Mercator Blog

COVID-19 and the Death of—Analog Commercial Payments
Date: September 17, 2020
Steve Murphy
Director, Commercial and Enterprise Payments Advisory Service

This is an update to a posting from July 1, at which time we were in week 14 of the general lockdown policies across most U.S. states as well as Europe, MEA and LAC, although Europe and some U.S. states were beginning to ramp up some normal business activity.  Asia had already started getting back to almost normal, with certain exceptions such as India.

One positive side effect of the pandemic is corporates' revelation regarding the negative effects of analog processes, which have impacted business continuity, cash flow and even the health of supply chains. Digital systems have been gradually replacing analog legacy versions and manual processes over the past 10 years and the pace of change is now accelerating. Digitalization improves data access and capture, allowing for better capitalization on other advanced technologies, such as AI and APIs, and promoting greater efficiency and better organizational control.  Starting in March, we have had a number of conversations across various parts of the financial services and fintech industry and heard similar stories.

In effect, the previous cash cycle digitization trend, which had been gaining momentum during the past several years, has essentially accelerated out of necessity. The previous inertia has been replaced by a sense of survival mode among the most vulnerable entities, and a recognition of competitive disadvantages among others. So the tide has turned and the days of checks and analog processes are numbered.  This does not mean that B2B payments will have overall growth in 2020, but it does mean that the number of checks being used will be declining at a faster pace than the five percent annual rate we had earlier predicted for the next couple of years.

Regarding the virus's direct negative effects, it is roughly two and a half months later (and six months from the initial general lockdowns), and some of the predictions about the recessionary impact of the policy decisions have come to fruition. A major drop in production was seen in the U.S. (Q2 '20 fully -33% versus Q2 '19) as well as many other markets.

It is now recovery time and as we pointed out in the previous blog, it's all about the curve.  Figure 1 provides one view as to the latest from one think tank.  This view is a little bit of an improvement from the version from one month earlier, which we assume is due to the July-August unemployment numbers being more favorable than expected. Generally speaking we find a fairly strong coefficient between GDP and overall payments activity, which we recently pointed out in several member research reports, including this one on the commercial credit card scene in North America.

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Corporate Cards (T&E)

We continue to attend bi-weekly remote meetings of a sub-group within the Global Business Travel Association (GBTA), which consists of 100+ professionals from the industry hardest hit by the lockdowns and travel restrictions.  The group shares data and insights from industry participants to help members assess best practices and potential actions as business travel remains far below normal and the persistence of COVID-19 causes further business travel delays.  The GBTA has also been conducting regular member polls across a broad swath of travel managers and others in the space across many regions to gauge the travel policies and expectations for resumption of business travel.

The latest GBTA posting from an Aug. 13 poll suggests that there continues to be a hangover effect around the pandemic, driven by continued travel restrictions both domestically and internationally.  Figure 2 provides a view of various market travel expectations.  This generally pessimistic view among travel industry professionals is about the same as the prior survey.  Early on in the pandemic spread, it was thought that the virus curve would be front loaded and begin dissipating as the summer weather unfolded, with subsequent domestic travel increases during Q3 & 4.   However, the spike in reported cases along the Sunbelt in the U.S. and certain other markets has resulted in new lockdowns, modified school re-openings, and a lingering general fear of travel.  In the previously mentioned commercial cards report, we predicted that corporate card (the product used for T&E) spending in 2020 would decline by 68% and 61% respectively in the U.S. and Canada versus 2019.

The growing pool of data in various markets, especially the U.S., suggests that COVID-19 is a particularly egregious virus for those with comorbidities and an above 65 age range. The data also indicate that there is a greatly reduced fatality rate for healthy and younger people, closer in nature to the typical strains of flu.  This would logically result in policy decisions that are in line with data, suggesting schools should be open and we can get back to business as usual, with reasonable and logical protection procedures, especially for the more vulnerable.

Given the political environment in the U.S. and election year status, it now seems more likely that 2021 and a potential effective vaccine may be the true timeframe for a return to whatever will be the new normal for business travel.

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Other Commercial Spending

Through reviews of various markets in our Worldwide Payments Model, we have done some regression analysis to try to determine if a correlation existed between U.S. nominal GDP and commercial credit card payment volumes (including small business cards) from 2012-2019; we then forecast 2020-2021 using the latest IMF data. We did the same for various international markets using debit card spend. In both there was a fair amount of correlation between the variables. Obviously corporate cards will be skewed due to the travel restrictions but we think it is reasonable to assume a relatively close relationship between commercial payments and GDP.

Please feel free to reach out for additional discussion on these or other commercial payments topics.