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Cash & Working Capital

Real-Time Payments Upheaval Seen in 2017

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January 02, 2017

This year should see the start of a real-time payments revolution.

financial system softwareAn existential question for corporates: zero-balance accounts and sweeps that require tallying cash balances at the end of the day before making payments or investing money overnight, but what happens if there’s no end to the day?

Companies may have to address those types of questions sooner than they think, along with a range of financial and operational issues that will accompany faster payment solutions that have already started unfolding.

On September 23, 2016 NACHA, the Electronic Payments Association, launched same-day ACH payments without a hitch. In addition to clearing and settling payments in traditional overnight batches, the long-time network for financial transactions now offers payment submission deadlines at 10:30 a.m. ET and 2:45, with settlement occurring within 2 1/2 hours. For now it only offers credit transfers, but it plans to enable same-day debit transfers by September 15, 2017 when it will have additional controls in place.

Debit transfers, such as a mortgage company automatically debiting a mortgage payment from customers’ accounts, present more uncertainty about whether the payer has sufficient funds as well as more potential for shenanigans by fraudsters.

The Society for Worldwide Interbank Financial Telecommunication (SWIFT) has been piloting its Global Payments Initiative (GPI) with 21 banks, some of which allowed corporate clients to participate, and several of the 90 or so banks that have signed on will begin using the service in first quarter of this year. Like ACH’s same-day payment service, SWIFT is essentially upgrading its current system, in its case a wire service that corporates can use to transfer funds to overseas destinations.

SWIFT, however, already operates in close to real-time, so its focus is providing greater transparency into the current status of payments and the fees attached by correspondent banks in its network, and to ensure that the full string of information accompanying a payment makes it through to the payee. Today, that information can arrive truncated, inhibiting straight through processing and at times even eliminating the payer’s name, sending accounts payable staff on frantic searches.

The elephant in the room will be The Clearing House’s Real-Time Payment (RTP) initiative. Also starting a pilot in fourth quarter 2016, RTP settles credit transfers in literally seconds and may be the first of several faster payment solutions emerging in 2017. In fact, the Federal Reserve established the Faster Payments Task Force (FPTF) in 2015 to facilitate and accelerate—not mandate—the development of faster-payment solutions, which 20-odd other countries have already implemented or soon will. The task force is currently analyzing 19 solutions, including RTP, and plans to come out with a report in February describing the process it is taking to identify and assess them. In mid-2017, it plans to publish its assessments and recommendations for proceeding forward.

Some of those solutions may proceed sooner if, like TCH, they haven’t already. The TCH system has been built on technology by VocaLink, which provided the infrastructure for the UK’s and Singapore’s real-time payment systems. The US, however, has the most complex financial system by far, with thousands of banks and other financial institutions, increasing the potential for operational risk and fraud. Consequently, again like the ACH’s same-day payments, it will first limit payment size to $25,000.

Rick Burke, head of corporate products and services at TD Bank, said that recent feedback from corporate customers suggested the size limit could impede some companies from taking advantage of the faster-payment options.

“The change they would most like would be no limit at all,” Mr. Burke said, noting that corporate processes don’t necessarily segregate payments by dollar value, requiring them to cull transactions that don’t qualify and creating inefficiency.

Both NACHA and TCH, however, anticipate raising those limits within fairly short order, much as the UK did.

RTP and similar real-time payment systems are likely to fundamentally change the payment landscape for corporates. Since its payments are cleared and settled within seconds, those funds will be final and irrevocable almost immediately. Cash flows will be more predictable and working capital used more efficiently.

In addition, RTP is designed to work 24 hours a day, seven days a week, all year. Ultimately, that means corporates’ customers should be able to pay utility or other bills over the weekend, at the last minute, without incurring penalty fees. And companies will be able to pay vendors as soon as supplies are needed, making just-in-time inventory more than just a goal.

Those are some of the benefits, but it won’t come with a snap of the finger. Banks will do most of the heavy lifting in terms of facilitating the actual real-time payments, but corporates will have a lot on their plate as well. Linda Coven, a senior analyst with Aite Group's wholesale banking and payments practice, said that corporate management may believe there’s little rush to be concerned about real-time payments. However, companies including Dwolla and clearXchange’s Zelle have developed systems and worked with banks to provide already functional person-to-person and bill-pay (C2B) real-time payments, and an executive at a supplier who receives one of these payments is likely to inquire about immediate corporate payments.

“How can a company then instruct customers that it can’t post their payments in real time?” Coven said, adding that consumers will likely apply pressure in other ways, too. “Once consumers are exposed to real-time payments, they’ll expect credits to hit all their accounts in real time.”

For that to happen, however, significant changes will have to be made to companies’ financial and enterprise resource planning systems. While big companies have invested large sums to automate the receivables process, that process still tends to be batch oriented, Ms. Coven said. Banks and other technology providers will no doubt view real-time payments as a business opportunity, and they’ll seek to develop a plethora of APIs to bridge new real-time payment systems with corporates’ existing financial infrastructures.

Ms. Coven added that another area to consider will be contracts between corporate buyers and sellers, since they will have to be adjusted to acknowledge real-time payments as the appropriate method. “Once they can do real-time payments it will be very appealing, giving them much greater control over cash flow and the advantage of rich data. But much will depend on how much banks end up charging for expedited payments,” she said, noting the cost of RTP payments will likely fall somewhere between ACH and wire payments.

Then there will be the more profound issues to deal with. Today’s batch systems have resulted in companies developing systems to tally up their finances at the end of the day, process them overnight, and start afresh the next day. How will companies set their positions, and how will they determine available liquidity when payments are constantly coming and going 24/7?

“It could be that the market will decide there’s still going to be an end of day, and after a weekend of transactions files won’t be sent out until Monday morning,” Ms. Coven said. “Those are the kinds of really challenging questions that corporates will have to ask themselves. But that’s not being talked about today.”

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