Small Businesses Anticipate Savings with Real-Time Payments

Status of Real-Time Payments in the U.S.

The Federal Reserve has set a 2020 target for real-time payments to be available to every U.S. consumer and business. Meanwhile, many large banks have signed onto The Clearing House’s real-time payments network launched last November, with hundreds of smaller institutions expected to follow.¹ Estimates are that half of all U.S. accounts will be reachable via real-time payments by the end of 2018.²

However, American Banker points out there are a number of issues that banks need to resolve before being able to meet the U.S. payment systems 2020 deadline, including management (should they outsource real-time payment infrastructure or manage it internally?) and the exact shape of instant payment services to offer customers.³ And then there is pricing: Banks are looking to set a rate somewhere between wire transfers that cost anywhere from $5 to $25 and ACH (Automated Clearing House) transactions, which typically don’t cost more than $1.⁴

Real-Time Payments 101

Global markets’ increasing need for speed alongside potential business benefits of faster payments is driving the interest in real-time payment services. Such services generally include the following characteristics, according to an Accenture report:⁵

• Funds are debited from the payer's account and made available in the recipient's account within seconds.
• Payment status and confirmation are also available immediately.
• Payments can be made 24 hours a day, 365 days a year.
• Many systems are based on the ISO 20022 standard, which facilitates the exchange of payment-related information that can simplify reconciliation and enable straight-through processing.

Operational Advantages of Instant Payments for Merchants

Retailers small and large are taking notice of real-time payments, not just as a customer benefit and competitive need, but as an operational imperative. A May 2018 report from the research house Ovum found that 78 percent of merchants believe real-time payments will increase efficiency, up from 59 percent in 2017, and 78 percent think it will allow them to cut costs. More specifically, Ovum found real-time payments could enable greater efficiency in liquidity management, negotiating more favorable rates with suppliers, and expediting payments for short-term or temporary workers. The research showed that the largest merchants (those with revenues above $5 billion) were seeing the biggest benefits from real-time payments: 81 percent expect cost savings. Those in the telecoms and retail sectors expressed the highest expectations that real-time payments will drive cost savings (87 and 86 percent, respectively).⁶

Retailers were also bullish about using instant payments to enhance customer service. Across all markets, 78 percent of survey respondents expect to improve customer experience with real-time payments, particularly in time-sensitive areas such as refunds and disbursements, up from 59 percent in 2017.⁷

Ovum recommends that larger merchants update or change their IT development roadmaps to take advantage of real-time payments opportunities, while others should press their banking partners to unlock real-time benefits for them.⁸

The Real-Time Payments Business Case for SMEs

So how might instant payments potentially improve SME businesses? According to payments technology solutions provider Hyperwallet, there are three main areas:⁹

• Moving away from paper checks: Real-time payments will offer the ability to link invoices with the relevant transactions and lower overall cost.
• Processing regular payroll: A business can now wait until the last hour to process payroll and gain additional working capital if required, giving businesses 3-5 additional days of working capital.
• Domestic transfers via wires: Real-time payments support transfer of the same information as wires (at lower cost); but, at least for now, they don’t support the high transactional amounts of wire transfer (into the millions of dollars).

Moreover, real-time payments have the potential to simplify retailers’ transactions with consumers and wholesalers/suppliers, note FIS, another payments technology supplier. Instead of waiting for a consumer’s payment to clear before placing that customer’s order and then sending payment to the wholesaler for fulfillment, retailers can request a customer’s order, receive payment, and send their payment to the wholesaler all on the same day – with no impact on cash flow while improving the customer experience. FIS says merchants win in this scenario two ways: They free up working capital from supply chains – capital they can now use for growth – and they drive loyalty and satisfaction with their customers.¹⁰