Real-time payments systems are gradually transforming the landscape for international commercial payments. In a detailed blog post from February 2016, Accenture explained that at least 18 countries have already implemented national real-time or near-real-time payments systems, and many more are at various stages of planning or development.1
Several factors are driving the global proliferation of real-time commercial payments, also known as immediate payments. Due to rapid technological change and the adoption of smartphones, consumers expect almost everything to be available instantly – including payments.2 According to a 2015 report by Deloitte, real-time payments offerings from fintech startups are increasing pressure on established financial institutions to offer faster payment services. Meanwhile, regulators are supporting real-time payments to benefit consumers and improve competitiveness of national economies.
The U.S. doesn’t yet have a ubiquitous real-time payments system designed for business-to-business (B2B) as well as consumer transactions, though the U.S. Federal Reserve (Fed) is leading a broad initiative to spur development of one.3 Some real-time systems already exist or are in development, including several focused on person-to-person payments. Of course, national real-time commercial payment systems will have to become interoperable across borders before they can be routinely used for paying foreign contractors.
What Does “Real-time” Commercial Payments Really Mean?
The term “real-time” can cause confusion, so it’s worth briefly describing how real-time payments differ from other payment types. Two key steps in payments that transfer money between bank accounts are clearing, which is when the funds become available in the recipient’s account and are debited from the payers’ account; and settlement, which is when the two banks involved actually transfer the funds between them.4 The key characteristic of real-time payments is that the recipient immediately (usually within seconds) receives and can use the funds. Settlement may also occur in real time or it may occur later, depending on the system.
For comparison, credit-card authorizations provide an immediate guarantee of payment, but the recipient may not actually receive the funds until later. With other B2B payment methods commonly used in the U.S., such as Automated Clearing House (ACH) and Real-time Gross Settlement (RTGS), funds are usually available to the recipient within one business day.
Characteristics of Real-time Payment Systems
Definitions of real-time commercial payments systems typically include some or all of the following characteristics:
- Systems are available 24/7/365, so payments can be made and received payments at any time. Not all systems support this today; in some countries, real-time payments are only available during limited hours.5
- Funds are delivered to the recipient and debited from the payer within seconds.
- Both recipient and payer receive immediate confirmation of payment.
- Payments are irrevocable.
- Many systems use the ISO 20022 messaging standard to exchange information, facilitating automated processing of B2B payments.
- The payer doesn’t need to know the recipient’s bank account information; money can be sent to an email address or mobile phone number linked to the bank account.
Of note, that last bullet reflects strong sentiment among U.S. businesses. According to a report from the Fed: “When making a payment, not having to give their bank account information to the payee was important to 85 percent of consumers and 81 percent of businesses. By a significant margin, consumers and businesses indicated that they would rather share an e-mail address or a phone number to make/receive payments instead of sharing their bank account numbers.”6
The U.S. lags other countries (including the U.K., China, India, Japan and Singapore) in implementing a national real-time payment system. Reasons include the sheer scale of the U.S. banking system and the fact that regulators haven’t imposed pressure on banks in the way that they have in other some countries.7 However, progress is underway. The Fed is leading an effort to improve the speed, safety and efficiency of payments, involving the financial-services industry and other stakeholders. Members of a Faster Payments Task Force established by the Fed submitted 22 proposals for fast-payment systems, which are being assessed against criteria including speed, ubiquity, security and efficiency.8,9 Results of the assessment are due in early 2017.10
Companies that submitted proposals include The Clearing House (TCH), the bank-owned operator of ACH and wire payments infrastructure, in conjunction with FIS. TCH is developing a real-time payments system due for pilot deployment in early 2017.11 The Fed itself is unlikely to develop a real-time commercial payments system unless it absolutely has to – i.e., unless “actions of the private sector alone will likely not achieve the desired outcomes for speed, efficiency and safety in a timely manner.”12 However these developments play out, it may take time for real-time payments in the U.S. to become ubiquitous, due to the size and number of players in the U.S. financial-services industry.13
Benefits for B2B Payments
Real-time commercial payments may provide a number of benefits for B2B invoice payments and other transactions, including:
Better cash flow.Businesses will receive payments faster. On the other hand, outgoing payments will move faster too.14
Transparency.Payer and recipient both receive immediate confirmation of payment.
Easier Emergency Response.Urgent purchases and last-minute bill payments could be easier.15
- Executives surveyed by Capgemini said they believe value-added services based on real-time payments systems will increase adoption by businesses. Potential services include integration with invoicing to facilitate automated payment processing.16
Real-time international commercial payments systems that can be routinely used for paying foreign contractors aren’t yet universally available – but they are coming fast. Stay tuned for further developments.