Are Real-Time Payments on the Horizon for U.S. Businesses?
Author: Russ Oatman, Sr. Vice President, Treasury Management
According to a recent report, more than half of businesses increased their usage of digital services for B2B payments as a result of the COVID-19 pandemic. Digitization makes it possible for companies to send and receive electronic payments, which reduces reliance on paper checks and opens the doors to faster payments.
Electronic payments, however, aren’t the only piece of the puzzle when it comes to creating a more efficient process. In the absence of an end-to-end payment solution, many businesses still report lengthy payment cycles are the norm and that late payments are on the rise.
By some reports, 43% of the total value of issued invoices were still unpaid by the due date in 2020. Late payments can have a trickle-down effect on the economy, as businesses are often forced to delay their own payments for goods and services due to overdue invoices.
This trend comes at a time when consumers are adopting real-time payment (RTP) services to manage personal finances. RTP solutions allow individuals to transfer bank funds to people they know and trust in an instant. Transactions happen in real time, which is another way to say that funds are immediately transferred.
As consumers adopt RTP systems to manage their personal finances, these expectations naturally flow into how people manage their business finances. RTP has the potential to revolutionize B2B payments in several ways and implementation could be just around the corner for business entities.
Currently, companies can take advantage of some commonly accepted “fast” payment rails, such as ACH or wire transfers, but these payment methods are not as fast as RTP. ACH transactions, for example, are made in batches, meaning that businesses must wait until the bank transfers its payment batch to the ACH operator, the organization responsible for sending payments to the receiving bank.
On the other hand, real time payments occur within seconds and can be made around the clock, not just when the bank is open or processing transactions. Payment confirmation is also immediate, with both sender and recipient receiving acknowledgement of the payment.
In fact, the level of detail facilitated by RTP offers another advantage to businesses. With RTP, payments utilize the ISO 20022 financial messaging standard. The richer data included with ISO 20022 improves straight through processing and reconciliation and results in lower costs for businesses. ISO 20022 also facilitates faster payments.
For example, SWIFT estimates that 10% of international payments are delayed for compliance checks, most resulting from false positives due to insufficient or poor-quality data. The trouble stems from outdated payment standards that prioritize message size over data quality.
ISO 20022 reduces issues like these by facilitating greater message detail and a higher standard of quality. Companies are also able to dispute payments by line item rather than rejecting an entire payment. The conversation occurs within the payment system, allowing for faster resolution of payment terms.
RTP may also eliminate many of the ambiguities surrounding cash flow projections and financial forecasting. With greater control over the timing of payments, businesses can gain a more accurate understanding of their current cash positions. Payments are irrevocable, reducing the likelihood that payments can be cancelled after goods have shipped.
However, for the near future, experts agree that RTP will have limited application within business AP and AR processes. At present, RTP is most likely to be used for one-time B2B payments. For example, an insurance company that needs to settle a claim quickly, or a business wanting to pay an overdue invoice, could initiate a real-time payment on a one-time basis.
Given that ACH is a secure payment method that offers cost advantages for reoccurring payments that can be scheduled in advance, it isn’t likely that RTP will be used in situations meeting these conditions, such as paying salaried employees.
While more than 20 countries internationally, including the UK, now have access to RTP systems, development across the U.S. has been slower. Visa has implemented a RTP platform to support its ecosystems of clients and partners. However, payments must be made by card.
The Clearing House (TCH), a firm owned by 24 of the largest banks, also operates a real-time payment rail for individuals and corporations. However, in order to utilize the system, businesses must initiate payment through a bank that is connected to the TCH payment rail. As of mid-2020, the network included 29 financial institutions.
However, efforts by the Federal Reserve’s FedNowService may soon open more doors to real-time payments. Given that the Fed currently has relationships with 10,000 different financial institutions, the FedNowService could connect nearly all American banks, allowing consumers and businesses alike to send up to $25,000 per payment instantly. The Fed anticipates launching the FedNow Service as early as 2023, a move that could grant businesses the advantages of real-time payments within the next few years.
For now, we continue to monitor developments in the RTP space and evaluate how it can be used effectively for business.
About the Author
Russ is the Senior Vice President of Corporate Treasury Services. He and his team are responsible for providing innovative payment solutions to commercial clients nationally. His responsibilities include managing customer relationships and developing new products that enhance client accounts.