As the NACHA membership approves same day ACH, the global cry for real-time payments once again begins to make headlines. Not just for certain established business and banking networks. And not just settlements that are only completed three times each day either. No. It’s real-time payments that are being called for. And that means immediate settlement on all of payments all the time.
The good news is that in response to this demand, true real-time payment services are beginning to emerge. And, according to a new research paper from financial cooperative SWIFT, they promise to transform the payments landscape as we know it.
The SWIFT report – ‘The Global Adoption of Real-Time Retail Payments Systems’ – has been put together to examine the challenges that are preventing a meaningful widespread adoption of real-time payments in both B2B and B2C environments.
Immediacy matters to modern businesses, but the reality often proves to be a far cry from what is currently achievable for a lot of companies. As stated in the report: “The seemingly straightforward process of debiting one bank account and crediting another often takes longer than the physical movement of the goods.”
The Changing Landscape of Payments Clearing and Settlement
Large value inter-bank payments are often completed by real-time gross settlement (RTGS) systems. These are operated by central banks and are dealt with on a transaction-per-transaction basis for the purposes of minimizing credit risk.
This is not how it works for low-value payments, however. The “clearing and settlement of high-volume, low-value retail payments are usually batched and netted to optimize the use of central bank liquidity, and processed on a deferred settlement basis (DNS),” according to the report. “These functions are centralized at dedicated entities, known as automated clearing houses (ACH), which are operated by central banks, or by third-party service providers.”
Today, across the industry, the desire and the emerging trend is that ACH payment processes move away from end-of-day (or three times each day) batch processing, to more frequent settlements, with the ultimate goal being real-time. As the cost of technology begins to fall, transaction-per-transaction real-time settlements are becoming more realistic and practical for larger numbers of retail payments.
Businesses want the immediacy, the ubiquity, the convenience, the safety, and the value for money in the same way that they enjoy as consumers. Mobile technology innovations over the past decade have seen a rise in so-called “m-commerce,” where increasingly mobile phones are being used for the purposes of transferring funds. Mobile payments to friends, merchants, and utility providers can now all be accomplished on a smart, handheld device. Now the demand is for the same ease of use and speed to become the norm in the B2B realm, and no longer the exception.
The Types of Payments Suitable for Becoming Real-Time
Not all payment types are suitable for real-time availability and confirmation of the transferral of funds. The following chart from the report shows the difference in suitability between payment types.
As you can see, large value payments across the P2B and B2B segments are found to be the most suitable. B2B urgent invoice payments also score highly, as this will optimize working capital.
But, even so, the desire for immediacy has not yet transposed into the realization of it. As companies around the world have continued to innovate and hasten their ability to move goods in an accelerated fashion, the movement of money has simply never kept pace. Payments, frankly, are a late-comer to the real-time revolution, and have always proved to be too slow or too costly when it comes to speeding them up.
At last, financial institutions are becoming increasingly under pressure to meet all of the real-time payment needs of all of their customers – from the large enterprise to the SME to the individual consumer.
Real-Time Payments for Businesses
The transition to real-time payments will require investment in operational changes. From the report, once more:
“The emergence of digital payments, value-added services, and the push for immediacy are having a knock-on effect on underlying Payment Market Infrastructures, which were originally designed to process relatively simple payment information in bulk files, either at the end of the day or overnight.
To satisfy ‘immediacy’, the underlying payment systems would have to provide:
- instant and irrevocable debiting of payers’ accounts and crediting of payees’ accounts
- immediate confirmation to both parties that the funds have been transferred, and can be re-used immediately
- service availability on a 24/7/365 basis”
All of these things amount to one thing – additional expense. The report reveals that the UK-based Faster Payment Service – launched in 2008 as the culmination of almost a decade of work to improve the speed of payment processing in the UK – spent an estimated £800 million ($1.2 billion) on the initial investment of the initiative, and the ongoing costs of the system.
It was a slow start for the first-mover initiative in the early years in the UK, due to a general lack of customer awareness, incomplete reach across accounts, and inconsistency of bank offerings – some would offer the service online with transaction limits of several thousands of GBP, while others would only offer far more limited services. Over the years, however, consistency has improved, which has resulted in the strong annual growth of 20% of one-off payments. Now, 90 million accounts are available to receive payments via the Faster Payment Service in the UK – and the success of this program has created a groundswell of demand around the world.
Visibility and control to improve predictability and reduce risk while optimizing working capital and cash flow is what buyers and suppliers want. Real-time payments goes a long way in making that possible, and they want it now. In our next installment in this series, we’ll be taking a closer look at the actual adoption rates of real-time payments around the globe on the heels of the UK’s Faster Payments scheme, the key drivers of adoption, and the differences in how the clearing and settlement processes of real-time processes work across the varying available systems. Stay tuned.