VP Strategy at Kyriba, Bob Stark offers his insights into the current initiatives that are driving innovations in real-time payments.
Real-time payments are getting closer to reality. While there are more questions than answers at this point, we have seen this discussion evolve over the past year as innovations such as SWIFT’s GPI, Faster Payments in the U.K. and same-day ACH in the U.S. have all sought to reduce settlement and clearing times to within a day.
We are now seeing the development of real-time, instant payments projects – including low-value payments. Instant payments within the Eurozone (SEPAInst) are soon to be deployed and The Clearing House is developing an entirely new real-time payments infrastructure in the U.S.
There are numerous considerations that financial professionals should take into account and prepare for, however, as real-time payments come to fruition:
What are the use cases for real-time payments?
In the short term, instant payments will be another option to send funds. Treasurers will have wires, low value payments such as ACH or SEPA, and they will soon have real-time payment options, too. Real-time payments will have an increased cost associated with them, which, until cost efficiencies are fully realized with mainstream adoption, will restrict usage to certain scenarios.
Priorities for real-time payments will include funds transfers that have a significant urgency: 1) late payments, 2) refunds and 3) insurance claims. When a treasurer needs to send money right now, the extra cost will be easily justified.
Treasury teams can already foresee a role for real-time payments and could already build a payment policy that supports their use in the right scenarios.
Real-time payments will become the market standard
While the immediate future suggests real-time payments are a luxury, reserved for only the most urgent payment scenarios, eventually instant payments will become the market standard.
For better or worse, we live in an era that demands an immediate response (just watch the impatience of your children when waiting for an iMessage to change from Delivered to Read). Technology has enabled even greater immediacy in our personal and professional lives and, for payments, technology advances that allow payments to be delivered and settled in real time will have the same effect. Suppliers will know that you can pay an invoice in real-time and you will expect the same of our own customers. The evolution to real-time payments as a market standard will not take long once the technology is available and proven.
Implications for corporate treasury
The biggest advantage of instant payments is predictability. Knowing exactly when a payment arrives means you know when to send the payment. This optimizes cash so you aren’t tying up funds waiting for payments to clear.
A second advantage is where treasury can better support the supply chain. Programs such as supply chain finance will benefit from expedient invoice presentment, reconciliation and payment to take advantages of early payment discounts or, in the case of reverse factoring, term extension for the buyer. Real time payment systems, such as that being developed by The Clearing House in the U.S., will enrich the invoicing and remittance process in addition to offering the instant payment component. As a result, treasurers can add value by injecting liquidity into the supply chain more quickly – reducing supplier risk and simultaneously helping their own working capital.
What about fraud?
One of the biggest concerns that real-time payments brings for CFOs is the difficulties around fraud prevention. Because instant payments are transmitted and settled within seconds, there is no bringing that payment back once it has been sent.
This does not necessarily need to be a reason to avoid instant payments. However, the instant nature of payment settlement certainly heightens the need for CFOs and treasury teams to invest in better fraud prevention strategies.
Standardized payment controls across all systems and all payment types – ideally leveraging centralization strategies such as POBO, shared services, and payment factories – will remove the inconsistency in payment initiation and approvals that can otherwise be prey for fraudsters.
More importantly, fraud detection has also become more sophisticated with artificial intelligence and scenario-based algorithms screening payments in real-time to uncover suspicious payments before they are sent to the bank. This final line of defense, a backstop after all the payment controls have been tested, should be completely configurable to align with treasury’s payment policies. Whether screening is against payments that have been modified by certain individuals or irregular payment amounts based on a user-defined threshold, the ability to screen custom scenarios in real-time will provide the comfort CFOs and treasurers need to confidently leverage instant payments to their full potential.
How will treasury be able to use instant payments?
In the near term, corporates will leverage their banks’ instant payment services by transmitting payments from their ERP and treasury systems via direct connections, SWIFT or local bank protocols. Treasury teams will continue to rely upon their treasury system as a payment factory and fraud prevention tool just as they would today.
However, the anticipated emergence of distributed ledgers, cryptocurrencies, and the rise of fintech payment providers will create new opportunities to make B2B payments. The impending rollout of PSD2 in the Eurozone will create momentum for payment service providers offering abilities to send real-time payments not only through bank channels, but also outside of bank networks.
Treasury technology providers will have to adapt, ensuring that they provide a scalable and secure payments platform that enables corporates to leverage real-time, instant payments through their choice of payment channels and formats.