Guidance Note Supporting Payment Sector Development: B2B corporate payments requirements in the traditional retail sector Guidelines for conducting a local market assessment April 2016 1 This consultative paper and the research contributing to it are part of a broader program funded by the Swiss State Secretariat for Economic Affairs (SECO). It has been conducted in collaboration with the Mandiri Institute and the World Economic Forum. The authors recognise important contributions to this research paper from experienced industry experts including in particular Fred Bär, Tom Buschman, Andrew Davis, Antonio DiLorenzo, Nader Elkhweet, Thomas Lammer, Harish Natarajan, Edy Prawiro, Brad Pragnell, Paul Reynolds and Ghada Teima 2 Foreword Access to and usage of payment services are important objectives within private and public sector efforts to enhance financial inclusion. Electronic payments (often now referred to also as “digital payments”) can, at scale, provide a cost effective means to facilitate economic activity of all kinds in the economy. Electronic payments can also provide for more efficient and cost effective access to other financial services including loans, savings and insurance. These are essential for businesses and households to manage their finances, invest and save in ways that contribute to welfare and overall economic development. Retailers and their suppliers can play an important role in expanding use of electronic payments and inciting further adoption thereof by consumers. Retailers sit at the crossroads of much of the economy that reaches the consumers not served by banking and formal payment services. Through the payments that they make and receive, many of which are in cash, they account for a significant portion of retail payment volumes in developing markets. Despite innovations in retail and B2B payment services, uptake by traditional retailers remains limited. Payment services may need to be better adapted to the circumstances and business operations of traditional retailers and their suppliers as well as consumers. Often in payment systems, network inter-operability (or lack thereof) can also play an important role in enhancing value (or undermining) to end-users. This report has been prepared to inform policy makers and service providers about traditional retailers’ and their suppliers’ business payment and related financial services needs and the implications thereof on payments systems strategy. The paper shares insights into the particular needs, constraints and motivations of traditional retailers and their suppliers. It sets out a framework of key business requirements and an analysis of their implications for payment systems strategy and collaboration between private sector providers. The research behind this paper has contributed to and complements related research undertaken by the World Bank Group and the World Economic Forum, notably a global sizing and a recent 2016 publication entitled “Innovation in Electronic Payment Adoption: The case of small retailers”. 3 4 Contents Foreword .................................................................................................................................... 3 Glossary ...................................................................................................................................... 6 Executive Summary ................................................................................................................ 9 I. Introduction ..................................................................................................................... 11 Overview ............................................................................................................................................ 12 Policy Context ................................................................................................................................... 14 Economic Development .............................................................................................................................. 14 Financial Sector Development ................................................................................................................. 15 II. An Approach to Market Sizing .................................................................................. 18 Market structure ............................................................................................................................. 18 Estimating payment value and volume ................................................................................... 19 III. Traditional retailers ................................................................................................... 24 Retailer Profiles from Indonesia ............................................................................................... 26 Purchasing Operations .................................................................................................................. 28 IV. B2B payments and supply chain integration ...................................................... 31 Business Operations and Requirements ................................................................................. 31 Business Process Steps ............................................................................................................................... 32 Sub processes between sellers & buyers and their impact on payments .................... 33 Payment Process Steps ............................................................................................................................... 34 Post payment processes and functions ............................................................................................... 38 Automation between buyer and seller .................................................................................... 39 V. Payment Service Requirements ............................................................................... 42 Business Requirements ................................................................................................................ 42 Operational implications .............................................................................................................. 49 VI. Implications for Payment Systems Development ............................................. 59 Annex A: Information Flow Analysis of the End-to-End Process ........................... 62 References and further reading ....................................................................................... 68 5 Glossary Authentication: the methods used to verify the origin of a message or to verify the identity of a participant connected to a system and to confirm that a message has not been modified or replaced in transit. Authorisation: the consent given by a participant (or a third party acting on behalf of that participant) in order to transfer funds or securities. Beneficiary: a recipient of funds (payee). Depending on the context, a beneficiary can be a direct participant in a payment system and/or a final recipient. In the case of retailer payments to suppliers, may designate also the supplier. Bilateral net settlement system: a settlement system in which participants’ bilateral net settlement positions are settled between every bilateral combination of participants. See also net credit (or debit) position. Clearing: the process of transmitting, reconciling and, in some cases, confirming payment orders or security transfer instructions prior to settlement, possibly including the netting of instructions and the establishment of final positions for settlement. Sometimes the term is used (imprecisely) to include settlement. Credit transfer: a payment order or possibly a sequence of payment orders made for the purpose of placing funds at the disposal of the beneficiary. Both the payment instructions and the funds described therein move from the bank of the payer/originator to the bank of the beneficiary, possibly via several other banks as intermediaries and/or more than one credit transfer system. Four-party Scheme: a card scheme involving separate issuers and acquirers of payment instruments and transactions and which clear payment obligations between each other Interoperability: a situation in which payment instruments belonging to a given scheme may be used in other countries and in systems installed by other schemes. Interoperability requires technical compatibility between systems, but can only take effect where commercial agreements have been concluded between the schemes concerned. KYC: Know your client rules and procedures that must be followed by banks and other payment service providers to establish and verify the identity of the client on whose behalf they hold funds or execute payment instructions. Large-value funds transfer system (wholesale funds transfer system): a funds transfer system through which large-value and high priority funds transfers are made between participants in the system for their own account or on behalf of their customers. Although, as a rule, no minimum value is set for the payments they carry, the average size of payments passed through such systems is usually relatively large. Large-value funds transfer systems are sometimes known as wholesale funds transfer systems. Large-value payment: payments, generally of very large amounts, which are mainly exchanged between banks or between participants in the financial markets and usually require urgent and timely settlement. Non-Bank: any entity involved in the provision of retail payment services whose main business is not related to taking deposits from the public and using these deposits to make loans. Payee: The recipient of a payment, also the beneficiary of a transfer or payment of funds. Payer: the party paying a bill or debt. Generally but not always this is the buyer, but payment can also be made by a third party on a buyer’s behalf. See also Creditor. 6 Point-of-sale (POS) terminal: a device allowing the use of payment instruments, including but not limited to cards, at a physical (not virtual) point of sale. Processing: the performance of all of the actions required in accordance with the rules of a system for the handling of a transfer order from the point of acceptance by the system to the point of discharge from the system. Processing may include clearing, sorting, netting, matching and/or settlement. Real-time gross settlement (RTGS) system: a settlement system in which processing and settlement take place on a transaction-by-transaction basis in real time. Reconciliation: a procedure to verify that two sets of records issued by two different entities match. Retail funds transfer system: a funds transfer system which typically handles a large volume of payments of relatively low value in forms such as cheques, credit transfers and direct debits ATM and POS transactions Retail payment: this term describes payments that are not directly related to or the result of financial market or interbank transactions; generally the payer and payee are both consumers, businesses and/or government entities but not financial institutions. The parties to the transaction are both participants in the payment system processing the transaction. Settlement: an act that discharges obligations in respect of funds or securities transfers between two or more parties. Straight-through processing (STP): the capture of trade details directly from front-end trading systems and complete automated processing of confirmations and settlement instructions without the need for rekeying or reformatting data. Three-party card scheme: a card scheme involving the following stakeholders: 1) the card scheme itself, which acts as issuer and acquirer; 2) the cardholder; and 3) the accepting party. This contrasts with a four-party card scheme, where the issuer and the acquirer are separate entities and are separate from the card scheme itself. Value date: the date on which it is agreed to place a payment or transfer at the disposal of the receiving user. The value date is also used as a point of reference for the calculation of interest on the funds held on an account. 7 Acronyms Acronym Definition AML Anti-Money Laundering B2B Business to Business ERP Enterprise Resource Planning KYC Know Your Client MNO Mobile Network Operator PAFI Payment Aspects of Financial Inclusion POS Point of Sale SME Small and Medium Enterprises 8 Executive Summary 1. Grocery shops, supermarkets and other retailers are central actors in the landscape of retail payments and important stakeholders in financial inclusion efforts in developing and emerging markets. Combining the payments they make to suppliers and those they receive from consumers, retailers account for a large portion of non-institutional1 payment volumes in a domestic economy. Yet most of these payments are still conducted in cash2. 2. Retailers’ and wholesalers’ payments to their suppliers (B2B) provide a pragmatic way to use economic incentives to expand adoption of electronic payments. In the consumer to retailer transaction (C2B), both actors must be persuaded to adopt or acquire efficient payment instruments and then subsequently persuaded to use them. Whereby many higher income consumers and modern sector retailers may already use electronic payments, lower income consumers and traditional retailers are less likely to be equipped with electronic payment instruments and acquiring solutions. But in the case of B2B payments, many suppliers, e.g. distributors of packaged goods, are already entrenched users of electronic payments and banking. Hence only one party – the retailer – needs to be assisted in the transition away from cash3. 3. While many small and traditional retailers remain un- or under-served by bank, their suppliers are more often banked and are interested in reducing their reliance on cash. These incentives need to be leveraged to support change. Organized consumer goods producers and distributors often consider cash collections and manual processes a burden and hence have some incentives to help retailers adopt electronic payments and banking. This is an important opportunity to use market incentives to promote expansion of electronic payments, especially where low penetration and merchant fees act as disincentives for retailers to accept electronic payments from consumers. 4. Traditional retailers and their suppliers also have specific non-payment business needs and preferences that condition their demand for electronic payments. These other business requirements are interdependent with payment and credit processes. If they are not well met by or integrated with payment services, they can undermine the efficacy of new electronic payments services. But to date, these needs have not been well targeted or supported by new consumer oriented mobile money solutions. More recently some MNO service providers have begun to expand into this market segment, but despite a wave of innovations, many of these needs of traditional retailers and their suppliers remain inadequately addressed. 5. To facilitate extension of payment services to this part of the market and encourage adoption, key requirements that need to be addressed include: a. Digital payment solutions must be as easy to use as cash. Retailers that receive much of their income in cash need to be presented with payment solutions that address disincentives to adopting electronic payments. Retailers are reluctant to have to make frequent trips to a bank branch to deposit funds; retailers can feel they have less control and visibility over sales and outgoing expenses if they move away from cash but are not provided with or are not comfortable using electronic tools for monitoring accounts; order and invoicing processes using paper receipts and 1 This excludes potentially high volume financial market transactions for instance between financial intermediaries, in securities, derivatives and FX, etc. 2 see also World Bank and WEF market sizing assessment by Euromonitor 2 see also World Bank and WEF market sizing assessment by Euromonitor 4 Refer also to World Bank cost of retail payments methodology: https://consultations.worldbank.org/data/hub/files/a_practical_guide_for_measuring_retail_payment_costs_con 9 records may also be replaced with digital solutions that are less user friendly or reliable for retailers. b. Payments networks should be inter-operable. Payment services are less likely to be used by retailers if they can only be used for paying some suppliers. There are additional disincentives to their use if competing suppliers require use of different banks or payment accounts. From a supplier’s perspective, it should be possible to receive payments from a range of, if not all, possible accounts and institutions. These need to meet requirements of interoperability at each stage of the process, including payment confirmation and account reconciliations. c. Other non-payment benefits need to be available for for suppliers and retailers. The simple benefits of non-cash payments alone are not enough to overcome the inertia of cash. To accelerate the transition to deferred payment or credit terms can be instrumental in providing incentives for retailers to adopt non- cash payments while also relieving some of the burden of having to deposit cash to a bank. Distributors can also be encouraged support change if digital payment solutions also contribute to their sales or market development objectives, for instance by enhancing control over sales incentive programs. 6. Service providers should take account of these inter-related requirements that need to be met to expand payments and finance to small retailers. Progress has been made in many markets where either vertical integration or limited competition in payment services have enabled principals, i.e. anchor distributors, to impose a choice of payment and banking solutions. But in more fragmented markets or those with less developed payments infrastructure, coordination issues have led to a number of failed projects in this corporate banking space. This paper attempts to provide an overview of the requirement of each respective party and to highlight the key inter-dependencies that service providers and users should be aware of when developing new business initiatives. 7. Policy makers should help ensure that payments infrastructure can support access to finance and integration of non-payment services required by retail supply chains. A more open and inter-operable framework for banking and payments could include facilitating access by or membership of non-banks to payments infrastructure, encouraging development by infrastructure providers of new payment functionality, development and publication of open APIs, and easing of restrictions for entry and innovation by payment or merchant service providers. Policy makers should also assess whether new service adoption or commercialisation is unduly constrained by anti- competitive behaviour or impediments to inter-operability. Regulators should also be careful that through promotion of common standards or steps to inter-operability they do not stifle innovation and flexibility in the growing array of financial technology services that are also serving businesses in the distribution and retail sector. A balance can best be met through enhanced engagement with services providers and users of the payments systems. 10 I. Introduction The purpose of this study is to inform policy makers and industry participants in their respective efforts to expand usage of digital payment and financial services in the traditional retail sector. It provides indications of the size and structure of this market, using examples from an assessment in Indonesia. It also provides methodological support for conducting similar analysis in other markets. The second objective is to provide insights into the behaviour, needs and challenges of traditional retailers and explain the requirements that they place on B2B payments services and infrastructure. It provides a framework for this analysis of the end-to-end requirements of supply chain payments. The analysis highlights areas of payments systems that would benefit from industry coordination. The working paper concludes with discussion points for stakeholders from government and banks and other payment service providers. The rest of this paper is organized as follows. The introductory section provides an overview of the policy context and market development issues. It outlines related concerns, motivations and initiatives in economic and financial sector development that can impact incentives and opportunities to increase adoption of electronic payments in the retail sphere. The following section provides a structure for sizing the B2B payments market. With examples from market sizing in Indonesia, it describes the structure of the retail and distribution market and how impacts the volumes and instruments used for B2B payments in traditional retail. It outlines a simple methodology for estimating volume and value of payment flows in this part of the economy. Chapter III provides snapshot profiles of traditional retailers in Indonesia and highlight their needs, constraints and business behaviour that impacts payment service adoption. The subsequent sections of the document explain how payments fit into the broader context of Supply Chain Integration along the purchase-to-pay processes of seller and buyers. The penultimate section provides an analytical view of payment service requirements that need to be addressed in order to facilitate adoption and usage by traditional retailers and their suppliers. The paper summarises implications for Payment Systems Policy to inform policy makers and industry debate about how to improve payment services for this segment of the economy. Particular attention is focused on areas that may require enhanced coordination at the industry level or with policy makers. 11 Overview Payments are important, even essential, services for households and firms. In a modern economy, electronic or digital payment services also form an essential backbone of the financial sector - a part of the infrastructure required to conduct business, fulfil the functions of government, and through which to provide other financial and related services. Many retailers, as well as other small businesses, still conduct transactions predominantly in cash. Evidence from surveys in a range of middle income and developing markets indicates that many retailers, including those with a bank account, pay most of their suppliers and receive most income in cash. In markets across Africa and South Asia in particular, only about 30% (by value) of all retailers’ payments to their suppliers are made electronically (see exhibit 1) This puts much of their savings and information about their creditworthiness outside the banking system. This in turn limits their access to interest earning and new sources of working and investment capital. Exhibit 1: Retailer to Supplier Payments: annual value and % electronic Micro, Small and Medium Retailers B2B* Payments – Value: Cash vs. Electronic Europe & Central Asia Global Total: $1.2 trillion Total: $13.3 trillion Electronic: $0.69 trillion (59%) Electronic: $7.1 trillion (53%) High-income OECD Total: $4.4 trillion Electronic: $3.5 trillion (81%) East Asia & Pacific Middle East & North Africa Total: $3.8 trillion Total: $0.52 trillion Electronic: $1.5 trillion (40%) Electronic: $0.20 trillion (40%) South Asia Total: $1.5 trillion Electronic: $0.4 trillion (26%) La5n America & the Caribbean Total: $1.4 trillion Electronic: $0.61 trillion (45%) Sub-Saharan Africa Total: $0.61 trillion Electronic: $0.19 trillion (31%) * B2B payments include only those payments by retailers to their immediate suppliers, and does not include other B2B payments up the distribuPon channel. Source: Euromonitor, IFC Although cash does not create overt nominal costs on retailers, its pervasive use along the supply chain imposes system-wide costs and can undermine efficiency of businesses in the real sector. Beyond lost interest earnings, the costs of physical logistics and operational costs of cash collection, invoicing, reconciliations can weigh on retailers. Manual operations can open the door to error and fraud and undermine potential efficiency gains from better information management and planning along the supply chain4. 4 Refer also to World Bank cost of retail payments methodology: https://consultations.worldbank.org/data/hub/files/a_practical_guide_for_measuring_retail_payment_costs_con sultation_draft_final.pdf 12 New payment services are being brought to market that target un- and under-served segments of the economy. Most have first gained traction in niche areas. These include services launched by non-banks, mobile operators and technology companies to address the needs of the unbanked, for bill payments, remittances and a growing array of e-commerce and digital services such as games or media. Meanwhile, banks and established actors such as card networks and operators of inter-bank systems have also continued to evolve their payment service offering with intent to expand penetration and usage in lower income segments and areas of business dominated by cash. Traditional retailers - under pressure from the modern sector5 – would be better placed to compete if they could benefit from better access to credit and efficiency gains from supply chain integration. Digital solutions for procurement, stock management, accounting and general business management can create efficiency gains that, in a competitive market, can pass on savings to consumers. As larger suppliers automate and integrate their supply chain operations, retailers outside this trend may find it more difficult to benefit from credit or discounts or from competition between alternative suppliers. Being equipped to participate in new “digital” business practices is important for them to be able to compete with modern retailers that have greater economies of scale in the deployment and usage of technology. Exhibit 2: modern vs. traditional retail market share (by value of sales), selected markets 2013 China# Mexico# South#Africa# Brazil# Thailand# Venezuela# Argen;na# Colombia# Philippines# Indonesia# India# 0%# 20%# 40%# 60%# 80%# 100%# Tradi;onal# Modern# Source: Euromonitor 5 the modern sector refers in this context to organized generally larger scale retail companies, chains or franchises that operate many outlets and support them with a scalable centralized infrastructure for purchasing, logistics and distribution as well as branding. Typical examples of minimart modern sector retailers in Indonesia include Indomaret, Circle K, 7-Eleven and Alfamart. 13 Policy Context Economic Development Retail sector development and access by retailers to financial services raise important policy issues, including not just finance, but also employment, competition, tax and competitiveness. Expanding financial services to this sector can help government contribute to achieving non-financial sector policy objectives. Equally, to efficiently expand financial services access to this sector, governments should make use of policy initiatives and instruments in other areas beyond the financial sector to address relevant constraints. In particular the following points and areas of policy should be considered: The retail sector, especially food grocery, plays an important role in the welfare and development of lower income economies. As the conduit through which consumption goods are supplied to households, the sector and its efficiency has an impact on the overall cost of essential goods on which lower income persons spend a large portion of their income. Lower income households spend a greater proportion of their income on consumption and via traditional retailers (see exhibit 3). Efficiency and pricing in this part of the market therefore has a disproportionate impact on poorer households. Expenditure on foodstuffs and consumers goods represents an important share of low- income households’ income. So changes in the efficiency of this sector can have important welfare effects. Exhibit 3: GDP per capita vs. food expenditure per capita, cross-country comparison (each marker indicates a country) Comparing)HH)Expenditure)on)Food)(%$of$GDP$pc)$with)GDP)pc) 70%# 60%# Consuumer)Expeniture)on)Food)as)%)of)GDP)per)capita) 50%# 40%# 30%# 20%# 10%# 0%# #+#### #10,000## #20,000## #30,000## #40,000## #50,000## #60,000## #70,000## #80,000## #90,000## GDP)pc)in)current)USD) 2011)(or$nearest$available)) Sources: World Bank and Euromonitor Traditional retailers are also an important source of employment. Many traditional retailers are small, owner operated businesses that generate an important source of income for lower socio-economic and rural population segments of society. Many small shops are opened on the ground floor of the place of residence of a family and are run by women of the household, allowing them to also take care of other domestic responsibilities, while running their business. 14 Modernisation of the retail sector and the rise of organized chains present a challenge to traditional retailers. Policy makers are concerned about the role of the retail sector in employment and on local foodstuff producers and the effects on it of modernization in the retail and distribution industry. The retail sector plays a key role in expanding usage of electronic payments by consumers. Retailers generate a big portion of overall consumer payments in any economy. They are hence a focal point for efforts by banks, retail payment schemes and governments to reach important financial sector and inclusion targets. Low usage of cards and payment accounts for retail consumption has made acceptance by retailers in emerging markets a focus for industry’s and policy makers’ efforts to expand the payments sector. Retailers and their suppliers also feature prominently in attempts to broaden the tax base and streamline and simplify operations of reporting, collections and tax credits. Some countries, particularly in Latin America, have introduced e-invoicing obligations to reinforce the tax base. The obligation to capture invoices electronically has pushed distributors and in some cases also retailers to digitize more of their processing, thereby increasing potential benefits from automating the rest of the process to include electronic payments. In conjunction with tax issues, many countries are putting in place electronic invoicing and procurement systems. The aim thereof is generally not just to “digitize” these processes but also to help improve and simplify business operations, enhance transparency of government procurement and the ability for SMEs to participate in tenders and gain access to new markets. Financial Sector Development Traditional retailers in emerging markets sit at the crossroads of financial sector development. The sector can play an important role in policies aiming to increase the access for the poor and under-served to better payments services, benefits of the digital economy 6 and finance for SMEs. With relevance to payments system strategy and development, several specific policy issues7 and market developments are pertinent in most markets and should be taken into consideration when reviewing plans to promote B2B payments: § Central payment switch and ACH infrastructure development B2B payments in this segment bridge the gap between banked corporates and small firms often poorly (or not) served by financial institutions. Renewal or expansion of payments infrastructure can be designed in a way to accommodate better the access and utilisation challenges of this segment of the economy. A growing number of countries are upgrading Automated Clearing House (ACH) infrastructure to support faster retail payments and enhance access to and management of associated of non- payment data. § ISO20022 payment standards Global payments systems are migrating to ISO20022 standards. These payment message structures support automation and integration for business processes that are also important for the retail and distribution sector. While distributors may 6 Small business may also face challenges to benefit from the shift to offer government and business services as well as marketing and sale opportunities to internet based platforms; for example they may not be able to afford a computer or regular access to broadband; they may lack skills to market their service or collect payment via internet channels. 7 Refer also to policy issues the consultation on Payment Aspects of Financial Inclusion (PAFI). 15 already have systems and operations that integrate with these standards, many of the smaller retailers that they supply do not use related banking or enterprise management solutions. Hence they have little incentive, nor the capacity, to use ISO20022 messages to support automation of their accounting and operations. Together, market participants need to set out plans to help make these ERP and payment related services easier and more attractive for small businesses to adopt. § Promotion of financial technology and non-bank innovation The growing role of so-called fintech services has inspired many countries to set up policies, industry bodies and funding sources to support the application of new technology and business models to support financial sector innovation and development in their economy. New financial technology companies can help to provider services that that better adapt and connect underlying payments and banking services to meet needs of specific users such as small retailers. There can be mutual benefits from facilitating or even directing new companies’ attention to improving services to serve the B2B payments and financial services needs of the retail sector. § Expansion of networks to include agents and retailers Mobile money, bill payment and agent banking models often target small retailers to act as agents for new payment networks. There can be important synergies between these efforts and addressing the B2B payment needs of retailers and their suppliers. SME Finance Many governments have policies to support access to finance for small and medium sized enterprises (SMEs). These firms tend to account for a large portion of employment and output. But their capacity, scale and level of formality make them often more costly and less attractive clients for banks to serve. Hence governments may have policies that help to promote their access to financial services, for instance through lending targets, interest rate controls, lending subsidies or capacity building projects. Banks and non-bank financial institutions have an array of service models that aim to support distribution chain finance. Distributors themselves often provide deferred payment terms to retailers. In other instances, banks provide inventory or working capital facilities to larger wholesalers or retail chains. For high value goods such as motorcycle parts or electronics, consumers may be provided with short term lending products, either direct by the seller or intermediated by the seller and financed by a consumer credit organisation. 16 Box 1: The context of B2B payments Payment aspects of financial inclusion (PAFI) The World Bank and the BIS have, with other parties, developed guidance on the “Payment Aspects of Financial Inclusion (PAFI). In this report, emphasis is place on the role that large-volume recurrent payment streams can play – if properly addressed – to build scale and reach of the financial ecosystem and enhance inclusion. Small retailers’ Business–to-Business payments are one specific and kind of such large-volume, recurrent transactions. They are especially relevant in developing and merging markets where traditional retail is often a large part of the overall retail economy. The PAFI report provides broad guidance to policy makers and industry leaders on financial inclusion aspects of payments, such as infrastructure, services and regulation. This current document on B2B payments is a complement to the PAFI report. It draws upon the broader PAFI framework and provides more detailed, operational and targeted guidance on the foundations required to support B2B payments: (i) infrastructure (ii) regulatory and (iii) private sector commitment. It also identifies the requirements that need to be fulfilled by product design, access points and awareness in order to leverage the potential of B2B payments as a catalytic large volume transaction stream. 17 II. An Approach to Market Sizing This section outlines a simplified methodology8 for estimating the size of payment flows in the traditional retail sector. For illustrative purposes It also provides estimates of different measures of the importance and size of the traditional retail segment in Indonesia. Overall the size of B2B transaction is important and exceeds many of the other payment flows that originate from or reach lower income parts of society. As per the table below, retailers’ payments to their immediate suppliers can equate to as much as 25 or 30% of GDP, while remittance inflows in contrast, albeit important, tend to be more in the realms of 5% of GDP. The overall size of the B2B market is even larger, as many retailers buy from wholesalers or other intermediaries who in turn purchase from a chain of other distributors. This tends to multiply the overall number of transactions by a factor of 2 to 4 depending on the number of distribution layers in the market. Exhibit 4: Estimated value of B2B grocery payments to immediate suppliers compared to remittances 35%# Remi@ances#as#%#of#GDP# Grocery#Supplier#payments#as#%#of#GDP# 30%# 25%# 20%# 15%# 10%# 5%# 0%# Kenya# Vietnam# Morocco# Indonesia# Pakistan# Turkey# Colombia# Sources: Euromonitor and World Bank Market structure The traditional retail sector tends to account for a large part of emerging and developing market economies. This section provides an overview of the size and structure of this market segment, based in particular on primary and secondary empirical research into selected markets. Exhibit 5: Distribution structures Consumer Product Producer Distribution in the retail sector usually passes through a series of channels including direct key accounts, Key A/C Key A/C D D W W distributors and wholesalers. Key account clients may be large retail chains or hotels to which product is sold W W W directly and then further distributed with their own networks. Larger distributors are used to reach another W portion of the market for retail. They tend to be well Hotel Rest R R R R R organised, with a high proportion of them using formal banking and payments services. Many of them would have Consumer Expenditure D Distributor W Wholesaler R Retailer Key Key account client 8 This follows a bottom-up approach to market sizing which complements A/C the approach used in the Euromonitor study for global market sizing. 18 some form or credit terms offered to them by the supplier or a bank. Wholesalers usually make up for the rest of the direct customers of consumer goods companies. they are less likely to use banking services or have access to credit from suppliers; they are more likely to pay in cash. Estimating payment value and volume Data on consumer expenditure provides a first level estimate of B2B payment flows. Most countries have statistics on consumer expenditure, broken down by category of goods and services consumed at varying levels of aggregation. Private sector research firms also provide estimates of retail expenditure across different categories of goods, although these may under-estimate or exclude informal (i.e. unregistered) retailers. Estimates of B2B payment values also need to consider the level of margins retained by each layer of distribution. Retailers purchase Total sales value per product category = supplies at a wholesale price, which represents their margin. If using consumer expenditure as a starting § Value of good sold by Producer by category point for market sizing, it is necessary to first + Wholesaler margins estimate the level of these margins and then deduct + Retailer margins them from each payment leg. Otherwise payment value is over-estimated. Information on retail and = Total value of retail sales per category wholesale margins can also be useful to assess how payment or credit fees would impact profitability. Estimates of margins can often be obtained from private sector market experts. Some countries conduct input/output analysis that can provide estimates of margins, as is the case in Indonesia (see box 2). Value and volume of payments depends hence on the number of legs in the distribution chain. Some retailers may buy direct from a distributor supplied by the consumer goods company, generating one transaction from distributor to retailer. Other, particularly smaller retailers may buy from wholesalers who in turn purchase from another wholesaler that is supplied by the Consumer goods company. This generates 2 payment flows from a given distributor to the end retailer. Similarly, getting product to some smaller or remote retailers may involve 3 or 4 steps. In this manner, the number of distribution legs determine the volume of B2B payments processed in the overall market. Hence sizing the market for these payments requires some estimation of this structure. Exhibit 6: Schematic chart of consumer goods and retail distribution market structure Schematic Chart of Consumer Goods and Retail Distribution Market Structure Grocery Motor vehicles ConstrucKon Household Household Fresh Produce & Parts Consumer Durables Materials Durables Non-Durables Tobacco Beverages Dairy Foodstuffs Motorcycle spare parts Goods Categories Apparel & Footware NARTD (inc Water) Fruit & Vegetable Electronics Packaged Food Personal Care ConfecKonary White Goods Home Care Meat & Fish Electronics Cement Grains Fuels Milk Flow of goods Distributors Retailers and Distributors Wholesalers Flow of funds Specialised Retailers Food and non-food Grocery Retailers Hyper / Mini-Markets Small Retailers Micro Restaurants Super- Retailers markets 19 To estimate the value of sales, the retailer and wholesaler margins must be deducted from the value at the point of sale. Industry expertise or data from input/output tables can be used to estimate the average margins across different product groups and retail structures within the market. Gross figures reported by statistical authorities for value of retail sales will generally include value added tax (VAT). For retailers for which this is applicable, it should be deducted from the total value of sales to estimate payment values to distributors. However it should be noted that there are variations depending on the tax regime in the way in which VAT is charged and collected. Volume and value estimates require information about the number of retailers in the market, segmented by size or business model. This kind of data is often available from market research firms as well as enterprise surveys conducted by government agencies. But care must be taken using these sources as many such surveys either look only at formal sector firms and hence exclude - or may underestimate the number of - informal enterprises in the retail sector. Interviews with a balanced selection of consumer goods companies can also help to provide a quick overview of the total number of retailers. Depending on the country, there may also be reliable information available from industry associations or chamber of commerce organisations. However, small and traditional retailers may not be within their membership. Lastly, it is essential to estimate the number of suppliers that retailers have and the frequencies with which they purchase supplies from each of them. Overall expenditure needs to be divided by the number of retailers and supplier relationships they have in order to estimate how many actual payments are being made on a regular basis. This requires some survey-based work to estimate the number of suppliers and average purchase frequency and size. Combining estimates on overall expenditure, number of retailers and purchase frequencies with data on market structure allows an estimate to be made of gross payment values and volumes in the retail market. Further input from interviews with retailers and distributors can then be used to estimate the portion of these payments being made in cash instead of through electronic payment instruments or other non-cash means. 20 Box 2: Extracts from retailer survey in Indonesia Retailers source suppliers of different kinds at different frequencies. These charts summarise the frequency with which retailers within the sample purchase specific product types, expressed as a % of the overall sample base. Chart 1: frequency of stock purchases by food category Source: IFC & e-Mitra, 2014 Indonesia Tradi,onal Retailers Survey Frequency of stock purchases by product type (percentage or respondents) 60% 50% 40% 30% 20% 10% 0% 2 – 3 +mes a week Once a week Every 2 weeks Every month Once in 2 months > Once in 2 month Ready to drink beverages instant beverages Mineral water Indonesia Tradi,onal Retailer Survey Frequency of stock purchases by product type (percentage or respondents) 50% 45% 40% 35% 30% 25% 20% 15% 10% 5% 0% 2 – 3 *mes a week Once a week Every 2 weeks Every month Once in 2 months > Once in 2 month Rice Toiletries household care medicine / drugs 21 Box 3: Examples of consumer expenditure data analysis, Indonesia The Indonesian statistical agency estimates spending per expenditure category for households of different levels of income. Lower income households spend proportionately more on basics such as food. Chart 2: household expenditure, by expenditure category and income segment Alloca&on(of(Income(per(segment(and(products( Indonesia(2012( 100%# 90%# 80%# 70%# ParMes#and#ceremonies# Taxes#and#insurances# 60%# Durable#goods# 50%# Clothing,#footwear,#headgear# 40%# Health#cost# EducaMon#cost# 30%# Goods#and#services# 20%# Housing#and#household#facility# 10%# Food# 0%# Less#than#100# 1004#150# 1504#200# 2004#300# 3004#500# 5004#850# 7504#1,000# 1,000#and# Per#capita# over# avg.# Income#Segment#in#Thousand#Rupiah#per#month#per#capita#expenditure#by#Households#(2012)# Using input/output tables, estimates of wholesaler and retailer margins can be obtained per expenditure category. These figures can help to better understand the structure of the distribution sector and the competitive environment. Chart 4: Indonesian consumer expenditure, retail and wholesale margins, by product category Wholesale and retail Composi.on&of&Final&Expenditure&on&selected&goods& (based$on$2005$Input$Output$data,$in$USD$equivalent)$ margins: BPS statistics Alcoholic!Beverages! Processed!meat! provide one indication of how Processed!tea! Canning!of!fruits! Wholesale!Margin! Retail!Margin! the final expenditure by Chocolate!&! Wheat!Flour! Private!Expenditure! consumers is shared out by Soap! CosmeRcs! non"Alcoholic! the main stages of production Bakery!Products! Milled!Coffee! and distribution. Overall, Sugar! Noodles! Soya!bean!products! wholesale and retail margins Drugs!&!Medicine! Other!food! in packaged consumer goods Dairy! animal!and!veg!oil! range from about 8% to 16%. Vegetables! Fish! Poultry! These figures help estimate Meat! Fruit! value of purchases between Cigare6es! Rice! retailers, wholesalers and !"!!!! !1,000!! !2,000!! !3,000!! !4,000!! !5,000!! Source: BPS Indonesia Input/Output data 2005 Million&USD& !6,000!! !7,000!! !8,000!! !9,000!! !10,000!! (at$12600$Rp$=1)$ distributors. By way of comparison, comparable studies in Australia find total gross distribution and retail margins for food and non-alcoholic drinks to be notably higher, closer to 35 %9. As the study notes, margins often depend on the competitive structure of the market. In Indonesia, lower gross margins may reflect the fragmented nature of the retail industry relative to suppliers as well as the relatively lower wages in the retail sector. Table 1: Indonesia: number of grocery and non-grocery retailers 2007 2008 2009 2010 2011 2012 Grocery'Retailers '''''''2,501,964 '''''''2,540,273 '''''''2,573,589 '''''''2,596,201 '''''''2,589,430 '''''''2,582,875 224,374 ''''''''''' Non;Grocery'Retailers ''''''''''' 236,216 ''''''''''' 230,804 ''''''''''' 245,115 ''''''''''' 241,258 ''''''''''' 248,368 Source: Euromonitor World Retail Data and Statistics 2014 9 cf D’Arcy et al, 2012 22 Box 4: Value and volume estimates for traditional retail B2B payments, Indonesia The Indonesian market has an estimated 2.5 million retailers, of which the vast majority are in the traditional and informal space. Most of these pay their immediate suppliers in cash. Estimates of annual sales of packaged consumer goods are about USD 92 billion, with up to about USD 164 billion in total consumer expenditure on food. Estimates of sales through tradition retail range from about USD 46 billion to about USD 80 billion depending on the scope of goods covered and the classification of traditional vs. modern retail. Using a conservative estimate of $46 billion, it is likely that overall value of sales through the supply chain to such retailers totalled about USD 130 billion in 2014. Es6ma6ng the value of payment flow from tradi6onal retailers to wholesalers and distributors Food and Packaged Goods Companies and Sellers 12 US$ 18 B 11 Large Distributors US$ 10 US$ 15 B 15 B Distributors 9 US$ 23 B US$ 130 B Wholesalers US$ 8 13.5 B Retailer Wholesalers 6 5 4 3 2 US$ 7 6.6 B US$ US$ US$ US$ US$ Whole salers 6.8 B 6.8 B 12.5 B 5 B 3 B US$ 1 7 B Hyper markets & Mini-markets Large Retailers Small Retailers Micro-Retailers (avg. revenue > USD 200K) (avg. revenue < USD 24K) Σ = USD (USD 200K > avg. revenue > USD 24K) Supermarkets US$ 15 B sales US$ 20 B sales US$ 11 B sales 46 B Traditional retailers tend to source goods from smaller wholesalers and distributors, with a higher frequency of purchases. Based on overall markets statistics and the results from surveys of small retailers in Indonesia, it is estimated that there were over 1.4 billion per annum transactions made by retailers and wholesalers in the traditional retail market segment Es*ma*ng the volume of payment flows from tradi*onal retailers to wholesalers and distributors Distributors Wholesalers Retailer Wholesalers Es*mated 100 thousand Wholesalers est. 52 M Wholesalers Supplier purchase est. 1.4 Billion transacDons per annum TransacDons per annum Large Retailers Small Retailers Micro-Retailers (avg. revenue > USD 200K) 40 tsd (USD 200K > avg. revenue > USD 24K) 350 tsd (avg. revenue < USD 24K) 1.5 million TRADITIONAL RETAILERS 23 III. Traditional retailers This chapter highlights some of the specific needs, behaviour and challenges of traditional retailers related to B2B payments. It draws in particular on surveys and market research conducted in Indonesia. There are over 2.5 million traditional retailers across Indonesia. The encompass a wide variety of enterprises, in terms of the size of the business, number of customers, distributors, and purchases, access to financial services and their overall attitudes. These differences play a role in the requirements for B2B payments, and the impact that access to credit and electronic payments offer. It is therefore necessary to understand traditional retailers within the context of these key differences. While no retailer is the same, traditional retailers can generally be grouped into the following four stylized profiles: Exhibit 7: Retailer and Wholesaler Categorisation Wholesalers & Large Retailers Wholesalers and Large retailers represent businesses with annual turnovers typically greater than IDR 3 Billion10. While their customers differ (Wholesalers sell to traditional retail businesses) both wholesalers and large retailers stock a variety of products, deal as many as 12 suppliers, and serve a large client base. To handle the business they may employ up to 5 people. Purchase orders can be in the range of IDR 8 million. Some of these retailers and wholesaler can be quite sophisticated. They may have multiple bank accounts, take bank loans, offer some form of digital payment to their customers, and may pay their suppliers electronically via card based transfers initiated via ATM. While they may not make use of technology for their business, there is a precedent of use of technology such as SMS or mobile banking for their personal expenses. These retailers tend to be more open to the use of technology in their business if it can be provided at a fair price, has clear benefits and is easy to use. At the other extreme are Wholesalers and Large retailers that operate entirely manually and informally. These retailers do not have bank accounts, do not make use of bank loans or supplier credit, and conduct 100% of their business manually and in cash. This is despite the complexity and size of their business and purchases. Their attitudes towards credit and financial services is that of a burden; they show no interest in taking 10 approximately US $ 24 advantage of bank loans or supplier credit and oftentimes do not wish to expand their business any further. Traditional Retailers tend to be family run operations that have been in business for many years. Ranging from small shops on the side of the road, to large wholesalers, often these businesses were started with very little capital as a means to supplement the family’s income when a woman had children or if a family member lost their job. Traditional retailers do not need a formal education, significant capital, or access to formal financial services to start their business. In many markets, women play a significant role as a business owner, or partner with their husband or other family members. Most traditional retailers manage their business manually and pay their suppliers in cash. Inventory management, stock taking, order placement, and simple business management functions are performed by the shop owner either mentally, or on a piece of paper, with interaction from their suppliers’ sales staff. Payments are made in cash; traditional retailers receive payment from their customers in cash, and they in turn pay their suppliers in cash. Small & Micro Retailers Small and micro retailers are defined as having annual turnovers of less than IDR 3 Billion11. They are usually family run operations and may employ one additional person outside the family to help with the business. Small and micro retailers purchase weekly or bi-weekly from distributors in the range of IDR 100,000 - 500,000 per order. They also frequently top up their stock by purchasing directly from wholesalers. A large portion, probably more than 1.5 million of the estimated 2.5 million retailers fall into this category. Small and micro retailers also vary in their attitude towards financial services and the future of their business. Many small and micro retailers start out with limited capital and manage to grow their business into profitable ventures. These types of businesses represent retailers that take advantage of supplier credit or deferred payments, take bank loans, and have bank accounts (albeit for personal use only). They may even use banking services to pay their suppliers, sell mobile phone credit, or transfer money to their relatives. These retailers want to grow their business but may not be aware of how to make use of financial services or technology to do so. There are also many retailers of this size that operate a small shop to supplement household income but do not necessarily have strong ambitions to expand. These retailers do not have any exposure to the formal economy or financial services and have less capacity or incentive to use greater access to capital to expand sales or outlets. They tend to be very small in size and have limited scope of products and customers. These firms were found to be less interested improving access to finance or electronic payment services. 11 equivalent to about USD 230 thousand, at exchanges rates in September 2016. 25 Retailer Profiles from Indonesia Traditional retail can be an important Most traditional retailers pay suppliers economic stepping-stone in cash, even for large purchases ! Inventory Management & Ordering ! Inventory Management & Ordering Process: Ibu Mari keeps track of her Process: The Budiman’s manually manage inventory manually. She orders an average of their inventory by visually checking what IDR 2.4 M in stock from 4 distributors who stock is low. Ms. Budiman performs stock visit her shop to take her orders. She keeps check before each order and records a list of track of stock by sight; if she sees she is the stock to be ordered. She discards the list running low on a product she calls the sales once the distributor has received the order. staff to visit her or she goes to a wholesaler if she cannot order from the distributor in time. ! Payment Process: All payments are made in cash, even for their largest orders of rice, ! Payment Process: She pays all her suppliers which are IDR 14 million every 4 days. in cash ! Management Functions: The Budiman’s do ! Management Functions: Ibu Mari provides not have a bank account, but they deposit their credit (deferred payment) to 15% of her savings each week to their son’s bank account. customers. To manage cash flow she took a They use these savings for large orders, and bank loan but feels it is a burden and will not are saving to start a second store for their son. consider expanding her business until she can They do not provide credit to any of their pay off the loan. She has a bank account from customers, have not taken a bank loan, and her previous job but does not use this for her only receive 4 day deferred payment terms business or for any electronic payments. from their rice suppliers. 26 Some traditional retailers are more open to technology than others. ! Inventory Management & Ordering ! Inventory Management & Ordering Process: Ibu Eni keeps track of her Process: Ms. Suna has 10 suppliers. She inventory by maintaining a list to indicate records sales and stock movements daily in a what is running low. When the sales person book, but relies on the sales person to visits her store she will match her list recommend how much/what to order based against the salesperson’s record of her past on past records. orders to confirm the stock and quantity. ! Payment Process: Ms. Suna pays suppliers in ! Payment Process: Ibu Eni pays one of her cash. After a bad experience using a debit suppliers electronically via ATM, the rest in card - she was charged twice - she refuses to cash. use or offer electronic payments in her store. ! Management Functions: Ibu Eni has two ! Management Functions: Ms. Suna does not bank accounts. She uses them to pay her have a bank account. She manages all her suppliers and for mobile recharges. She business, including her savings, in cash. She does not offer credit to any of her does not offer credit to customers; she does customers. She would like to expand her not have a bank loan or use supplier credit. business by accessing credit from a bank She wants to expand but does not want a loan. but does not know how to approach a bank. Many retailers do not keep records, pay taxes or know how to calculate profits. ! Inventory Management & Ordering Process: Ms. Mulo does not keep any records of her business; she buys stock from wholesalers. She mostly sells small sachets of products and cigarettes. ! Payment Process: All her payments are made and received in cash. ! Management Functions: Ms. Mulo understands the margin of her products but does not know how to calculate her profit. If she has money in her cash box at the end of the day she thinks that means she had made a profit. She does not keep any records. 27 Purchasing Operations Seller (Distributor) Buyer (Traditional Retailers) Customer / Vendor set-up and management ! Traditional retailers manage their suppliers ! Distributors try to maintain customer informally. They rely on the distributors’ records of their traditional retailers in schedule to visit their shop to take orders order to track sales, issue invoices, (usually weekly or biweekly) and are less manage orders & outstanding payments, likely to pro-actively plan orders ahead and optimize logistics / delivery ! Many traditional retailers are not ! If they run out of stock before the next visit registered entities and do not have unique they may call or SMS the salesperson to IDs; address details may be ambiguous order more stock, or visit a wholesaler near ! Distributors keep a record of whether by to buy the necessary products. they need to issue a tax invoice ! Information about retailers is manually entered into systems by sales staff and prone to errors and duplicate entries. ! Recently some banks and distributors in Indonesia have approached retailers to ask them to set up and store bank details with suppliers to support e-payments ! Some retailers and wholesalers are eligible for deferred payment terms; Marketing & Sales Inventory Management & Purchasing ! Traditional retailers manually manage ! Distributors sell their products to their inventory either by visually keeping traditional retailers through sales staff track of quantities, or through written who physically visit the shops on a pre- records of daily sales and stock agreed schedule. Incentives (e.g. quantities. They use their experience to discounts, marketing brochures and identify which products have a high deferred payment terms are administered demand and/or high margin. face-to-face by the sales staff. ! The sales staff keeps records of their ! The order process typically takes place face retailer’s historic purchase orders; they to face between the traditional retailer use these, together with any incentive and their supplier’s sales staff. Even if programs, to sell specific SKUs, to take traditional retailers keep a record of their orders from traditional retailers. Some stock requirements they rely on the sales distributors may use a hand held sales staff to help them decide what to order automation device, while others do this based on historical purchase records. manually. Upon their return to the office Once they have submitted their order to the sales staff will submit the orders for the sales person the goods will generally processing and delivery. be delivered the next day. ! Some distributors also employ a ! Alternatively traditional retailers visit canvassing sales model for very small wholesalers to purchase new stock. purchase orders; traditional retailers will simply point and choose which products they wish to buy on the spot. ! Discounts may influence traditional retailer’s decisions to buy products. 28 Delivery, Logistics & Invoicing ! In the traditional retail sector in Indonesia, the delivery, logistics, invoice presentment and payment process is usually executed by the same person at the same time, although some companies have separate staff for sales, delivery and collections. ! Once the sales person has submitted the order, it is processed by the warehouse to load the delivery truck with the stock and by the invoicing team to issue the invoices. Distributors will rely on the data captured in their systems to issue the invoice and tax receipt (if the retailer is registered). Distributors will typically deliver orders the next day based on a geographical route. ! Order taking may be automated via a hand held device and integrated to the distributor’s inventory management system; If not, sales staff will not know whether the stock they have sold to traditional retailers is available in the warehouse until they return to the office and submit the order. Hence there can be differences between ordered stock and the delivery; distributors may propose to deliver alternate products. ! Delivery trucks are loaded with the stock and corresponding invoices. At each location the delivery driver will deliver the goods and corresponding invoice to the retailer. If the delivery is small, the delivery driver may physically select the individual goods from the truck based on the invoice, and carry orders to multiple retailers at one time. ! At the time of delivery the traditional retailer will inspect the goods to ensure they match the invoice and amount. Any discrepancies such as incorrect stock, or damaged goods which result in a difference between the invoice amount and payment amount will be physically marked on the invoice by the delivery driver. ! Payment is nearly always made in cash. Traditional retailers are expected to pay cash on delivery and delivery drivers will not release goods unless they receive cash payment from the retailer. Some distributors even offer a cash discount if retailers pay up front. ! Distributors mostly have to manually reconcile cash payments against invoices. Upon return to the office the delivery drivers will hand over the cash to the collections and cashier team who will reconcile and count the cash. The accounts receivables team will then close the outstanding invoice in their system. For most distributors in Indonesia this entire process is done manually and results in the physical counting and transportation of cash multiple times. ! For larger distributors, some banks collect cash from their sub-distributor partners and credit such funds to their banks account. For others that collect cash themselves, such distributors undertake significant cash handling and safekeeping functions. Credit Management Financing ! Distributors offer some buyers ! Traditional retailers need to manage their interest free credit or deferred cash flow in order to be able to buy stock. payment terms. This may include some traditional retailers. Distributors must ! Some traditional retailers and wholesalers manage credit limits in their systems, provide credit to their own customers. however this is often informally managed between delivery drivers, ! Many traditional retailers do not have branch managers and retailers. access to formal sector credit. If they do ! Distributors employ collections staff not have sufficient cash, traditional retailers whose sole job is to collect deferred may buy less, holding less stock and payments. operating on shorter replenishment cycles. ! The cost of offering credit to their buyers impacts distributor’s working capital ! Some traditional retailers have the ability to costs. Cash discounts may be offered to take a bank loan, or deferred payment terms retailers that pay up front / on delivery. from their suppliers. To repay bank loans traditional retailers visit the bank each month to reimburse in cash. Others borrow from friends and family. 29 Management Functions ! Formal business management functions § Most distributors will have some such as accounting and tax management technology to manage their are simply not performed by traditional business. They may range from retailers. Most traditional retailers do not sophisticated ERP and Treasury keep track of their stock, or their profits. If management systems to basic there is money left in the cash box at the end accounting and simple ERP programs. of the day it signals a profit. § Distributors often have multiple ! Most traditional retailers are not banking relationships and registered business entities and do not pay accounts. Employees need to reconcile tax. The impetus for a traditional retailer to across banks and accounts to manage register their business is to be able to receive their accounts receivables. a loan; this is a prerequisite for a bank. § Distributors will pay Value Add Tax ! Most traditional retailers do not use a on their purchases to the bank account for their business. They mix government. The management of this their personal and business finances. process can be quite onerous for Generally the only use for a bank account by Distributors when invoice amounts traditional retailers is for savings, or a bank change (due to returned loan. Once the loan has been repaid they goods/rejected items by retailers) often stop using the bank account. which impacts the VAT amount. 30 IV. B2B payments and supply chain integration Business Operations and Requirements Overview Business Payments are part of a larger end-to-end process involving multiple actors. When a company purchases supplies or inventory from another company, the payment is part of a broader set of process steps. In an increasingly integrated and automated environment, payment processes and operations need to fit into this end-to-end process that may encompass operations of the seller, the buyer itself, various banking and payment services providers as well as third party logistics. The purchase-to-pay process is also integrated within other company functions that have an impact up- or downstream from the purchases. Preceding a purchase, such functions include the set up and management of client and vendor data, sales planning, inventory management. After a purchase, several other “down-stream” functions are impacted, notably finance and accounting. Exhibit 8: Overview of macro-processes and actors in the purchase-to-pay process Seller% Buyer% Customer)Set+up) Vendor)Set+up) Enterprise)Data)Management)) Enterprise)Data)Management)) Marke5ng)&)Sales)Planning) Inventory)Management) Sales)&)Delivery)Process) Stock)Ordering)&)Purchase) Invoice) Invoice) Presentment) Beneficiary’s%A/C%Ins4tu4on% Creditor’s%A/C%Ins4tu4on% Confirma5on) Payment) Payment(( Payment)Receipt) Infrastructure( Payment) Payment) Receipt) Reconcilia5on) Reconcilia5on) A/C)Receivable) A/C)Payable) Management(Func2ons( Management(Func2ons( Accounts)Receivable)Management) Stock)Registra5on) Customer)Management) Account)Management) Finance)&)Accoun5ng) Finance)&)Accoun5ng) Process integration is important for larger firms and those making more extensive use of digital information technology. Companies organise the many different aspects of the purchase-to-pay process in sub-processes. At larger or more organised firms, several different people and departments generally manage these process steps. This applies to the purchasing firm as well as by multiple people at the selling firm. One reason for organising the process with multiple sub processes is the sheer volume of transactions, which cannot be handled by a single person. Another reason is that structured controls are much more important within the context of a company than for a private individual or sole trader’s operations. Companies not only need to put in place such controls to manage risk of error and fraud but also to ensure compliance with rules and regulations. Payments are just the culmination of this business transaction. As payments become supported by digital infrastructure and integrated within the broader operations, each step in the chain needs to be supported in order for overall business requirements to be met. The sub-processes and supporting functions and processes that may generate or impact 31 requirements that payment services need to fulfil or accommodate are outlined in Exhibit 9. This constitutes a framework for analysis of the specific requirements for B2B payments in the subsequent sections of this paper. Business Process Steps As firms and banks move towards greater integration and digitisation of this end-to- end transaction, service requirements become more specific and inter-dependent. Hence it is important to understand at a more detailed level what sub-process and operations are required, how they may be met and in what interdependencies may need to be addressed by collaboration between actors including payment providers. This following section describes relevant features of the business sub-processes of seller and buyer, as outlined in the exhibit below. Exhibit 9: sub-processes and supporting functions for purchase-to-pay Macro and Sub-Processes in End-to-End Payments Seller Buyer Enterprise Data Enterprise Data Customer set-up Vendor Set-up Customer Set up processes Vendor Set-up Marke/ng & Sales Planning Inventory Management Sales Proposals Stock Check Order Processing Order Placement Order Prepara/on Returns / Discounts Delivery & Logis/cs Stock Inspec/on Sales process steps Purchase Transac/on Func/ons Returns & Amendments Process Steps Invoice Confirma/on Transac/on Fuc/ons Invoicing Provisioning and Credit Payment Receipt Payment Reconcilia/on Stock registra/on Accounts Receivable Management Credit / Payables Mgt Manage Credit & Risk Account Management Management Management func/ons Cash & Liquidity Cash & Liquidity func/ons Management Management Finance & Accoun/ng Finance & Accoun/ng Tax Repor/ng & Claims Tax & VAT These processes are inter-linked within each company and may be executed by multiple people with the support of one or more systems. The buyer who purchases from another company needs to interact with the various people and systems of the seller. This applies not just for the payment, but also for what precedes the payment and relates to the purchase. The buyer may obtain marketing information from the seller about the seller’s company and their products. The buyer may be contacted by the seller to discuss his needs, what products he may buy, the price, and the other terms and conditions that apply to his purchase. In order to formalise the purchase for tax and legal purposes and for the purpose of having recourse on the seller, the purchaser registers himself with the seller and may formalise an agreement with the seller. When the product is out of stock or the buyer notices there is something wrong with it he may be in contact with the seller about returning the product and a possible replacement. When the buyer pays he may be in contact with the seller about when to pay, how to pay, how to inform the seller about the payment and how to be informed about payments received by the seller. Most process steps and related exchange of information can have an impact on the payment process. This of course includes the amount that the seller charges the buyer for 32 the purchased goods and the amount that the buyer believes he needs to pay for his purchases. But other less obvious information elements information can determine reliability, ease of use and the extent to which processes can be automated or efficiently supported by information technology. Transaction and supply chain process interdependencies between sellers & buyers Seller Buyer Customer / Vendor set-up and management The type, size and location of the buyer can impact calculations of sales tax, price discounts and delivery charges. Inaccuracies and omissions in the registration of the buyer may then lead to incorrect calculation of prices and charges. On certain goods higher sales taxes may be levied. Incorrect registration of list prices and sales tax will lead to errors in data that may be transferred to invoices and other documents used internally by the buyer or seller and potentially also be tax authorities. Important static data – for business and payment operations - may be recorded when “setting up” a customer or vendor file. Information about bank accounts, preferred payment methods and credit terms may be defined. Customer identification may also at this stage make use of a company register or tax ID or some other unique form of identification. But in traditional markets with low levels of automation, many of the inputs may be missing or incompatible with the requirements of banking systems and procedures. Seller Buyer Marketing and sales: Inventory management and purchasing: The seller may be able to influence what Retailers need to prioritise what they stock and how much the buyer purchases. and at what price. Their success as a business Distributors’ sales staff can have incentives to depends on how well they identify a product’s influence retailers’ purchase of specific contribution tot their profitability, what the products or brands, or to test new products best ways are to display these products, which and combinations. Sales officers may use products attract customers to the store, which marketing campaigns and discounts to products generate cash flow, when best to have influence buyers’ decisions and meet their own these products available, what is the best personal sales targets. If discounts are not frequency to purchase these products and with administered correctly and marketing what volumes. campaigns fail, retailers may not pay what the distributor expects. Buyers may influence the price levels and will need to check that discounts and other Decisions may be based on historical terms are properly applied. Retailers will try payment data and purchase patterns. to influence delivery and terms and conditions Sellers may use this data to decide on whether of the sellers or take advantage of discounts discounts are provided, how to managed and promotions offered by the seller. requests for deferred payments or credit. Delivery and logistics Sellers and buyers may need to deal with partial delivery and / or multiple deliveries of a given product. A product may appear to be faulty before or after delivery and returned by the buyer to the seller. The buyer will only want to pay for what he has received. He may pay for the delivery but then request a discount for incorrect deliveries or returned products or incorrect charges and settle the discount in a subsequent invoice / payment. Invoicing Invoices formalize agreement on how much needs to be paid, for what, to whom, by whom and when. Any document issued by the payee-company could serve as formal trigger for payment - such as contracts, orders, delivery notifications and even letters. But in practice in formal markets, the invoice, which is the basis for fiscal registration of the sale and purchase, serves as the payment trigger for payment and is a important feature of the process for larger consumer goods and distribution companies. The invoice is formal confirmation of request for funds to be transferred. Together with credit notes – for both the payer (buyer) and the payee (seller) – an invoice is the formal basis for any funds transfers between them. To facilitate the actual payment, the invoice should not also 33 include the requested total amount to be paid by the buyer but also (i) the payment method acceptable for the seller, (ii) the agreed / required payment date and (iii) the details the buyer needs from the seller to make the payment. In countries where sales tax is levied invoices are mandatory. They provide documentation for the seller of his sales and for the buyer of purchases. The invoice is a formal document that represents the value and relevant details of the sale = purchase.12 Invoices may include a reference number to facilitate accounting and reconciliation. Given that the invoice is a formal document for tax and accounting purposes and serves as the basis for payment by the buyer, it is also used as a key control instrument for both the corporate seller and buyer. To support the auditing processes of both firms, it needs to provide sufficient information for the identification of both the seller and the buyer, information about what has been purchased and by whom, references to relevant documents such as orders and contracts and information from the payee about his payment address. Last minute alterations often need to be made to invoices. To minimise the risk of issuing invoices that will not be paid, they may need to be finalised and issued at the moment the product is delivered to the retailer and accepted by him. Assuming the retailer has been able to verify the quantity, quality and price of the delivered goods at the time of delivery there will be few reasons for the retailer to dispute the invoice. Discrepancies between invoice amounts and actual payment are more likely to arise if invoices that are issued earlier in the process. Credit management Cash and liquidity management Some suppliers provide credit to retailers. Buyers review their funding and ensure This can be in simple form of deferred they have enough to pay for new stock. The payments, even just a few days. Or it can be for buyer may decide to pay partially or delay longer periods. Credit needs to be accounted payment when he does not have enough cash for in the invoice and payment amounts and available at the moment the payment is due. He reconciled with an outstanding balance that may take advantage of short-term credit or the retailer holds with its supplier. deferred payment terms offered by the supplier. In many markets, distributors may Suppliers may make discounts and bonuses informally allow a retailer a grace period, conditional on the payment behaviour of agreeing to collect payment at the next the retailer. This could be done based on delivery or even just later in the day. metrics such as whether the buyer pays electronically at the right time to the right Retailers need facilities and time to deposit payment address, whether the buyer uses the cash earning to their bank. Most earnings of payment method of choice of the seller and small retailers are in cash. Funding electronic whether the buyer informs the seller or payment accounts requires an extra step in the distributor the correct payment reference process to ensure funds are available. And when making the payment. retailers need to be able to verify quickly and easily how much they have available. Finance & accounting: Financial reporting or taxes can impact the payment and in particular the timing thereof. Budgets, financial targets and the calculation of income tax and sales tax are defined per period. The desire to stay within budgets, to meet certain targets and the postponement of paying taxes can result in delayed sending and acceptance of invoices but also in delayed payments. Payment Process Steps Payments involve a number of distinct steps that need to be performed. Actual payment processes and operations depend on the infrastructure and services available in a given market. Several steps and their sequencing also depend on whether the payment is 12 These invoices are generally created by the seller and then sent to the buyer after the sale and before or after the payment. In some tax jurisdictions such as The UK, The Netherlands and New Zealand, invoices can also be generated by the buyer and sent to the seller. These are then called “self-billed invoices”. 34 initiated by the seller (a pull payment) or by the buyer (a push payment). But there are general business level requirements that set the framework for identifying gaps and recommendations for national payment system development. The following section provides an overview of the main process steps. The buyer can verify the invoice and instruct the payment solely based on the data provided with the invoice and the eventual complementary invoice and credit note. From a controls point of view the payment address or bank account to be credited should always be provided by the payee and not altered by anyone in the organization of the payer (buyer). The retailer may want to make partial payment. If the buyer does not agree with the requested payment amount stated in the invoice and any there are no matching credit notes received from the seller then the buyer will want to pay partially and make a note of this in his own accounts. Related to cash flow considerations and possibly contractual considerations, the buyer may want to pay one part of the invoice at a certain data and another part at a future date. The buyer has the option to notify the seller of the payment and inform how much is being paid, with what value date and which invoice(s) and possibly to which credit notes the payment relates. Exhibit 10: Payment Process Steps Seller% Macro%and%Sub0Processes%in%End0to0End%Payments% Buyer% Enterprise)Data) Macro%and%Sub0Processes%in%End0to0End%Payments% Enterprise)Data) Customer)set*up) Seller% Vendor)Set*up) Buyer% Customer)Set)up) Vendor)Set*up) processes) Enterprise)Data) Marke/ng)&)Sales)Planning) Enterprise)Data) Customer)set*up) Inventory)Management) Vendor)Set*up) Customer)Set)up) Vendor)Set*up) processes) Marke/ng)&)Sales)Planning) Inventory)Management) Sales)Proposals) Stock)Check) Sales)Proposals) Order)Processing) Order)Processing) Stock)Check) Order)Placement) Order)Prepara/on) Order)Placement) Returns)/)Discounts) Order)Prepara/on) Returns)/)Discounts) Delivery)&)Logis/cs) Stock)Inspec/on) Sales)process)steps) Delivery)&)Logis/cs) Purchase)) Stock)Inspec/on) Sales)process)steps) Returns)&)Amendments) Process)Steps) Purchase)) Returns)&)Amendments) Invoice)Confirma/on) Invoice)Confirma/on) Process)Steps) Payment) Invoicing) Payment) Invoicing) Provisioning)and)Credit) Provisioning)and)Credit) Payment) Payment(Steps( Payment) Payment)Receipt) Payment)Receipt) Payment) Payment) Reconcilia/on) Stock)registra/on) Accounts)Receivable)) Accounts)Receivable)) Management) Credit)/)Payables)Mgt) Payment(Ini+a+on( Management) Credit)/)Payables)Mgt) Management) Management) Manage)Credit)&)Risk) Manage)Credit)&)Risk) Account)Management) Account)Management) Management) func/ons) Cash)&)Liquidity) Management) func/ons) Cash)&)Liquidity) func/ons) Cash)&)Liquidity) Management) Cash)&)Liquidity) Management) func/ons) Management) Finance)&)Accoun/ng)) Management) Finance)&)Accoun/ng) Tax)Repor/ng)&)Claims) Finance)&)Accoun/ng)) Tax)&)VAT) Tax)Repor/ng)&)Claims) Finance)&)Accoun/ng) Tax)&)VAT) Valida+on(&(Authen+ca+on( Authorisa+on(( If the payment is &(Control( initiated by buyer, the payment service provider will Payment(Confirma+ons( inform the buyer of the status of the payment: has it been accepted for Clearing(&(Se:lement( processing?, refused? or upheld? After the payment has been accepted for processing and the account is debited, the buyer (payer) is informed of the debit in his/her “account statement”. These statements can be provided real-time or, as often is the case, electronically in a batch after the clearing and settlement cycle for the relevant payments infrastructure has been completed. This has often been on a T+1 basis, i.e. the next day, but in many countries is moving to multiple cycles within the day and even near real time13. 13 The introduction of more frequent and near real time clearing and settlement cycles for retail payments is becoming more common. Many countries/economic zones including Singapore, UK, the European Union, India, Australia and Malaysia have or are planning to introduce this functionality for credit transfers. In some countries 35 Alternatively, for a payment initiated by the seller (i.e. the distributor or wholesaler), an important step will be for the payment service provider to confirm to the seller that payment is valid and that they can under their contractual terms now expect to receive the funds due. ! Payment initiation Payment can be initiated by the buyer, the seller, or a third party agent, that facilitates the billing operations. Initiation involves setting up and filling in key elements of an instruction that will be executed by a bank or payment service provider. In the context of electronic payments, this will at least need to include identifying: ∗ The buyer or payer ∗ The payer’s account and the institution / account holder ∗ The currency, amount and value date of the transaction ∗ The seller (also known as the payee or beneficiary) ∗ The account and institution at which the funds should be credited to the seller ∗ A reference number that can be used to facilitate reconciliation The challenge for serving traditional retailers (and other users in general) for B2B payments is that this information must be able to be entered into a payment instruction quickly, reliably and easily by either the supplier’s delivery agent or the retailer himself or herself. A cash transaction can be conducted very quickly without needing to formalize and enter all of the above details into a device14. Most successful payment solutions enable some or all of the above data to be entered automatically, drawing on pre-registered information and digitized formats such as bar or QR codes. Then time and manual errors are minimized. Seller and buyer then only need to manually check information. ! Validation & Authentication The information entered (manually or otherwise) needs to be confirmed as accurate and correct and the transaction need to be authenticated by the buyer/payer. The validation of completeness and accuracy of the information in a payment instruction is critical is the overall service is to be reliable, and support the kind of automation that sector development requires. There are several checks that may be needed including for example15: ∗ Is the account number valid? Does it conform with the number of digits and structure of the institution? ∗ Is the code or identifier for the bank or payment institution valid? ∗ Does the account number exist with the identified bank? Does it belong to the named account owner? Even a small error in a number or formatting may result in the payment being rejected or to require manual intervention, undermining efforts to automate and streamline the overall payment and business process. Many checks or validations can be automated. Banks and payment processors put in place rules to help ensure that data entered into a payment instruction is conform with the format, length or type of information required. In some systems, the identifier or a bank or the owner of a bank account number can be checked on-line with a central register or institution as part of the payment validation process. But in manual environments, with off-line or cumbersome technology processes, many of these automated checks cannot be performed, with subsequent impact on the risk of errors and the time and effort required by the users. such functionality also exists based on card payments infrastructure. Where this type of infrastructure exists, it can be well adapted to the needs of B2B payments concerned by this report 14 It should however be noted that cash payments do not enable retailers to use deferred payment or credit terms; combining credit facilities with electronic payments can though make the overall transition from cash to electronic payments more attractive for retailers. 15 A more extensive list of checks and validation is discussed in the chapter on requirements 36 A payment instruction also needs to be authenticated. This means that checks need to be made to ensure that the person or representative a company that is instructing the payment is indeed authorized to do so. This may just be taken on trust, for instance if someone writes a cheque. But it may also be addressed by requiring the payer to have pass some level of security such as use of an account number and PIN code before being able to enter and confirm payment details. ! Authorisation & Control Once the payer confirms the instruction, the bank or processing institution must control and authorize the actual transfer of funds. Banks (and other payment service providers) are trusted by their clients to only execute payment instructions that they have authorized. So a first step is to control instructions to ensure they are legitimate and accurate. Additional controls may need to be made. This may include procedures to (i) ensure that the client has sufficient funds available for the payment and (ii) to check that the payment does not contravene embargo, (iii) exceed legal limits such as those imposed under e-money regulations, (iv) currency restrictions and (v) to comply with AML requirements. Only then can the payment instruction be authorized also by the account holding / deposit institution. ! Payment Confirmation It is important for seller and buyer to obtain timely and reliable confirmation of payment. This can be confirmation that payment has been made, that funds have been received by the seller’s institution or simply that the seller can be sure of “good funds”. Although many larger companies may be able to pay in arrears on credit, small retailers are often required to pay on delivery before the supplier leaves goods with them. And even if credit is provided to or used by the retailer to fulfill the transaction, sellers are likely to want to receive confirmation in some form in order to conclude the overall business transaction. ! Clearing & Settlement Funds ultimately need to be settled between the institutions at which the seller and the buyer hold accounts. How this is achieved depends on their respective payment services providers’ arrangements with other market players and infrastructure to enact clearing and settlement. Additionally, final receipt of funds by the seller does not occur until the institution at which he/she holds the transaction account has credited his/her account. In a very simple scenario, the seller and the buyer may hold accounts with the same institution. In this case, clearing and settlement are simple operations within a single payment service provider. Most often though in markets like Indonesia, there are many different banks and payment providers and small retailers are unlikely to voluntarily hold bank or transaction accounts with the same institution that their suppliers use. It is also unlikely that all suppliers use the same payment service providers. Exhibit 11: Stylised Payments Service Models Seller% Buyer% Customer)Set+up) Vendor)Set+up) Enterprise)Data)Management)) Enterprise)Data)Management)) Marke5ng)&)Sales)Planning) Inventory)Management) Sales)&)Delivery)Process) Stock)Ordering)&)Purchase) Invoice) Invoice) Presentment) Beneficiary’s%A/C%Ins4tu4on% Creditor’s%A/C%Ins4tu4on% Confirma5on) Payment) Payment(( Payment(( Payment)Receipt) Infrastructure( Payment) Payment) Receipt) Infrastructure( Reconcilia5on) Reconcilia5on) A/C)Receivable) A/C)Payable) Management(Func2ons( Management(Func2ons( Accounts)Receivable)Management) Stock)Registra5on) Customer)Management) Account)Management) Finance)&)Accoun5ng) Finance)&)Accoun5ng) ACH Credit Transfer 4 Party Card 3 Party Model Beneficiary Model Clearing Creditor Scheme Model Bilateral or Closed Loop Member Clearing Clearing Beneficiary Creditor Member Member (Merchant) (Payee) Payments Payment Network Hub Clearing Clearing Member Member Creditor’s*A/C** Beneficiary’s,A/C, Creditor’s*A/C** Beneficiary’s,A/C, Ins/tu/on* Ins1tu1on, Ins/tu/on* Ins1tu1on, Se2lement Bank Se2lement Bank 37 The arrangements for clearing and settlement influence how payment is finalized as well as how other parts of the process are fulfilled. The payment infrastructure used may determine, for instance, how payment can be initiated and confirmed and if (or how) payment references are captured and transmitted to facilitate reconciliation. Exhibit 12: Schematic outline of differences in payment steps per stylised payment service Inter&Bank*Model* 4"Party"Model" 3"Party"Model" Beneficiary) Clearing) Member) Creditor* "Bilateral"or"Closed"Loop" )))Clearing) Clearing)))) Beneficiary( Creditor( Member) ))))Member) Inter-bank (Merchant)( Payment"Network" (Payee)( Payments) Hub) Proprietary Clearing))))))) )))Member) ))))Clearing)) Member) Credit 4 Party payment service Creditor’s*A/C** Beneficiary’s,A/C, Creditor’s*A/C** Beneficiary’s,A/C, Ins/tu/on* Ins1tu1on, Transfers Ins/tu/on* Ins1tu1on, Payment Steps Se0lement*Bank* Se.lement"Bank" Credit transfers can be ini+ated by the Payment usually ini+ated by the Proprietary service provider sets payer; Direct debit instruc+ons can be payee by entering payment details access criteria, process and means to Payment Ini+a+on ini+ated by the payee; bank provide into a point of sale device or similar ini+ate transac+ons interface applica+on, e.g. on a smartphone Par+cipants may have access to Process and standards set by the Can be set by the payment provider as Valida+on & central database of valid bank network / scheme operator; bespoke process; Authen+ca+on iden+fiers and account numbers to All Iden+fier codes such as card All members IDs and accounts are verify details of the beneficiary; number valida+on checked through pre-registered and managed by the Security set by par+cipant scheme; on-line valida+on supported payment service provider Bank par+cipant manages Controlled by scheme and issuers; Process and controls set by the Authorisa+on authorisa+on and any credit controls business rules set by/for the payment payment service provider; payee and & Control before authorising the payment scheme; Requires on-line connec+on payer generally interact directly with instruc+on and se:lement risk guarantee the payment service provider, reducing 3rd party controls Usually sent immediately to the payer Confirma+on provided to payee and Payee and payer are linked directly to Payment Confirma+on to the payee from their the payer immediately at the Point of the same payment processor; this Confirma+ons bank may come later; New “instant Sale; can be supported by addi+onal facilitates immediate confirma+ons payment plaOorms enablin gnear real services to merchants or transac+on +me confirma+on to payee no+fica+ons to card holders via a centralised system run or Net se:lement posi+ons calculated by Handled by the sponsoring or Clearing & sponsored by the central bank; scheme and se:led through a controlling payment service provider; Se:lement Timing / cycles moving from batch to common designated ins+tu+on. Limita+on is that all account providers near real +me for retail Credi+ng of beneficiary / payee to distributors and retailers must be depends on account ins+tu+on members The way in which B2B retailer payment requirements can be supported in Indonesia will depend on the infrastructure options available. There are in reality many variations and combinations of the above models. Post payment processes and functions Exhibit 13: Overview of payment processes and functions – Seller% Macro%and%Sub0Processes%in%End0to0End%Payments% focus on post finance and account Buyer% management Enterprise)Data) Enterprise)Data) Customer)set*up) Vendor)Set*up) Customer)Set)up) Macro%and%Sub0Processes%in%End0to0End%Payments% processes) Seller% Buyer% Vendor)Set*up) Marke/ng)&)Sales)Planning) Inventory)Management) Enterprise)Data) Enterprise)Data) Customer)set*up) Vendor)Set*up) Customer)Set)up) processes) Sales)Proposals) Stock)Check) Vendor)Set*up) Marke/ng)&)Sales)Planning) Inventory)Management) Order)Processing) Order)Placement) Sales)Proposals) Order)Prepara/on) Stock)Check) Returns)/)Discounts) Order)Processing) Order)Placement) Delivery)&)Logis/cs) Sales)process)steps) Order)Prepara/on) Stock)Inspec/on) Returns)/)Discounts) Purchase)) Process)Steps) Sales)process)steps) Returns)&)Amendments) Delivery)&)Logis/cs) Invoice)Confirma/on) Stock)Inspec/on) Purchase)) Payment) Invoicing) Returns)&)Amendments) Provisioning)and)Credit) Invoice)Confirma/on) Process)Steps) Payment) Payment) Invoicing) Payment)Receipt) Provisioning)and)Credit) Payment) Payment) Payment)Receipt) Reconcilia/on) Payment) Stock)registra/on) Reconcilia/on) Accounts)Receivable)) Accounts(Receivable(( Stock)registra/on) Management) Management( Accounts)Receivable)) Management) Credit)/)Payables)Mgt) Credit(/(Payables(Mgt( Credit)/)Payables)Mgt) Manage(Credit(&(Risk( Manage)Credit)&)Risk) Management( Management) func=ons( func/ons) Management) Manage)Credit)&)Risk) Cash(&(Liquidity( Cash)&)Liquidity) Account(Management( Account)Management) Account)Management) Cash(&(Liquidity( Management( Management) func=ons( func/ons) Management) Management( Cash)&)Liquidity) func/ons) Management) Cash)&)Liquidity) Management( func/ons) Finance(&(Accoun=ng(( Management) Cash)&)Liquidity) Management) Finance)&)Accoun/ng)) Finance(&(Accoun=ng( Management) Finance)&)Accoun/ng) Tax(Repor=ng(&(Claims( Finance)&)Accoun/ng)) Tax)Repor/ng)&)Claims) Tax)Repor/ng)&)Claims) Tax(&(VAT( Finance)&)Accoun/ng) Tax)&)VAT) Tax)&)VAT) 38 Summary of key post payment management functions Seller Buyer Reconciliation of Receivables Registration of Payments Sellers need to verify their accounts and Retailers may register and track stock, match receipts with expected payments. In purchase price and margins. Whether an on-line procure to pay process, the seller manually or using semi-automated processes, collects the relevant data and presents sales they may need to match records in an orders, delivery notifications and invoices inventory system with payments made to electronically and defines the amount to be suppliers, track overall spend and monitor paid. This means that the seller can fully profitability of items. Invoices may be used to reconcile all incoming payments (triggered by support this stock registration and the seller himself) with the invoices, reconciliation process. complementary invoices and credit notes issued by the seller. Internal control and tax requirements may increase the importance of keeping electronic records. For instance, the absence Large B2B sellers such as FMCGs and of credit notes would provide the risk for the distributors process millions of incoming buyer of inadvertently overstating the tax payments per year. When they are not in declaration of purchases and hence overstating control of the details of the payment the VAT credit claimed with tax authorities. instruction by the buyer (i.e. when purchases and payments are not made via the website of the seller) then their degree of reconciliation of incoming payments with their receivables depends on the structuring of these payments by buyers and the payment infrastructure. Automation between buyer and seller Payment services are being pressed to adapt to the increasingly integrated and on- line manner in which business operate. Most large companies now run “Enterprise Resource Planning Systems” (ERPs) to support their sub processes for selling and buying. Spurred by the rapid rise of information technology services, smaller companies and even sole traders are now conducting some or all of their business with help of technology. This provides opportunities for smaller firms to benefit from broader supply chain automation. But it expands the set of requirements that must be met by payment service providers and infrastructure. Large companies led the introduction of ERP systems and their gradual standardisation. In the 1980s, the availability of processing power and electronic communication links made large scale, internal structuring and automation viable for larger organisations. They initiated the development of ERP solutions by third party vendors. These vendors then began to deploy their solutions with other organisations. Many corporates and banks began through this organic process to adopt structures and to automate processes in a relatively consistent manner. This made the establishment of electronic links viable between companies, between banks and between companies and banks for the exchange of data on the processing of orders, invoices and payments. Scale is important to reap the benefits from digital integration and automation. Companies have a commercial interest in reaching as many suppliers and buyers as they can for the exchange of orders and invoices and doing so with standardised file exchanges 39 between the ERP systems of these firms is attractive. The harmonisation of and adoption of electronic invoices has in some countries been accelerated by a need to comply with new tax or reporting requirements. The EU the tax authorities already in the 1990s stipulated in EU- wide legislation, which data elements were to be included in invoices and how invoices could be exchanged electronically. The invoice embedded data about the products and services ordered and delivered, which helped further in the structuring of the exchange of order information between companies. The result was a set of comprehensive standards for the Electronic Data Interchange (EDI) between companies for orders and invoices. Costs of EDI have until recently remained a barrier to adoption by smaller companies. The cost of integration between companies via EDI has in the past been high (approximately USD 50,000 per connection). EDI interfaces were de facto limited to high-volume connections between a limited numbers of companies. Smaller companies were given access to the systems of larger companies via dedicated terminals. But Automation is now reaching smaller companies at lower cost. The evolution of the Internet and mobile plus the improvements in open standards for connecting diverse systems has enabled companies in recent years to reach any other companies electronically at low cost. This has resulted in the last decade in an increase in electronic communication between buyers and sellers with the Internet as the primary communication channel. Although B2C e-commerce receives a lot of attention, the volume of B2B transactions in the broader economy is still larger than in just the e-commerce sector. According to research conducted by the US-based International Data Corporation (IDC), it is estimated that global B2B e-commerce, especially among wholesalers and distributors, amounted to USD 12.4 trillion at the end of 2012. This in comparison with the value of global B2C transactions that was estimated to reach USD 1.2 trillion at the end of 2012, or about 10% of total B2B transactions. Open standards and technology allow smaller companies to break out of trading silos. eCommerce via webshops and mobile applications is currently often a one-sided automation for the seller, with manual data exchange by the buyer with the seller who may automate the processes at his end (the buyer visits the website of the seller and enters details about himself and his purchase requests, often without the option to upload or download any data). Buyers then are forced to operate in “trading silos” dictated by their sellers with only accidental synergies for the buyers. This is a very similar issue to the creation of such “trading silos” by large buyers when they impose their automation on smaller suppliers, giving them access to websites or portals to submit their invoices on-line. Exhibit 14: Data flow and integration along the purchase to pay process Data(and(Informa2on(Flow(Integra2on(along(the(Purchase(to(Pay(Process( Seller% Buyer% 2( 1.1( Customer)File) 1.2( Product)Catalogue) Some)wholesalers)and) retailers)may)digitally) record)vendor)data;)but) Customer)ID)may) Name% ID% Registra.on%Nr.% Bank%A/C% Ref#%%Cat.%Product% Price% RRP% most)will)not) Most)wholesalers)and) retailer)will)not)have)a) be)used)to) Bank%Iden.fier% digital)inventory) populate)invoice/ Credit%limit%% management)system;) payment)message) but)those)that)do)need) Inventory) Management)System) digital)means)to)record) new)stock) 4( 5( 3( Purchase)Order) Delivery)Note) Invoice) Customer%ID% Invoice%#% Ref#%%%%%%%%Product% Qty% Amt% Qty% Amt% Ref#%%%%%%%%Product% Ref#%%%%%%%%Product% Qty% Amt% Does)the)retailer)have) Value%Date% Amt%Due%$$$% credit)notes)to)offset)the) 6A( total)payable)amount?) Payment)Instruc:on) Unique%ID% Beneficiary’s%A/C%Ins4tu4on% Creditor’s%A/C%Ins4tu4on% Benef:%BIC%/%Account%Number% Name% Payment(( Currency/Amount% Infrastructure( Debtor% Value%Date %Reference%#% 6B( Authorised) Credit)No:ce))) Payment)Instruc:on) Unique%ID% Unique%ID% Confirma:on) Benef:%BIC%/%Account%Number% Benef:%BIC%/%Account%Number% ) ) of)payment) Name% Name% Payment) Currency/Amount% Currency/Amount% Authorisa:on) Debtor% Debtor% Value%Date %Reference%#% Value%Date %Reference%#% Confirma:on)may)be) provided)by)the)creditor) Payment)inputs)may)be) bank,)a)PSP)or)by)the) validated)onJline;) Beneficiary’s)bank) Retailer)needs)to)) authen:cate)instruc:on) 7B( Reconcilia:on) 7A( Reconcilia:on) For%Reconcilia4on% Inventory) Management)System) Payment( 40 )Payment( Accounts)Receivable) ) statements( records( Customer%ID% Invoice%#% Stock)Registered) Small)retailers)unlikely) Ref#%%%%%%%%Product% Qty% Amt% A)file)may)be)provided) to)perform)any)formal)) by)Beneficiary’s)bank)or) Value%Date% Amt%Due%$$$% or)automated) a)3rd)party)integrator) reconcilia:ons) x( Reference)number)refers)to)the)respec:ve)sec:on)of)the)detail)analysis)of)data)flow)contained)in)Annex)B.)) Box 5: Selective initiatives in the evolution of automation in the payments industry In the same period where large companies and tax authorities triggered the establishment of EDI message standards and built many bilateral interfaces between companies for the electronic exchange of orders and invoices, banks worked on their own structuring and automation of the inter-bank payment processes. To provide an alternative for the exchange of faxes and telexes for instructing payments, 239 banks established in 1973 an interbank EDI network, with its own message standards, called SWIFT. This was set up as a closed network between banks, since these banks did have an interest in automation and standardisation between themselves but not in standardisation of their data exchange with bank clients since this could simplify the migration of clients between banks and could result in payments rapidly becoming a commoditised business. The banks did however develop dedicated interfaces between themselves and their larger clients. These interfaces enable sellers to receive data about incoming payments (in electronic bank statements) directly in their payment systems which they can reconcile with invoices and credit notes. These same interfaces enable buyers to send payment instructions to the bank electronically that are generated in the same systems that register the incoming invoices to be paid and the related credit notes. In some countries companies came together to develop and implement open solutions that can be used for instructing payments to multiple banks and receiving bank statements from multiple banks via one single interface design or possibly via one single interface. An example is the collaboration of German corporates in de development of the Banking Communication Standard (BCS/FTAM). In 1995 it became compulsory for all German banks to comply with this standard, which thus established itself as the German industry standard for corporate customer payment transactions. This means that for many years, German corporate clients have benefited from flexibility in their choice of a financial institution - a situation largely unknown in many markets. The standard’s user neutrality regarding business transactions, data formats and system-to-system communication protocol ensured that specialised solutions were developed (e.g. Multicash) as gateways for corporates to exchange payment transaction data files with multiple banks in Germany through one single interface. Other examples are the efforts of RosettaNet around 2000 to establish one standard between ICT companies and their banks for the structuring of remittance information and the efforts of TWIST to create the first version of ISO 20022 XML standards for payments, billing of bank services and the opening and maintenance of bank accounts. When the European Commission created the PEPPOL network, payments were explicitly left out of scope. Financial industry stakeholders explained that the standards applied by corporates would not be applicable for bank services. Instead the European banks offered to deliver electronic payment services based on ISO standards. These standards would structure data sent and received between banks and their customers but would not structure system-to-system. The PEPPOL standards are themselves an evolution of the EDIFACT standards just like the ISO 20022 XML standards are an evolution of the EDI payments standards that were originally developed by SWIFT. Public procurement authorities throughout the EU have started in 2016 with the implementation of the PEPPOL standards, setting staged deadlines for suppliers to be compliant within the next 1-2 years. As it happens the UK has become one of the most driven implementers of the PEPPOL framework. The UK government recognizes the value of these standards in improving procurement controls and processing efficiencies, as demanded to manage costs in the public healthcare sector. In the meantime corporates have at national level become active in some EU countries to negotiate with their banks the usage of bank-independent solutions and open standards complementary to ISO 20022. One such initiative is in the Netherlands, where large billers including the tax authorities (in totality representing 60% of the payment volume in the Netherlands) are supporting solutions that are not owned or developed by banks for direct debit eMandate management and have specified code lists for direct debit returns that enable automated handling of these returned direct debits. 41 V. Payment Service Requirements This section describes the high level and detail requirements for expanding usage of electronic payments for B2B transactions. These requirements are determined in part by the general business and operational requirements described in the previous section. But many choices about infrastructure, standard and solutions are also context dependent. Solving for some problems may impose indirect requirements on other parts of the process; and meeting the needs or demands of actors in one part of the process may constrain or impose choices in other areas. Hence a sub-section of this chapter exposes in more detail what some of these options and trade-offs are introduces three main stylized infrastructure scenarios that are relevant to Indonesia’s context. Business Requirements Exhibit 15: overview of requirements Business'Requirements' Primary(Set(of(Requirements( Detail(Requirements( 1' Posi%ve(Cost(/(Benefit( Outcome( 2' Stability(and(Trustworthiness( A( Data(Integrity( (Sales( (Seller( Efficiency( 3' B( Data(Quality( Reliability(and(Ease(of(Use( Cost( (Sales( 4' C( Payer(Funding(&(Control( Data(Exchange(&( (Buyer( Automa%on( Efficiency( D( Transparent(Pricing( Cost( 5' Reach(&(Scope( (Payment(Provider( (Sales( E( Consistent(and(Timely(Se@lement( 6' Efficiency( Free(Choice(of(Provider( Cost( F( Confirma%ons(&(Proof(of(Payment( 1" !!!Posi&ve!Cost!/!Benefit!Outcome! Seller Buyer “Can I electronically support customer set-up, “Can I electronically support vendor set-up, sales & delivery, payment collection and stock ordering & purchase, payments and multiple management functions such that the multiple management functions such that I can sale of my products is profitable?” run my business much better?” “Can I use electronic payments and technical solutions to fully replace cash payments and manual activities?” Electronic payments must compete with the main incumbent: cash. Overall solutions need to generate enough benefits for users to switch, and to hold them there in the long term. Benefits can include enhancement to sales of distributors or retailers, or even banks and payment providers. Important benefits also come in the form of firm and sector level efficiency gains from automation and supply chain integration. 42 Payment solutions need to adjust to the extent to which underlying business processes and operations of suppliers and retailers are digitised. Electronic payments and supply chain bring the greatest efficiency gains when they fit well with automated, effective, time saving and low cost processes between sellers and buyers. The more these parties have already adopted automated or semi-automated processes, the more likely this will accelerate the adoption of electronic payments. Payment services need be design in a manner that supports sales and commercial development aims. Payment services may not need to fulfil other business processes like promotions, credit or sales analytics. But where process automation and data collection steps are needed, they should support these aims in order to enhance adoption incentives. Efficiency comes from linking activities in the chain and achieving scope. Island or silo based payments solutions will undermine or negate the potential gains in efficiency or control that automation and digital business processes otherwise support. The applicability of electronic payments as integral part of the buyer’s and seller’s business further depends on the combination of payment services, system applications and other third party services. Adoption will be influenced by the marginal cost and ease of implementing solutions that stretch beyond just payments. Retailers and distributors’ decision to implement electronic purchasing, management and payments will depend on many aspects such as their functionality, ease of use, ease of implementation, trust, accessibility and obviously price. Multiple service providers need to be in the market and multiple solutions need to be made available that are interconnected with “plug-and- play” interfaces, based on comprehensive data standards plus mature and secure electronic communication protocols. 2" Stability(and(Trustworthiness( Seller Buyer “Am I informed by my bank who instructed the “Can I trust that the payments I instruct will be payment and can I trust that the payments I received by the specific seller I included in my receive are instructed by the specific buyer payment instruction and that the seller is indicated in the payment?” informed that the payment comes from me”? “Can I trust that all data included in the payment instruction by the payer is unaltered when processed by the banks and delivered to the payee?” Payments services must inspire a high degree of trust in users. Payments are ultimately about the transfer of value from one individual to another individual or – in the case of B2B payments – one company to another company. Banks and their regulators have incentives to ensure the integrity and reliability of the payments system. Payment infrastructure needs to be robust from end-to-end for transactions on a day-to- day basis and increasingly on a 24-hour basis. Payments systems also need to protect against fraud or misuse – both internal and external – to ensuring that everyone has confidence in the payment systems to “do what one expects it to do”. Measures need to be taken to ensure the integrity and mutual coherence of data. Payment data is entered by users and used by the banks and other payments providers. Some data is contained in the payment instruction to be delivered to banks by the payers. Even in markets with mature payment infrastructures, consumers, businesses and other organisations may not always be confident that electronic payments are made 43 to the correct payee. Data format, syntax and reference standardisation are key means adopted by banks to ensure quality and consistency of instructions can support automated payment processing. Other measures to ensure the integrity of data relate to the governance of payment systems. Access to the system need to be controlled and member roles, obligations and capacities need to be carefully defined. Participation in a payment system or scheme generally requires fulfilment of proportionate obligation in terms of training, security and skills as well as financial capacity. Data sources for systemic information such as a bank code, a client identifier or authorisations must be appropriate and secure. Although users themselves can sometimes help to monitor and control information, overall integrity of data that runs payment systems must be strong for it to provide a stable infrastructure that users can trust. Many countries have undertaken steps to enable participants to confirm that a bank account and holder exist before making a payment. For example in the UK banks created a “central billers database” that is used to advise payers - before the bank of the payer accepts the payment instruction - if they have incorrectly formatted references, A third activity of the UK banks in this context is their collaboration with the UK government in assuring the identities of individuals and businesses and in providing highly secure authentication systems that make sure that users of payment services (i.e. both the payer and the payee) are who they say they are and are entitled to participate in and transmit payment on behalf of customers and account holders. 3" Reliability)and)Ease)of)Use) Seller Buyer Can I account for incoming payments Can I instruct payments electronically in a few electronically without the need to take steps that I can remember and that I can do additional steps such as calling my bank or the quickly? buyer? Does the bank allow me to use the in-house system, on-line tool or mobile solution that I find very easy to operate without any need to use bank systems as well? Or, if I do not need any system of my own, is the bank system, on-line tool or mobile solution of the bank easy to operate? Convenience of cash versus electronic payments for companies. When companies make electronic payments, the reliability and easy of use depends on the systems those companies have put in place to support the payment process and whether these systems can be connected directly with the systems of the bank or payment service provider. For instance, if the bank requires payments to be authorised in the bank system only, companies may need senior officers to authorise in both their own systems and in the bank system, which may be impractical and cause senior officers to use cash instead. Handling of cash can in practice be cumbersome for businesses in particular when these businesses involve more than one person in the payment process. When the owner of a business makes the payments himself, then cash can be convenient because he can easily control what is paid to whom. When cash payments are delegated to another employee however, he or she needs not only to secure the cash but also prove he or she is handling the cash correctly. In this situation it might well be that electronic payments are simpler to handle and pose less of a personal risk than the handling of cash payments. Cash and cheques will have to be accounted for. Electronic payments can be accounted for automatically. Cash and cheques will have to be manually counted at least on a daily basis 44 and any outgoing or incoming cash recorded, which also is a manual process. When cash is not accounted for, handling cash can be convenient. But as soon as payments and collections have to be recorded and are recorded in systems, electronic payments surrounded by automated controls can be more convenient. The process for the retailer needs to be completed in no more than 3-steps. When making electronic payments this should be as intuitive and little time consuming as paying by cash or writing a cheque. This avoids errors but also makes electronic payments as convenient as paying by cash or cheque. Ideally the relevant details of the payment are already filled in for the payer, for instance by presenting an invoice, such that the payer only needs to verify and either authorise or reject the payment. The authorisation or rejection should also be intuitive and not time consuming. For the authentication of the authoriser one extra step might be needed, such as the verification of a code or the typing in of a passphrase. The result would be that payments could be verified, authorised and authenticated in no more than 3 steps. Data entry and validation needs to facilitate use and reliability. Payment errors can be costly but also inconvenient to handle. Some data such as payment amount can be reviewed or defined easily by the user of an electronic payment mechanism. But other data, such as the account details of the creditor or even of the debtor can be hard to obtain, is often not intuitive and can easily be typed in erroneously. The creditor effectively generates most data in the payment instruction. An invoice for instance contains all the data elements of a payment instruction apart from the bank account details of the debtor. Therefore the best way to facilitate data entry and validation of payments is by electronically presenting the invoice to the payer for payment. This would also enable the correct recording of payment reference data with the payment that the creditor can reconcile automatically. In the absence of invoice or bill presentment, presenting the account details and identification of the creditor to the payer at the moment of payment will help reducing the time spent with data entry and minimise errors in the payment instruction. Technical issues such as network stability must not undermine user experience. The end-to-end technical infrastructure used to transmit and process payments must be reliable and robust. Systems must be able to operate on a regular basis without errors or inaccessibility. The devices and networks that users, banks, payment providers or end customer used to access, transmit and receive payment information are quick, stable and reliable. Appropriate telecommunications infrastructure must also therefore be considered a requirement for fulfilling the payment needs of this segment of the economy. 4" Data$Exchange$&$Automa1on$ Seller Buyer “Will I receive the information the payer “Can I deliver with the payment the payee included in his payment instruction about information about invoice reference(s), credit invoice reference(s), credit note(s), other note(s), references to other payment triggers or payment triggers or possibly information about references to payment notification(s) and partial payments?” possibly information about partial payments?” “Can I trust that all data that is included in the payment instruction by the payer is unaltered when processed by the banks and delivered to the payee?” Payment services need to support data exchange and automation of related business processes. This requires very detailed descriptions of data, how they are to be generated and what they have to adhere to are essential for ensuring that each system in the payment 45 chain understands exactly what it receives from the system that feeds it and what it has to do to deliver data to the next system in the chain. Enable the payee to automatically match or reconcile incoming payments and credit notes to receivables. When paying invoices (possibly complemented by credit notes) it is important that the payer can inform the payee what he is paying. This enables the seller to link the incoming payment from specific buyers to the outstanding invoices and credit notes for that buyer or to any other payment trigger provided by the seller to the buyer. Ideally this should be done in a manner that enables reconciliation to be performed in an automated fashion with little intervention or error handling required. Companies generally process large volumes of payment instructions and reconciliations in daily routines. This means that in practice most companies will combine any outstanding invoices and credit notes of a seller in one single payment that day to the seller. It will then be important for the seller to receive information about the multiple invoices and credit notes – or part thereof – the buyer has paid with the single payment. Even when specific data fields are dealt with slightly differently by systems, the integration between them can become complicated. As an example, when sending payment instructions through the RTGS payment infrastructure in Indonesia a data field needs to be filled that has been given the number 50 and is called “Ordering Customer”. This field has a maximum of 140 characters that are to be grouped in 4 “lines”. RTGS recommends that this field is filled with “Account plus Name & Address of Customer”, which means the bank’s customer that instructs the payment, not the customer of the payer. Indonesia’s other payment infrastructure, SKN currently supports the field “Nama Pengirim” (in English “Sender Name”) which is 40 characters. It is not very clear whether the “Account” and “Address” of the sender are important as well and what to do if the account and address of the payer are known by the system that is linked to SKN. The result is that for payments processed by SKN the payee can knows the name of the payer and can probably not do much in case the payment is made inadvertently. Whereas for payments processed by RTGS the payee also knows the payer’s account number and address and can contact him when necessary. Provide for structured exchange of data about the payment, such as in the form of an invoice reference or for credit notes. Structuring the data of what exactly is paid for in a payment instruction is useful for both buyer and seller. Banks and payment service providers can help validating the data input by the buyer, for instance by creating a data field for invoice reference(s) and credit note(s) and a data field for references of other payment triggers and a field for the reference of the payment notification of the buyer to the seller. Technically these do not need to be separate fields as long as the payer can inform with the payment which “field option” he is using and that this choice is delivered together with the content (such as the invoice reference) to the seller. For example, in Scandinavia the banks have introduced the option for the data input of invoice references to be validated with a check-digit. As long as this functionality is made optional, sellers and buyers can choose to implement it in their processes and systems when they like it at the moment that suits them best. Facilitate additional automated controls that filter data before it is integrated and used by seller and buyer systems. With electronic payments, the exchange of data between corporate and bank systems makes the collection process for a seller efficient but also allow the application of automated controls. These automated controls for instance ensure that data is validated before it is accepted by the system, that new data input is linked to data that is already in the system and that two or more persons are needed to authorise the processing of certain data. Facilitate timely cash flow management of distributors. Companies that manage their 46 cash tightly can operate a practice where they identify at the moment payments are to be made how much funds are available for that day and which creditor will be paid and how much. It will then be important for the payer (the buyer in our context) to be able to inform the payee (seller) what invoices and credit notes are paid in full with the specific payment, what invoices are paid partially and preferably when the remainder is expected to be paid. 5" Reach&&&Scope& Seller Buyer “Can I easily instruct funds to be transferred “Can I receive the funds in the bank account or from my bank account or account with my e- wallet of my choice”? Money provider to the account with the bank or e-Money provider of choice of the payee?” The more counterparts you can pay or be paid by, the more valuable the payments infrastructure is. Payers are likely to want to be able to make payments to any of their suppliers/payees without opening a new service. Likewise sellers (payees) will want to ensure that their bank or payment service provider can collect payment on their behalf, regardless which bank the buyer uses. Large companies consolidate their finances with banks. Firms beyond a certain size and level of formality have a broader range of payment and financial operations to address, most of which need today to be catered for by formal sector banks. Even very small companies that wish to grow their business will at some point open bank accounts. In many markets, including in Indonesia, non-bank payment service providers can also offer payment services. These payment services my serve individuals and businesses that are beyond the reach or focus of banks and often far from fixed infrastructure such as branches and ATMs. For sellers it will be important for their clients to have access to a range of payment solutions that will ensure that payment is not inhibitor for completion of the purchase. Solutions need to address the incentive that payment service providers have to build on their payer network and encourage payees to become direct users of their payment service as well. The commercial model of most of these payment service providers is such that payers have the convenience of the service but do not pay very little for it, whereas the businesses that are being paid have the benefit of receiving funds from the payer and pay for the service. Solutions need to build on existing reach of other payment providers and retailers’ existing accounts to minimise the extra costs of opening and maintaining new accounts. For businesses the opening and administering of accounts where money resides is costly. Every account needs to be safeguarded against errors and fraud and every account needs to be properly accounted for. For reasons of controls and to ensure the funds of the company can be used easily for paying its creditors, credit balances are nearly always concentrated in one bank account. A key requirement for companies in structuring banking services is to minimise the number of bank accounts. 47 6" Free$Choice$of$Provider$ Free choice of service provider that can be given access to payment accounts Seller Buyer “Can I seamlessly incorporate information about “Can I seamlessly instruct payments and incoming payments in my applications that incorporate information about payments made support customer set-up, in my applications that support vendor set-up, sales and delivery and multiple management purchases and delivery and multiple functions?” management functions?” “Can I trust that I am not dependent on the solutions and tools of banks and payment service providers for the efficient and effective management of my purchase-to-pay and sell-to-collect processes?” Payment initiation and account information are integral part of the purchase-to-pay process for a buyer and account information is an integral part of the sell-to-collect process for a seller. For account information to be efficiently used in large systems or smaller applications, it is important that banks and other payment service providers can deliver this information in a standardised and accessible manner. For payment instructions to be generated in a controlled manner from any system, standard protocols should be used for the secure and efficient transfer of instructions from the buyer’s systems to any bank or payment service provider. When buyers or sellers wish to make use of third party service providers for the administration of their bank accounts and interconnected functions, then banks and other payment service providers should not be able to frustrate this. Third party access to the payment account must not be made dependent on the consent of an individual bank or other payment service provider since they may have no interest to allow non-bank solutions or third party service providers to potentially compete with bank solutions or bank services. To ensure controlled electronic access to banks for payment initiation and bank account information, banks and payment service providers should be requested by the regulator to implement standardised secure protocols and to support their implementation by customers and third party service providers based on predefined rules of engagement. 48 Operational implications A$ Data$Integrity$ Data sources and coherence need to be ensured to support trustworthiness. Two sets of operational requirements need to be addressed: A.1. Standards to support mutual coherence and consistency of data exchange Data needs to be structured and protected to ensure that it is reliable, mutually intelligible by automated systems and uncorrupted. Agreement on and adherence to common standards for payment messages helps to address these requirements. Standards are composed essentially of agreements on: - Syntax: Represents the structure of the message. One of the most widely used syntax in the world today is eXtensible Mark-up Language (XML). XML syntax sets out the format for which data is structured and enables universal understanding of the message content. XML data is structured by using opening and closing tags that indicate the meaning and structure of the information that is communicated. This enables message content to be electronically recognized and validated. - Data Elements; Represents the content of the message. Data elements are organized in a logical hierarchy within the message. Data elements in a payment message may include such information as currency, amount, and debiting and crediting parties and may or may not be mandatory depending on the context. - Reference Repository; While syntax and data elements are important for ensuring standardization of format and content, message standards should also reference a reference repository to guarantee universal understanding of the message content. A reference repository is like a dictionary that users can access to ensure consistent understanding of the data elements. A.2. Reference Data Legitimacy and Consistency A.2.1. Beneficiary and Payer Identification / Identifiers Actors involved in the supply chain as well as government authorities need to be sure of the identity of payee, payer and other actors in the process. Distributors, banks and retailers may use inconsistent forms of identification. Certain standards and data may or may not comply with legal or other procedural requirements. Tax or company IDs are often used a common and unique basis for client identification. Debtor banks might consider including the/an identifier of the debtor in the payment instruction. This can be the name and address of the private individual or the official ID of the company that is instructing the payment. This supports creditors in the correct identification of creditors and hence improving their reconciliation. But also forces banks to keep the registration of their customers up to date and encourages debtors and creditors to use between themselves their identifiers as these are registered by their banks A.2.2. Anti-money laundering requirements Payment service providers need to ensure that they use KYC procedures to identify retailers (i.e. payers) in a manner consistent with AML and CFT legislation with which distributors’ (i.e. sellers) banks are obliged to comply. A.2.3. Bank and account codes Consistent and current reference data is required to identify the right actors in the 49 payments chain, including the institutions that hold accounts for the payer and payee, the account identifiers for the payee and payer or other agents. These codes need to mutually intelligible to all actors involved in the payment process along the chain, including non-bank payment providers. B$ Data$Quality$ Automation of the payment and related processes requires measures to ensure that data standards are adhered to and that content is valid and accurate. Payment providers put in place mechanisms to check data and minimise errors from manual inputs. Of particular importance for B2B payments in the retail chain are the following requirements: B.1. Existence of bank / transaction, payment service providers and accounts This would include being able to verify bank IDs and MSISDN, at least where the latter are used by mobile operators as account identifiers B.2. Creditor’s preferred bank account to be credited This data would be important to register if billers pre-populate credit or debit instructions for the retailer. Updates to this data would need to be assured in order to avoid errors and account for changes in the retailer’s banking relationships B.3 Amounts and application of appropriate taxes Sellers, and where registered also buyers, will need to document amounts including taxes in order to maintain appropriate records. B.4. Payment limits and available credit limits Suppliers need to be sure to apply the terms of credit or deferred payment as well as any credit limits before finalising the invoice and payment amount due B.5. Payee and Payer identification The set up of the invoice and the payment instruction require some appropriate identifier of the parties to be used. This should conform with or be able to match with the client records of the supplier as well at the payment providers B.6. Invoice reference (and applicable credit notes). Payment data should be structured in such a way that retailers can include invoice reference and applicable credit note details. This is especially important to support partial payment of invoice amount and/or payments for multiple invoices which are currently very challenging for suppliers to reconcile today. 50 Exhibit 16: Selected impact of business requirements on payment services Selected&Impact&of&Detail&Requirements&on&Payment&Opera;ons& Seller& •  To#properly#calculate#amounts#&#taxes#(B.3.)!the#seller#needs#to# Buyer& 1& register#informa-on#about#the#client;# •  The#iden-ty#of#the#payer#needs#to#be#recognised#and#valid#for#AML,# Customer#set