By Mike Faden
Since many other countries already have adopted similar systems, widespread U.S. adoption will mean that domestic real-time payments are generally available in all the world’s major markets, according to Treasury Today. The publication also says that to date, instant payments have been used much more widely for consumer than B2B payments.3 However, proponents expect growing usage among businesses as companies increasingly expect faster payments and adjust their business processes to take advantage of the technology, and as transaction limits are raised.4,5
This article discusses how the impending wave of real-time payment technology may change the way U.S. businesses operate.
Several aspects of typical real-time payment systems are likely to be important for businesses, according to experts.
These characteristics may affect businesses in several ways.
Real-time payments may help businesses manage cash flow, because they provide greater control over the timing and certainty of payments, according to McKinsey & Co.6 Companies may receive money faster and get more accurate snapshots of their current cash positions.7
Instant payments are most salient for one-time, lower-value, B2B business payments. Examples are specific cases that require urgent funds transfers, such as late payments, refunds and insurance claims.8 Furthermore, businesses can make or receive those payments around the clock, since real-time payment systems are available 24/7.9
Even if businesses don’t need payments to happen faster, they may benefit from the additional payment information provided by real-time systems, experts say.10 That’s because many systems exchange payment information using the ISO 20022 standard, which includes standardized message types designed to make it easier to handle common payment scenarios.11
This may enable senders and receivers to have more detailed conversations about each payment, proponents say. For example, a company responding to a payment request from a supplier can either accept the request in its entirety or agree to pay only for certain line items, and immediately communicate that information to the supplier. A recipient of a payment can indicate that the amount received is incorrect and request reconciliation.12
Because these conversations can happen directly within the payment system, employees do not need to interrupt their workflow by switching to email or phone to communicate, experts say.13 Over time, businesses may increasingly be able to integrate this payment data into corporate systems and automate payment processes, reducing cost.14 The enhanced payment information also could provide businesses with real-time insights into customer satisfaction, preferences, and payment performance.15
Real-time payments may also remove some of the risk traditionally attached to working with new, unfamiliar buyers. That’s because payments are both immediate and irrevocable, potentially eliminating the possibility that a customer will initiate a payment and then cancel it after goods have been shipped.16,17
On the other hand, there have also been concerns that faster payments may bring faster fraud, due to the minimal time available for fraud detection and the fact that instant payments are irrevocable. However, the experiences of financial institutions and businesses to date have suggested that fraud concerns are manageable with improved controls.
Businesses will have a broader array of payment types to choose from, including real-time payments, wire transfers, and ACH. They will be able to select the right payment type for each application depending on factors such as cost and urgency.
Some experts say that higher costs associated with real-time payments may tend to restrict their use;18 however, an American Banker article argued that competition from low-cost financial-technology (fintechs) startups will restrict banks’ ability to charge higher fees.19
One expert suggests that ACH may offer cost advantages in cases where the payer and payee already know each other, where the payment amount is known and can be scheduled in advance, and where the payment is recurring. For those reasons, payments to salaried employees or long-standing suppliers may be unlikely to migrate to real time.20
However, real-time payments may be better in situations where a company needs the ability to initiate requests 24/7, and when the finality of the payment matters – such as when the company needs to request funds from a delinquent customer in order to restore service, or request payment from a new customer.21
For treasury management professionals, one of the biggest changes with real-time payments may be the transition from an older batch payment processing model to a world of steadily flowing payment-related messages.22 The design of many older treasury management systems is based on periodically sending payment information in batches, and the same is true for ERP and other business systems with which they exchange information, according to experts. Changing to a new model may require re-engineering business processes and employee behaviors in areas such as order-to-cash and supply chain operations.23
U.S. companies with international operations may have an advantage if they operate in countries where real-time payments have been available for some time. They can benefit from best practices already established in those countries, and from the experience of local banks.24
Real-time payments, together with other trends such as e-commerce, may also have even more far-reaching implications on how companies operate. One expert suggests that goods can flow more quickly through supply chains because companies don’t have to wait for payment before releasing the next shipment of products to customers.25
The head of the U.K.'s Faster Payments system has suggests that real-time B2B payments could enable the following scenario: Retailers could reduce the need to maintain storage space for inventory, instead converting the space into an expanded showroom containing a greater variety of products. When a customer makes a purchase, the retailer orders the product on the spot, paying their supplier using a real-time payment. Because the supplier instantly receives the funds, it can immediately initiate shipping for same-day or next-day delivery direct to the customer. The retailer eliminates the need for stock, freeing up working capital, while the customer benefits from efficient service, greater choice, and potentially lower prices due to the retailer’s increased efficiency.26
U.S. businesses will soon be able to add real-time payments to their options for doing business with other companies and with consumers. These instant payments may help companies manage cash flow, reduce risk, and make urgent payments when necessary; they could also support more far-reaching changes to the way businesses operate. However, transitioning to real-time payments may require reengineering corporate systems and business processes.
Mike Faden has covered business and technology issues for more than 30 years as a writer, consultant and analyst for media brands, market-research firms, startups and established corporations. Mike also is a principal at Content Marketing Partners.
1. “First New Core Payments System in the U.S. in more than 40 Years Initiates First Live Payments,” The Clearing House; http://markets.businessinsider.com/news/stocks/first-new-core-payments-system-in-the-u-s-in-more-than-40-years-initiates-first-live-payments-1007986561
2. “How The Fed Is Clearing A Path For Faster Payments,” PYMNTS.com; https://www.pymnts.com/news/faster-payments/2017/federal-reserve-real-time-payments/
3. “Your guide to the real-time payments revolution,” Treasury Today; http://treasurytoday.com/2017/09/your-guide-to-the-real-time-payments-revolution-ttst
4. “Instant payments: What SEPA can learn from the UK Faster Payments experience,” European Payments Council; https://www.europeanpaymentscouncil.eu/news-insights/insight/instant-payments-what-sepa-can-learn-uk-faster-payments-experience
5. “£250,000 Faster Payments Open for Business,” Faster Payments; http://www.fasterpayments.org.uk/press-release/%C2%A3250000-faster-payments-open-business
6. “Faster payments: Building a business, not just an infrastructure,” McKinsey & Co.; https://www.mckinsey.com/industries/financial-services/our-insights/faster-payments-building-a-business-not-just-an-infrastructure
7. “Real-Time Payments: Promises, Benefits, and Why it Matters,” Fifth Third Bank; https://www.53.com/content/fifth-third/en/commercial-banking/resource-center/executive-insights/real-time-payments.html
8. “Getting ready for real-time payments,” The Global Treasurer; https://www.gtnews.com/2017/11/07/getting-ready-for-real-time-payments/
9. “Real-Time Payments: What to Know, and What to Do,” Treasury & Risk; https://www.treasuryandrisk.com/2018/04/19/real-time-payments-what-to-know-and-what-to-do/
10. “Your guide to the real-time payments revolution,” Treasury Today; http://treasurytoday.com/2017/09/your-guide-to-the-real-time-payments-revolution-ttst
11. “Real-Time Payments: What to Know, and What to Do,” Treasury & Risk; https://www.treasuryandrisk.com/2018/04/19/real-time-payments-what-to-know-and-what-to-do/
14. “Real-Time Payments: Promises, Benefits, and Why it Matters,” Fifth Third Bank; https://www.53.com/content/fifth-third/en/commercial-banking/resource-center/executive-insights/real-time-payments.html
15. “Real-Time Payments: What to Know, and What to Do,” Treasury & Risk; https://www.treasuryandrisk.com/2018/04/19/real-time-payments-what-to-know-and-what-to-do/
16. “ Real-time payments forcing transaction flow rethink,” Euromoney; https://www.euromoney.com/article/b14r6x3pgbg5vc/real-time-payments-forcing-transaction-flow-rethink
17. “Real-Time Payments: What to Know, and What to Do,” Treasury & Risk; https://www.treasuryandrisk.com/2018/04/19/real-time-payments-what-to-know-and-what-to-do/
18. “Getting ready for real-time payments,” The Global Treasurer; https://www.gtnews.com/2017/11/07/getting-ready-for-real-time-payments/
19. “The Real Promise of Real-Time Payments (It's Not the Fees),” American Banker; https://www.americanbanker.com/opinion/the-real-promise-of-real-time-payments-its-not-the-fees
20. “Real-Time Payments: What to Know, and What to Do,” Treasury & Risk; https://www.treasuryandrisk.com/2018/04/19/real-time-payments-what-to-know-and-what-to-do/
25. “ Real-time payments forcing transaction flow rethink,” Euromoney; https://www.euromoney.com/article/b14r6x3pgbg5vc/real-time-payments-forcing-transaction-flow-rethink26. “Instant payments: What SEPA can learn from the UK Faster Payments experience,” European Payments Council; https://www.europeanpaymentscouncil.eu/news-insights/insight/instant-payments-what-sepa-can-learn-uk-faster-payments-experience