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How to rise to a global payment challenge?
Relationship Manager at Future Processing
Together with our guest, Igal Rotem, we’ll discuss the world of payments and how to rise to the global payment challenge. It’s a very interesting aspect, especially bearing in mind that the payments market is one of the biggest market sectors across the world of finance.
There’s surely an urgent need for universal real-time global payments across global markets – especially when we think about cross-border payments. International businesses today increasingly expect this global access to finance in real-time.
Igal Rotem is a high-tech executive and serial entrepreneur, former founder and CEO of a publicly traded (NASDAQ) company, with extensive business development, sales management and strategic business planning skills. Igal is currently a CEO and a board member of Cedorax – a global merchant acquiring bank, with best in class cross-border processing capabilities, that focuses on online commerce and omnichannel payment transactions.
Michał Grela (MG): An interesting and exciting topic, and even more interesting and exciting guest – Igal, a serial high-tech entrepreneur and executive, currently CEO and founder of Credorax, a licensed merchant acquiring bank. It’s a great pleasure having you here, Igal.
Igal Rotem (IR): I’m happy to be here. Thank you very much for hosting me, Michał.
MG: Would you be so kind as to tell something more about yourself and Credorax please, as an introduction?
IR: Yes. As you kindly stated, my name is Igal Rotem, I am the CEO and board member of Credorax. I’m a serial entrepreneur out of Israel. Credorax is actually my fourth company. My background – I’m a semiconductor engineer, so a little bit far away from where I started.
MG: Yeah, it is indeed!
IR: But I see that the payment opportunity, and what we do in Credorax, is ultra-exciting. My previous companies were semiconductor companies. I’ve sold, taken public, been around the tech scene for many years. Credorax is a bank licensed by the EC and focused on eCommerce, m-commerce and enabling mostly payments on a global scale, mostly for merchant and payment service providers that focus on cross border business, i.e. companies that sell products or offer services outside their native jurisdiction. This is our core expertise.
MG: Wonderful, thank you – good to hear that – it’s a very relevant discussion to you then. And just as a starter, I’ve heard one of the interviews you did, I found it on YouTube where you said that payment is affecting your business more than you are aware of it. And that really struck me as something really interesting because especially in retail and eCommerce, it’s all about the emotional connection with customers and this seamless user experience, which is crucial here. And if that does not work well, then the rest of the business is affected. And that’s what payments are all about, this seamless experience.
Could you please elaborate some more on that one?
IR: Most of the eCommerce retailers, definitely those who focus on cross-border, their operating business model is around, would say 5-10% EBITDA on their sales. Which means that they are operating in a very tight margin environment. They face a lot of competition. They face a lot of challenges. Mostly when it comes to cross-border businesses, a fast-growing industry. And due to its nature, there are many, many complexities.
Many companies are unaware of how big is the impact of the payment part of their business. And I would dare to say that the engaging and dealing with payment part of their business is probably the most efficient thing that they can do for their business, that will impact their EBITDA. Because any change, any improvement that they will do to their cost structure, to their approval rate optimisation, to their FX optimization will have a direct impact on their bottom line. More than in many cases any other operational function that they have in their daily operation.
And therefore, one of the things that we do at Credorax is becoming a consultancy provider more than anything else. We are a payment company and a payment enabler, but also we try to bring services to our ecosystem and our customers.
MG: Yeah, I definitely agree with the line you said dealing with ease of payments. It’s a great method of growing a profit margin. And that’s something that would not come as obvious, nonetheless, it’s extremely true. But what are the challenges of doing so? When you do global payments on the global scale on global markets, it’s a tough nut to crack. What are the most common challenges and how could you address them?
IR: I would say the number one challenge Michał is to make sure that you will be completing the payment cycle. The acceptance of the payment method that is being used by the customer is actually valid and it’s executable, and it’s happening. Let me elaborate on this.
Think of a huge effort that you put into marketing. You use affiliates to bring traffic to your website. You put a lot of energy to make sure that the quality of traffic that arrives and land on your landing page is good. The guy makes a decision if he wants to buy services or products from your website. And then after he took this decision, he goes to the checkout page, something doesn’t work, uses his credit card, the credit card is not accepted. He uses another payment method. For some reason, he cannot complete the transaction. And then he gets a notification ‘your credit card cannot be used’ or ‘your credit card company have not authorized the transaction. Please use another payment.’.
This situation happens at this particular case is very, very, very bad for the merchant. Why? The merchant loses three times. The merchant loses the specific transaction that you’re trying to complete. The merchant will lose the lifetime value of Michał as a customer because Michał will go then to a different website, to a different merchant and will try to get the product or the service that you want to get. And the third major loss – and this is the biggest loss – is the fact that the merchant will lose Michał’s circles, Michał’s connections, Michał’s relationships. Because what will happen is that this individual consumer, that had a problem because he couldn’t complete the transaction, he’s not going to recommend your website. He’s not going to recommend your shopping experience. And therefore, you’re not just going to lose him as a customer. You’re going to lose his family circle, friends and social network. And this is why completing the payment is so, so crucial.
MG: That really explains the scale of the problem.
IR: It’s called dealing with the acceptance, dealing with approval rate optimization and it is the most challenging task. In fact, as a cross-border merchant, you are facing a much bigger challenge, because this is not a face to face transaction. This is not a card-present transaction where a consumer appears in front of the merchant. It is online, remote, the guy can sit in Germany and the merchant can be a Polish merchant or a Chinese merchant. And the acceptance rate and the approval rate in some cases can be very low. As low as below 50%.
MG: Why is that?
IR: It is because the issuers and the acquirers, many times they don’t understand what are the risk parameters that need to apply to this kind of cross-border transaction. They still think that if the merchant is German and the cardholder is Polish or coming from the Czech Republic or coming from China, then immediately it triggers all the warning signs for no good reasons.
That means you will lose a transaction. Our main task, as a cross-border payment provider, is to ensure that we minimise these events and we secure, and we improve the approval rate of this particular merchant that uses certain payment methods. That’s number one.
MG: What’s number two?
IR: Number two is FX. You are again, let’s say, a German merchant, but now you have customers worldwide, in many cases you want to show them prices in their native currency.
MG: That’s it – you want to localize your service.
IR: Exactly. You want to localize your service. And therefore, the guy may pay in Taiwan dollars, in Japanese yens and so forth and so on, but you’re based in Europe. So your operational expenses are mostly euro linked, therefore you want to be paid in euros, but still you don’t want to lose the FX conversion and the FX’s expenses that are associated with this kind of transaction.
This is a big challenge. I’ll give you a figure that may shock you. Many of these companies, as I’ve said, operate at very, very thin margins and very compressed margins. Let’s say the guy works around 5% EBITDA margins. He may lose sometimes 5% only on FX without even realizing that he’s losing this amount of money. Let me give you a simple example. The guy has customers in the UK, they buy in British pounds and then he’s telling his payment provider – please fund the pounds that are the proceeds of the service or the product that I’m selling into my euro account. That means that if you fund British pounds to euro account, someone will do a conversion.
MG: And will earn on that one, yes.
IR: Exactly. And this someone may be an extremely expensive FX provider, it may be a bank, it may be another entity on the way, so you have to optimize that as well.
MG: What would be the third challenge?
IR: Last but not least, technology. Many eCommerce providers very often do promotions, they do campaigns, they do activities, enlarge their exposures. When they do these campaigns, the number of transactions per second will jump through the roof. And therefore, they need to make sure that their payment providers can withstand these volumes of transactions and exposures. If your system cannot handle a rapid change in the system load, you may be facing a situation that you run a campaign and suddenly the system has crashed. You have spent thousands and thousands of euros on building a campaign and suddenly boom because the payment is impacted and not possible.
MG: It’s a connection of reliability and scalability here, you’re talking about.
IR: Exactly. It’s about reliability. It’s about scalability. It’s about, I would say, the continued service that you are expecting from your payment provider.
Now, let’s go back 15 years from where we are now. When 99.9% of the transactions were offline, then it was not a big deal. The system is down or the system is not available, still we can perform the purchase. In the online rapid business where you promote services and products, you need completely different system reliability than it was before. And this is a big challenge because most of these systems that are out there are very outdated.
MG: Yeah, so definitely three very interesting challenges you’ve mentioned. And the last one you’ve said, you’ve started describing it, saying the challenge is about technology. And technology is definitely underpinning the whole industry when it comes to fintech and payments. Also, the technology allows making use of another asset that these sort of companies/merchants are in possession of, but are often not making use of, meaning data. A lot of merchants, especially eCommerce merchants, have to be, or usually are, data-driven businesses. Data is a crucial factor in building customer experience. Data is a crucial factor when it comes to marketing, personalisation, etc.
Could you say a few more words about the importance of how to make data useful, how to derive meaningful insights from it? How can that affect a business?
IR: Thank you very much for the question Michał. It touches the core of what we do. When people are asking me, can you describe from 30,000 feet what is the essence of Credorax. Saying, “Guys, Credorax is a data company that happens to be a bank. And not a bank that has an IT department.”
And this is at the core of what we do. We provide data to our ecosystem and we provide the data in a real-time fashion, which means also you will be getting the data live, you can see exactly the cost of the transaction to the most granular line item. And you will get notifications on any problems that are happening in real-time so you can respond to these events immediately and take actions in real-time in order to fix the problem.
If you have a problem in the Czech Republic, if you have a problem in Belgium, you don’t want to be notified on these issues in two weeks’ time in a way that you will not be able to fix the problem when the problem happened. Now the data we provide you will enable you to make smart decisions on the fly. Let me give an example.
Let’s say that you have a transaction, that transaction is originated from Spain in euros and you know that for these kinds of cards, this kind of transaction, at this value, the best bank to process this transaction is going to be Barclays. So, you want to run the transaction to Barclays.
You then get another transaction; it comes from Sweden and this transaction is in Swedish koronas. You want to optimise the approval rate, and you want to optimize the cost of this particular transaction. You know that Ingenico is the right provider for this kind of transaction. So, you would want to direct this transaction to Ingenico. This smart routing and the ability to make decisions on the fly is a mission-critical function that Credorax provides.
And that is based on your, what is called the target function you will determine, meaning what are the parameters that are crucial for you. You want to optimize the cost, you want to optimize the approval rate, you want to optimize the FX conversion, you want to guarantee a certain volume to certain providers. All these parameters have to be managed by the real-time decision-making platform. We call it smart routing. It will enable you to optimize your payments.
Another factor is how much transactions cost you. For instance, the OTAs, the online travel agencies, for them the cost of a specific transaction is the Holy Grail. Based on this cost, many times they can make a strategic decision on the fly of what to do with your specific transaction. So if you live in Germany and you want to fly from Frankfurt to London, they may buy the ticket for you in Russia using Russian rubles. Because they found it the most optimized for you, at this particular time, of sensitivity, of other parameters that you have indicated. They need to optimize and manage their platform to execute this kind of transaction in the most optimal way. Of course, you need this data in real-time, and we provide this kind of data. And this is, I would say, one of our most powerful value proposition and key selling factors that on top of it, we win business.
MG: Yeah, I see your point, definitely making proper use of data is crucial to any business, especially the one that operates on the fly in a volatile changing environment.
The last question I’ve got for you is regarding the future of payments and your predictions of trends. Especially regarding one trend, because obviously the thin margins, the customer acquisition growing, these are the trends that affect this environment. But I’m curious to find out your opinion on the cashless direction, especially on virtual cards, no plastic cards anymore. Is it a threat or opportunity, what would you say?
IR: So there are few trends that are happening, I would say, in many ways simultaneously. I think that cash, in its note form, will cease to exist in less than 20 years.
MG: That’s a bold statement.
IR: In most parts of the world. And I’ll tell you why. Let’s take China as a good example. China, although a gigantic country, is very, very close to being a cashless society.
MG: It is, yes.
IR: You can buy anything and everything using your mobile phone. That’s it. People can carry a note of a 100 and not use it for weeks and months.
MG: Very similar in Sweden as well, where there are plenty of cash-free spaces already.
IR: Exactly. And I think China is very close, second close to Sweden in this regard of being cashless. This is being pushed by most central banks, most governments because it saves a lot of money. It saves a lot of friction. It reduces the black economy; it reduces tax evasion. It provides a much, much, much stronger control on economic activity and the economic environment. And of course, significantly reduces crime. Because every time that you perform a transaction that is digital, you know the parameters. And your ability to hide the transaction or to do any kind of tax evasion is minimised.
Therefore, I think that we are getting very close to a situation when most governments in most parts of the world will embrace cashless society. Now, whether this is not going to happen over the next two years, I think it may take time.
MG: Yes, you need to foster a social mindset as well, especially within people who are not digital natives, that will not be immediately ok with it.
IR: Exactly, but we move more and more to the simplification of payments. One-click checkout, very simple, very transparent, very secure, the ability to move from cash to cashless will be rapid. So that’s one trend that will definitely grow our total available market fivefold.
People are not aware and still, most of the world needs cash. The cashless society, electronic money is still less than 25%.
MG: Approximately, yes.
IR: I’m talking about worldwide. We still have a way to go here, and we are very happy, very thrilled about this. And of course, happy to support it.
The other trend is the blockchain. Blockchain is a messaging platform. Again, people have the tendency to confuse between blockchain and cryptocurrencies. But it’s not relevant. General ledger and blockchain is a messaging platform.
MG: Yes, they serve a completely different purpose.
IR: Exactly. Do I believe in blockchain? Absolutely. Do I think blockchain will go more and more into the mainstream? Absolutely. If you look online at the Finextra you will see a big announcement that we did recently with Samsung SDS about joining forces to develop a fully automated reconciliation engine for eCommerce companies.
MG: That’s exciting!
IR: Very exciting. We are big believers in this kind of a trend. Having said that, I think this is a messaging platform that will help significantly ease the process that would be the back-office process for payment companies and for commerce banks. It’s an amazing opportunity. It’s not a trap.
Also, the alternative payment methods, trends like PSD2, SEPA direct debits, other means of payments, account to account and so forth and so on, they are a great opportunity to provide more services. I don’t think that the card business is going away.
MG: What about physical cards?
IR: Absolutely, the physical plastic will go away sometime. It’s still considered to be a status symbol if you want. And therefore, I don’t think that the plastic will go away completely. But the use of the plastic, the use of the physical card will slowly go down and down and down. From our point of view, it doesn’t really matter. On the contrary, because we are eCommerce and cross border focused, in any case, the transactions card is not present, to begin with. The fact that the physical card is not present is the nature of the piece, you can say.
I think that the penetration of smartphones in general is really, really accelerating this cashless and cardless payment method. We are definitely very, very, very much supportive of that.
MG: What about alternative payment methods?
IR: All the alternative payment methods are something that Credorax supports. We support more than 120 alternative payment methods on a global scale. We will see continuation and growth in this area as people want to be personalized, people want to have more loyalty to a certain channel, which we should absolutely support.
MG: Thank you for sharing that one. Well, it looks like there’s an interesting future ahead of us when it comes to payments, full of challenges and full of opportunities. Thanks for sharing your views on that, it was extremely informative.
IR: Thank you, Michał.
MG: And thank you our listeners for listening to this, another episode of our series of podcasts. If you found it useful, please don’t hesitate to like it and share it. And please do drop us a line if you’d like to have a topic covered in one of the other episodes.