Thursday, 6 September 2018

Digital dollars: Australian companies forge new payment frontiers

Australia has long been a nation of exporters. From wool and wheat in the 1960s to vast quantities of minerals and energy products since the 1980s, much of Australia’s economy has been built on exports.

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  • E-commerce platforms have facilitated rapid growth in Australia’s exports of services and processed goods
  • The most complex part of overseas expansion can be facilitating and managing overseas payments
  • HSBC’s FlexRate can provide bespoke foreign exchange pricing solutions for corporates and institutions

Although Australia is still the world’s largest exporter of iron ore and coal a shift in focus has been taking place. Increased demand for services from Asia’s growing middle class and the proliferation of e-commerce platforms are increasingly making it more efficient and convenient to do business overseas.

Over 85% of the next billion people to enter the middle class will live in Asia, according to a recent report from The Brookings Institution, with China, India and Indonesia leading that growth. Demand from these new consumers is already having a positive impact in Australia across both goods and services. In 2017, three of the country’s top ten exports were services, according to the Department of Foreign Affairs and Trade (DFAT) and service sector exports increased by 8% for the fourth consecutive year, according to Austrade. The export of goods expanded at an even faster rate, up 19% on a balance of payments basis in 2016-17, to reach A$291.6 billion.

This shift in demand, as well as developments in technology, has seen an explosion in e-payment systems. Globally, more than 25 active real-time payment programs were in place at the end of 2017, up from 19 in 2016, and that number is expected to grow steadily over the next ten years, according to payments technology company FIS. Australia’s New Payments Platform (NPP) has also joined other payment systems in the Asia Pacific, including those in Singapore, Hong Kong, Malaysia and Thailand.

Despite this growth, Guy Dickinson, Managing Director, Head of Global Markets and Treasurer at HSBC Australia, says cross-border payments remain difficult for many Australian companies and greater investment is needed to help spur the continued development of e-payment systems and support in the region.

With any sort of foreign exchange or cross border solution, faster reconciliation is a central piece of the puzzle for businesses with regards to making sure that when a payment is made it hits their account in a timely manner. And by ‘timely’, I mean the same day that it was paid or according to the agreement that exists with the vendor.

GUY DICKINSON, MANAGING DIRECTOR, HEAD OF GLOBAL MARKETS AND TREASURER, HSBC AUSTRALIA

Tapping into China

In Australia, growth in service exports like education has seen a rapid expansion of cross-border payments between Australia and Asia, particularly since the launch of China’s Alipay in 2016. According to the World Payments Report 2017, the number of cashless transactions in the region is expected to hit US$276.8 billion by 2020, a three-fold increase in the space of five years.

A growing number of Australian retailers are also eager to offer Alipay and WeChat Pay to tap into the estimated $11 billion in Chinese tourist spending in Australia in 2018, according to the Australia China Business Review. Mobile payments are widely used in China, and its mobile payments market was valued at US$5.5 trillion in 2016 – nearly 50 times bigger than the US.

However, there are a number of challenges that Australian companies face in seizing the e-commerce opportunities Asia presents. Many of its economies are less transparent or maintain more stringent currency and capital controls. As a result, many of these currencies are not easily transferable and regulations vary markedly.

“As Australia starts to export more services offshore, the need for increased solutions around e-payments will grow,” explains Mr Dickinson. “However, these will need to be in line with consumer expectations around customer experience and I that's probably where there's more work to be done in Australia.”

He gives the example of an international student from China enrolled at an Australian university to demonstrate how the speed of implementing solutions to minimise fees will be a distinguishing factor in an increasingly competitive services landscape.

“A student may be more likely to choose a university that has integrated with a bank on a foreign exchange solution, as opposed to the traditional credit card solution, because the cost will be significantly lower.” Mr Dickinson says. “Companies that are quick to offer solutions that meet overseas purchasers’ needs are likely to reap the rewards of doing so because a student is a multi-year consumer and a captive opportunity.”

Some Australian service providers have already recognised the need to tailor their product around foreign purchasers. Qantas, for example, launched its own WeChat account and began publishing a Chinese language version of its in-flight magazine in 2016 in response to growing Chinese tourism.

Risky ups and downs

It may be a business advantage, yet many Australian companies who expand their business offshore find that managing overseas payments is the most complex part of that process due to rapid and unpredictable currency fluctuations.

“An Australian seller’s perspective is naturally, ‘If I'm selling a service like education or tourism, whether I'm selling it to an Australian or someone offshore, I want Australian dollars for it.’ And frankly, accepting many different currencies isn’t the most efficient method of doing business because it creates foreign exchange risks,” explains Mr Dickinson.

“Credit Card payments have traditionally been the most widespread means of mitigating those risks. They are easy and efficient for the end user, popular amongst the mainstream consumer and they make sense.” Mr Dickinson adds. “But that convenience carries a much larger potential fee, especially when there is an implicit foreign exchange transaction.”

Globally, general purpose credit cards carrying Visa, UnionPay, MasterCard, JCB, Diners Club/Discover, and American Express brands accounted for US$295.65 billion in purchase transactions at merchants in 2017, an 18% increase from the year before. China’s UnionPay continued to have the highest percentage increase in purchase transactions for debit and credit cards and grew by 32% in 2016, according to the latest Global Cards report from the Nilson Report.

More recently, the likes of eBay’s PayPal and Alibaba Groups’ Alipay, have emerged as lower cost alternatives, and become popular and trusted payment platforms.

I think these new methods are here to stay, but we need to make sure we generate real convenience on the consumer side and surety on the corporate and vendor’s side. As a vendor, the delivery that a particular chosen payment method provides is paramount to ensuring seamless and convenient payments by the end purchaser.”

GUY DICKINSON, MANAGING DIRECTOR, HEAD OF GLOBAL MARKETS AND TREASURER, HSBC AUSTRALIA

Eliminating the third party

Mr Dickinson believes this is where fintech can add value to e-payments and provide smarter and faster reconciliation solutions, in partnership with foreign exchange specialists like HSBC.

HSBC has a global strategy to invest in its FX pricing technology and the company’s CEO, John Flint, recently announced Asian plans to invest $17 billion in expanding key regional markets and technology. Mr Dickinson says this gives HSBC a unique position in the Australian market, where it can draw on technology investment from across the Group for delivery locally.

“We can price more currencies than local providers because of our vast international network, and at a competitive rate,” he explains. “We're also in the business of pricing risk on behalf of the vendor rather than a third party, which has a different model at play.”

Mr Dickinson says FlexRate in particular has a wide application, and most recently has been used by airlines to allow certain categories of tickets to be refunded without currency fluctuations affecting the actual amount refunded.

“FlexRate takes the foreign exchange risk based on a pricing model that takes into account the number of cancellations that occur. We can set a ticket cancellation price from a day out to a year out which eliminates potential FX risk from cancelled or refunded transactions,” says Mr Dickinson.

FlexRate also reduces the time it takes to complete a transaction. “It can take up to three or four days for a reconciliation using traditional cross border payment methods. By providing a more tailored solution through fintech, reconciliation is timely and consumer and vendor experience is seamless.

“By working with partners like HSBC to establish workflows and take control of foreign currency payments, Australian companies can concentrate on their core offering and provide their customers with the most cost effective and seamless payment journey,” he adds.

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