Managing Risk and Supporting Growth in the E-commerce Era

Treasury and Trade Solutions 2 Digital commerce is becoming core to the growth strategy of organisations across many industries, from services to asset-heavy sectors. Industry research estimates that by 2025, about one-third of global economic activity could resolve into digital platforms that cater to consumers and businesses. 2 This changing paradigm is causing many companies with primarily business-to-business distribution models to deploy e-commerce strategies so they can begin to reap the many benefits offered by digital commerce. In the consumer packaged goods (CPG) sector for example, brick-and-mortar sales have been challenging — averaging 1% growth between 2013 and 2018 — but online sales grew at an average of 19% annually over the same period. 3 E-commerce routes to market Companies adopt a variety of e-commerce models as part of their growth strategy. The most common models are outlined below. Distribution via third party marketplaces One quick route to market for companies moving into online sales is through third party online marketplaces that provide a ‘one-stop shop’ for consumers to purchase different products. Online marketplaces with a compelling local presence can facilitate swift growth given their existing user base. However, the trade-off for companies using this model is the potential weakening of brand identity, reduced pricing power and limited opportunities to build deep relationships with the end buyer. Direct-to-consumer models An alternative route to market for companies moving to online sales is Direct-to-Consumer (D2C) — either by launching proprietary web stores and apps, by acquiring successful digital brands, or a combination of both. While D2C is a longer route to market compared to sales via marketplaces, there are many benefits to this approach. Proprietary web stores and apps allow the company to own the user experience and to harness the power of data to create personalised experiences for its consumers. Furthermore, some companies are starting to extend their D2C strategy beyond proprietary webstores to launch online marketplaces that offer third party branded products or services in addition to the company’s own. All these options represent a huge change in business models for companies that have historically reached consumers via brick-and-mortar distributors. The changing ecosystem The changing payments landscape Payments are critical to e-commerce success because they directly impact the customer’s checkout experience. Companies that adopt a D2C e-commerce model must design and implement a payment strategy, which often can be challenging as it requires local market knowledge of the payments landscape. This challenge is compounded by the fast pace of change in the payments landscape — notable developments include: a. Proliferation of new payment methods : consumer payment methods for e-commerce are moving beyond card payments into a variety of alternatives. An estimated 55% of all online transactions globally are now completed using non-card payment methods. 4 b. Non-bank institutions are becoming dominant players in payments. Both Fintech and Big Tech companies are building digital ecosystems and embedding payments and other financial services directly into these ecosystems. Companies such as Google, Amazon and Alibaba have established payments and financial intermediation as a core business line. c. Real-time payment systems : Every major country is building real-time systems for payments and collections. In particular, Request to Pay (RTP) schemes, which facilitate instant collections from bank accounts, are emerging to offer alternative payment options for online and mobile commerce. India’s Unified Payment Interface (UPI) scheme is a standout example of this — UPI facilitates e-commerce and physical point-of-sale payments instantly, direct from consumers’ bank accounts. The UPI model is being considered by several other countries as a best practice model to replicate, including in Europe where the European Banking Association (EBA) is planning to deploy a pan- European RTP platform. 5 These modern RTP connections will lead to a new cost of payments model for merchants. d. Open banking : Regulators are driving open banking models that compel banks to deploy APIs for both retail and wholesale banking services. Europe is leading open banking developments with the revised EU Payment Services Directive (PSD2) and the UK’s Open Banking initiative. To enhance its credibility with the business, it is essential that treasury closely follows developments in the payments landscape to interpret market and regulatory changes and distil relevance for the business. Given the fast pace of change, this is challenging. Treasury should leverage its network of relationships with banks and other payment providers so that it has access to the support and insights it needs to fulfil its role as a strategic advisor to the business.