eighty five payment items within that batch. So we're highlighting and surfacing those. Customer sees them right at the top of the list. They're flagged as having risk factors against them, and therefore we're focusing attention where it matters most and where it's most likely to deliver a result.

So those kind of things that we can bring to the party really fundamentally change the dynamics around things like review and approvals and mean that we've got a much, much better, not only overall process for, customers to follow, but a much better mechanism for actually, you know, helping them intelligently make the right decisions about payments to protect against fraud.

Speaker 2

Very interesting, Daniel. And, yeah, you you wanna be the smarter on recent fraud. So that is very interesting what you're talking about, how the process is learning also. I know that this is a much broader topic to explain in twenty minutes, but we need to conclude, Daniel. And I want to thank you very much for the opportunity to talk with you. I appreciate it.

Speaker 3

It's been my pleasure. Great to speak to you, Xavier. Thanks a lot.

Speaker 1

That was Jetsetting cross border payments. Special thanks to Xavier and Daniel for their time. If you like this podcast, please be sure to subscribe to catch our next installment of Bridging the GAAP and to take all of your business spend management far beyond basic automation, visit medius.com. Thanks for listening.