Real-time payment schemes have already transformed the consumer payments arena. Christof Hofmann sets out progress so far and the opportunities for organisations prepared to invest in the infrastructure
The treasurer of an oil refinery smiles to herself as she heads out into the Californian sunshine, after the successful receipt of a shipment of Alaskan crude oil on time again. Not so long ago, the shipment would have sat in the harbour until payment had been settled and confirmed, meaning late nights and – at worse – a fear that parts of the refinery would have to be shut down and restarted due to a lack of oil, incurring potentially significant costs. But today, the transaction was settled via an instant payment. The funds were transferred within seconds of the instruction being sent and both the treasurer and her supplier received the notification just a few seconds later – meaning the shipment could be loaded into the system without delay.
Our treasurer’s scenario still lies some time in the future, as this is not quite yet today’s practice. An example that is perhaps closer to the present day is urgent domestic payments made within minutes. But they are more expensive, come without credit confirmation, and do not work at weekends or outside office hours.
Instant payments’ journey so far
Market infrastructures around the world have developed instant payment clearing solutions of varying descriptions since the early 1970s, but few have had the 24/7 functionality that is growing in prominence today. Business-to-business use of these schemes has also often been restricted by low upper limits on transaction amounts.
There have been exceptions. The UK’s Faster Payments Service (FPS), for instance, was launched in 2008 and now stands as a relatively mature instant payment scheme of use to both private and corporate clients. While the scheme’s general service level agreement allows for execution within two hours to give the beneficiary bank time to perform certain regulatory checks, this is the exception and, in general, payments are executed within 1.5 seconds. The maximum amount for FPS transactions, meanwhile, has grown steadily since 2008, now standing at £250,000, with banks having successfully trialled transactions in tens of millions. If the Bank of England were to agree to a further raise, this amount could set the new benchmark for instant payments.
Though still relatively new, India’s Unified Payments Interface (UPI) is a more recent success story. Despite the low transaction limit of INR100,000 (equivalent to around €1,250), the system has grown rapidly since going live at the end of 2016, with 674 million transactions processed in February 2019. For the same month, the monthly transaction value of UPI reached INR1,067bn (approximately €13.5bn).
The noise around instant payments has increased further in recent years with the introduction of the SEPA Instant Credit Transfer (SCT Inst) scheme in Europe, which not only caters for domestic instant payments, but also facilitates transfers right across all the SEPA countries (36 countries and territories, encompassing the 28 EU member states plus Iceland, Norway, Liechtenstein, Switzerland, Monaco, San Marino, Andorra and Vatican City). At the same time, a number of Nordic banks are working to establish a similar architecture for the krona countries (Denmark, Sweden, Norway) and Finland.
While instant payments have yet to hit their stride in the same way in the US, a small number of banks are now live on the new Real-Time Payments system (RTP),1 which was designed and launched by The Clearing House in late 2017 for corporate transactions.
Demand for these instant payments schemes has typically been driven by the retail and peer-to-peer sectors – but this is changing. More and more corporates are integrating them into their payments processes to benefit from increased visibility over funds, as well as certainty and finality of payments. The advantages of instant payments can be felt right across the business, from tightening procurement processes and improving customer experiences through to fast delivery or instant refunds.
transactions processed in April 2019 by India’s UPI
In an instant
Not so long ago, banks would only provide confirmation of successful payment as a premium service, while the delay between the payment instruction and receipt by the end beneficiary meant that the concept of a ‘cut-off date’ had to be built into payment schedules. Now, by sending payments just in time, rather than days ahead, companies can improve working capital – allowing for more precise funding, cost reductions and the maintenance of facility headroom.
We can visualise further benefits in working capital management. Global drinks companies selling to cafés, bars and restaurants are a classic example of the interchange between big suppliers and small buyers. On the one hand, global consumer brands are under pressure to grow sales while managing credit risk. On the other, independent food and drink outlets need to balance limited access to funding and credit with the need to have sufficient stock to meet rapidly changing demand. With instant payments, cafés and bars will receive funds from customers in real time. They will then be able to use those funds to purchase and pay for the additional stock in real time to meet unexpected peaks in demand. The result is a win-win for both the big supplier and the smaller buyers, as both benefit from sales growth and improved working capital management.2
The mere existence of instant payments can help treasuries with their collections, while the old excuse that the payment has been sent and is ‘on its way’ will no longer wash. Equally, instant payments can help customer service. Insurance companies, for example, often deal with clients that need reimbursement at short notice, prompted by unforeseen events. Customers used to long delays between the filing of their claims and the resulting payout will likely be easily won over by a company that can make good on claims in a fraction of the time – something instant payments make increasingly possible.
IA The full package
By investing in a treasury infrastructure that can register payments and track funds in real time, corporates can combine just-in-time payments with a dynamic picture of their cash positions. Having a real-time picture of what funds are in an account, and what will be going in and out when, should see corporates making better use of their liquidity buffers. With instant payments able to cover for any shortfall of liquidity in a matter of seconds, keeping accounts topped up just in case is no longer necessary – leaving corporates free to deploy capital elsewhere.
"By sending payments just in time, rather than days ahead, companies can improve working capital"
There is even potential to marry the benefits of instant payments with those of APIs – maximising the benefit of new payment models such as ‘push’ payments where banks can benefit from the new role of Payment Initiation Service Provider (PISP) stipulated by the second Payment Services Directive (PSD2). Under the regulation, authorised PISPs that have been given consent by a payer are entitled to gain access to that payer’s account, check they have sufficient funds, and then initiate a payment directly to the payee account.
This represents a significant improvement in the payment process for companies used to receiving large numbers of online card payments, which can take several days to process and incur additional costs through card fees.
Despite the clear benefits of instant payments, a number of hurdles lie ahead. Foremost in many treasurers’ minds will be the need to minimise transition costs. Yet, as we have seen, many of the benefits may not necessitate the drastic levels of surgery that often come to mind when IT upgrades are tabled.
Banks can also take steps to help their clients accommodate the technology – adapting their own portals, for instance, to enable corporates to reconfigure their proprietary files in the required payment format, rather than having to recreate them from scratch in a new system. Furthermore, banks can work with the ERP and TMS providers to have the instant payments initiation via API integrated into their systems.
Transaction caps and security measures on the rise
Cautious chief financial officers will rightly raise other questions, with low transaction caps probably top of the list. When the UK launched FPS in 2008, transactions were initially capped at £10,000 (which might be fine for individuals); but a significant barrier to corporates used to dealing in far larger denominations. In 2015, however, the FPS limit was (as mentioned above) increased to £250,000.
What’s more, Europe’s SCT Inst, which currently only supports real-time payments of up to €15,000, has stressed that the cap is only an initial limit and the European Payments Council’s governance process specifies that “the Scheme Management Board will formally analyse once a year if there is a need to adapt the maximum SCT Inst Instruction amount”.3 In the meantime, it can be changed for a higher maximum amount if individual banks come to a mutual agreement either bilaterally or multilaterally.4
The security of instant payments has also come under scrutiny. If a payment can be made immediately, then a fraudster can similarly use malware to hijack user sessions and move money to an unintended recipient at the same speed, without the window for banks to halt the payment.
So how can banks address the issue? Simply, heightened risk is being met with heightened caution. A central part of the instant payments process is ensuring that all the necessary checks – sanctions checks, embargo screening, fraud checks, funds availability, booking and reporting – are all completed within the timeframe of a few seconds, while all corporate transactions are recommended to be reviewed by at least two people (the ‘four eyes’ principle). In short our mantra is: if in doubt, reject it. Already, we are seeing payment providers building their own ‘white lists’ that identify transactions that meet the criteria for rejection under the banner of heightened caution, but that have been demonstrated to be non-fraudulent.
"The old excuse that the payment has been sent and is ‘on its way’ will no longer wash"
Beyond this, the payments authorisation process is becoming increasingly rigorous. PSD2, for instance, mandates that banks enforce a two-factor authentication system, requiring two of the following to make a payment:
- Something they possess (a smart card or mobile phone, for example);
- Something they know (such as a password or PIN); and
- Something that is unique to them (such as a fingerprint).
This reduces the risk created by stolen data and passwords, making it increasingly difficult for fraudsters to falsify credentials.
New payment order
While security and payment caps pose challenges to the further adoption of instant payments, these are outweighed by the better payment experience – from dynamic payment updates with confirmation as standard, through to innovative, streamlined payment rails – at a fraction of previous costs. For corporates, this makes the investment worth it many times over.
Christof Hofmann is Global Head of Payments and Collection Products, Cash Management at Deutsche Bank
Instant payments can be a differentiator for corporates to improve the experience of their clients, particularly for corporates with direct consumer relationships
Immediate notification of payments promotes transparency:
- Reduced need for large liquidity buffers
- Clearer picture of cash positions
- Better understanding of financing needs
Immediate execution of payments enables payments to be made ‘just in time’, meaning businesses can:
- Eliminate cut-off times from their payment schedules
- Take advantage of short-notice opportunities
Collections can no longer be held up by buyers claiming that unmade payments are simply being processed slowly
Areas of caution
Low maximum amount of instant payments currently limits their use – particularly for larger businesses
Instant execution leaves no time for banks to stop and recall payments once they have been approved
Consumers who are able to pay in real time to corporates may expect the corporate to react in real time, while it is not capable of doing so
The client’s payment initiation processes will have to be migrated from daily payment run and batch transmission to immediate single payment initiation as and when the decision to pay was made. For a lot of corporates this is a major change
1 See https://bit.ly/2PBfgBf at theclearinghouse.org
2 See page 10 of Deutsche Bank’s The road to real-time treasury at https://bit.ly/2MR8N7M, cib.db.com
3 See https://bit.ly/2WmXNAm at europeanpaymentscouncil.eu
4 See page 6 of the EPC proposal for the SCT Inst scheme at https://bit.ly/2UWvLeC, ecb.europa.eu
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