Time to Get Up to Speed with Instant Payments

Believe it or not, real-time payments are already changing the face of treasury. They offer an opportunity to rethink legacy payments, collections and liquidity management processes, glean valuable data, and add strategic value to the business. Instant payments are also a huge enabler of real-time treasury. But the rewards can only be reaped if treasurers embrace the possibilities that instant payments offer, and if regulators and banks continue to push towards global, not just local, real-time payments capabilities.

The era of real-time payments is upon us. Over 30 real-time payments schemes are now operational worldwide, with more on the cusp of going live, or in the development pipeline. As Craig Ramsey, Head of Real-Time Payments, ACI Worldwide, explains: “Real-time payments (RTPs) are happening all across the globe, with many countries either having a defined strategy or closing in on one. And it’s not just the developed markets that are doing this, all economies are pushing ahead with RTPs, with some of the best initiatives coming from developing or less mature markets.” 

Regardless of geography, instant payments (the terms ‘real-time’ and ‘instant’ payments are used interchangeably in the market) present a new way to do business for everyone. They have the potential to change the way that businesses interact with their customers, but also how businesses interact with each other, says Ramsey. So, the benefits are by no means limited to B2C companies.

Francis De Roeck, Head of SEPA Offering, BNP Paribas, says that “the speed of instant payments – with settlement typically occurring in under 10 seconds – is not only extremely interesting for retail customers but also for corporate treasurers. In fact, the advent of instant payments offers a significant opportunity for treasurers to create value within their organisation by rethinking legacy payments and collections processes.”

While it may seem unusual for a treasurer to want to pay money away quickly, there are a number of reasons why making disbursements using instant payments can be beneficial, notes De Roeck. “Insurance companies could, for example, use RTPs to settle claims instantly, or retailers could issue refunds on the spot. In turn, this should help to improve customer service, drive customer retention, and attract new business.” Ramsey agrees, adding another example: “A retailer which is able to refund money instantly upon return of goods can improve customer loyalty and satisfaction substantially,” he observes.

Elsewhere, supplier payments, can be synchronised more closely with the production cycle, helping companies to embrace just-in-time business models, says De Roeck. In addition, “RTPs will give all corporate treasurers far greater control over their payments and allow them to be on the front foot. Old-fashioned cut-off times no longer apply. Weekends and bank holidays will not be an impediment anymore. And since instant payment schemes operate 24/7/365, corporates can actually hold on to their liquidity for longer – paying only at the last minute.” 

Corporates could also use the ‘always on’ nature of RTPs to pay their employees’ salaries earlier in the day – perhaps at 7am rather than 10am, he suggests. “This is a small gesture, but it can have a significant positive impact for the workforce.”

The other side of RTPs  

Of course, real-time payments not only offer treasurers the opportunity to improve disbursements; they can enable real-time collections too. “After all, real-time payments offer finality of settlement, since RTPs are irrevocable, which is a huge benefit for treasury. And with instant collections, companies can ship goods much more quickly to customers, leading to improved customer service,” De Roeck notes.

There are significant opportunities to leverage real-time collections in the e-commerce space, therefore, integrating real-time credit transfers into the shopfront – which can also improve the customer experience and make the payment process even more seamless. And compared to more traditional payment instruments such as cards, real-time payments have a lower fraud rate associated with them, which is an added bonus for treasury, explains De Roeck.

Shahrokh Moinian, Head of Cash Products for Cash Management, Global Transaction Banking, Deutsche Bank, builds on these thoughts, saying that, 

“By encouraging customers to pay via instant payment, either through discounts or making the payment experience as seamless as possible, companies can lower their days sales outstanding [DSO], close down credit lines with their customers, and ultimately manufacture and sell more because funds are coming in more quickly.” 

“Elsewhere, real-time payments remove risks such as the need for cash handling for those companies who accept payment on delivery. Of course, moving away from physical cash to instant payments also results in enriched data around each transaction,” De Roeck notes. 

Anupam Sinha, Global Head, Domestic Payables & Receivables, Treasury and Trade Solutions, Citi, also points to the data benefits, adding that “Together with technology solutions, the enriched data that comes with instant payments means that corporates can reconcile in near real-time, rather than waiting several days, and this will lead to DSO improvements.” We will come back to this important point about data later in this article, since it has significant implications for treasurers that go beyond quick wins.

Request to pay: a quiet revolution

Meanwhile, request-to-pay schemes add another dimension to the real-time collections angle. “These offer a new way to collect from consumers and businesses alike, instantly. They can be used for ad hoc payments, not just to replace direct debits, and are essentially a next-generation electronic bill presentment and payment (EBPP) solution,” says De Roeck.

For anyone unfamiliar with request-to-pay schemes (also confusingly shortened to ‘RTPs’ like real-time payments – go figure!), Dean Wallace, Practice Lead, Real Time and Digital Payments, ACI Worldwide describes their origins and usage. “With the advent of open banking and the much more widespread use of open application programming interfaces (APIs), another way to pay is on the horizon, which could revolutionise life for millions of UK consumers and businesses. Request-to-pay is a new payments service, which will provide another flexible way for payments to be made and received. It complements existing ways to pay, benefiting consumers, small businesses, charities, larger corporate users and governments,” he explains.

Fig 1 - How request-to-pay works Source: Citi

The new service, he says, would allow consumers and businesses to change payment dates to suit their needs. It could, for example, include warnings for consumers and businesses about upcoming bills. The US has already launched a similar service in 2017. They are also popular in Asia and emerging across Europe. One example, says Wallace, is the PaybyBank app by Vocalink. The UK’s Faster Payments service is also working on a request-to-pay solution.

Despite the growing number of request-to-pay schemes, Sinha believes that there is still an education piece that needs to take place around how they work. “In a nutshell, request-to-pay is a collective term for schemes that trigger payments from bank accounts. In contrast with direct debits, request-to-pay schemes operate in real time and are suitable for single or ad hoc payments. No static upfront mandate is required from the payer and there are no extended rights of revocation,” he observes. 

But how does it actually work? Wallace explains: “Let’s say you – as a consumer – have agreed to pay your gas and electricity provider using request-to-pay instead of a direct debit. Your provider would most likely send you a ’request to pay’ as an app notification on your mobile. 

“You (the consumer) would then tap or swipe to open the authorisation screen. Key information about the requested payment would be displayed and a thumb print reader enabled on that screen. The consumer would check the information, press their thumb on the reader, and that’s it, job done - 1 screen, 2 taps, 3 steps. Request paid.” 

What is going unsaid here is that the technology enabling all of this is APIs. “Request-to-pay is bringing both APIs and real-time payments together in a seamless manner and will offer completely new and sophisticated banking and payment services for customers,” observes Wallace.

Of course, no solution is perfect and there are potential sticking points in the request-to-pay workflow to be aware of. The consumer may not instantly approve the payment, for example, which makes it no longer real-time. Nevertheless, request-to-pay is an interesting development in the collections space, and one for treasurers to watch closely, and be part of where appropriate.

Looking beyond the surface

Although real-time payments and collections offer significant benefits on their own, there is more mileage to be had out of this instant revolution. Sinha shares some interesting thoughts here, saying that it is important to look beyond the surface of instant payments. “For treasurers, this is not just about moving and receiving funds more quickly, or 24/7/365; there are bigger impacts and opportunities on offer, including significantly improving the cash application process and future-proofing the treasury function.”

With the enriched data provided as a result of the majority of instant payment schemes running on ISO 20022 XML, many of the cash application challenges that treasurers face today could soon be a thing of the past, he believes. “No longer will treasurers have to wait several days to process a batch payment via ACH, and then discover five days later that the payment has been rejected and must be sent again. When a treasurer makes an instant payment, they will know on the spot whether or not it was successful – and can reinitiate it straightaway if not.”

Since they are ‘always on’, instant payments have the potential to bring significant benefits in terms of just-in-time funding, allowing corporates to minimise idle balances, as well as improving cash flow forecasting, says Sinha. “We also expect to see the use of intelligent technology solutions evolving on the back of instant payments, such as virtual accounts and more sophisticated fraud detection software.” 

Real-time treasury and liquidity

He adds that “many corporates wanting to embrace instant payments are now looking at the best ways to maximise their value – such as embracing the broader move towards real-time treasury, and moving to an API set-up, rather than a host-to-host connection with their bank. After all, API will provide a true instant payments experience.” And this will be vital in the world of real-time treasury to enable true real-time liquidity management.

As Domenico Scaffidi, Principal Solution Consultant Immediate Payments, ACI Worldwide, notes: “The new real time world will require completely new liquidity management tools. In addition, treasurers will need to learn how to monitor intraday liquidity in real-time, and to optimise clearing and settlement processes to work in a 24/7/365 environment.”

De Roeck echoes these thoughts, and adds that: “At the moment, the value limits on many RTP schemes are relatively low. But these will increase within a fairly short timeframe. And treasurers could suddenly find that they have significant amounts of cash landing in their bank accounts at weekends, or at other ‘unusual’ times. As such, it is important to start looking at re-engineering treasury processes as soon as possible in order to reap the benefits that RTPs offer.” 

Moinian agrees, adding that real-time payments, in combination with open banking, APIs and regulatory initiatives in the market, should provide “an impetus for treasurers to rethink their liquidity structures, and how investment policy parameters can be automatically adhered to, leaving the treasury team free to manage ‘event-driven or exceptional’ scenarios and broader liquidity and risk issues.” 

With this in mind, Deutsche Bank has been working closely with clients, carrying out workshops on areas such as real time, smart investment. “There are significant liquidity and working capital implications associated with real-time payments. As the cash conversion cycle becomes faster and shorter – as a result of 24/7 payments, APIs for account information, optimal investment decision analytics and movement, and AI to accelerate cash conversion cycle through auto-matching – the time between payment execution and settlement all but disappears, and managing working capital becomes a far more precise and interactive process than in the past. The need for large cash buffers could also be reduced, freeing up working capital and optimising the use of surplus liquidity,” he explains.

 Another area the bank has investigated with clients is auto-policy investments. “Given the prevailing negative yields within Europe, USD volatility, the regulatory impact of MIFID II, MMF reform and the placement of surplus non-operational balances across liquidity providers, treasurers increasingly expect that liquidity providers are able to auto- implement/amend their investment policy parameters within their bank proprietary liquidity pools  – and automatically adhere and provide a corroborating audit trail for on and off balance sheet solutions within their bank and with all other bank and fund providers,” he says.

“While historically the toolkit to move balances between entities, banks and liquidity providers has been MT942 based, the opportunity to use market standard APIs to get real time information later in the day and more frequently than typical MT942 allowed and to move balances just in time and more cost efficiently is now increasingly live in the market,” he notes.

 To take advantage of these opportunities, Moinian explains, treasurers will increasingly require dynamic, automated liquidity management solutions. Today’s liquidity instruments are structured around the current business day, but, as mentioned, the concept of ‘end of day’ and ‘cut off times’ will rapidly become obsolete. The need to develop new ways to manage liquidity will soon become a more pressing concern, not simply with auto-sweeps into the bank’s own money market funds, but the ability to establish and automate multi-provider liquidity solutions.

So, there is certainly a liquidity conversation to be had with banking partners off the back of real-time payments. But there has to be a significant focus on internal processes and procedures too, if treasury wants to make the most of instant payments.
 

Garnering the benefits

In fact, for treasury to reap the full rewards that instant payments can offer, there will likely need to be organisational and technological changes, with greater adoption of tools such as artificial intelligence and machine learning, says Citi’s Sinha. “No treasury team has sufficient resources to have people working 24/7!” 

As such, he says that treasurers looking to benefit from real-time payments would do well to take a step back and carefully design a new ecosystem for their treasury function – one that is no longer predicated on manual processes. “That means keeping in mind new technologies and the strategic direction of the organisation. Treasurers may also wish to consider whether they have any skills gaps in their team. And while this might sound like hard work when treasurers are already over-stretched, it’s actually an excellent opportunity to design the treasury function of the future, and a worthwhile investment of time.”

It’s not just treasurers who need to put in some groundwork to extract more value from RTPs, though. “In order to encourage adoption by corporates, especially in the B2B space, however, it is important for banks to work with the regulators to ensure that real-time payment schemes become mandatory in key markets. This is the only way to ensure maximum reachability, which is ultimately what treasurers want,” notes Sinha.

The challenge, as ACI Worldwide’s Ramsey explains, is that “most countries are focused on their domestic needs first, although there are a few regions where we see cross-border real-time payments being pushed. Obviously, in Europe we see SEPA Instant Payments, but also in regions such as ASEAN and Southern Africa there is a push to real-time cross border payments to help trading. Elsewhere, SWIFT’s global payments innovation [gpi] initiative is a step in the right direction – for SWIFT. But what we have today is only the start of that initiative and we will see more developments coming through to upgrade the messaging standards and reducing the payments time to move it closer to true real-time,” he explains.

Inevitably, these innovations and evolutions will take time to filter through to the market. But that is not an excuse for treasurers to sit back and wait for RTPs to go global before jumping on the bandwagon. After all, “treasurers shouldn’t have to work too hard to build a business case around RTPs,” says Ramsey. “With improved customer experience, improved data, collections and reconciliation, not to mention the speed of payments, RTPs will become the new normal for conducting business. And being an early adopter will help treasurers reap the rewards more quickly.”

Moreover, as Moinian points out, “real-time treasury is not five years down the road; it is starting to happen right now. By embracing the real-time environment, treasury could add significant value to the wider business – both from a risk- and value-management perspective.” So, when it comes to instant payments, the time is now.