For businesses of any size, maintaining a smooth cashflow has always been a key priority. In fact, according to recently published research in the Bottomline Business Payments Barometer, 69% of businesses in the UK and 73% in the US reported that receiving money quickly has never been more important. But what many do not realize is the key role real-time or instant payments can play in resolving wider cashflow issues.
Such payment methods enable companies to hold on to money longer, while still paying staff and suppliers on time. That explains why 60% of US businesses claim to have adopted real-time payments, and a further 25% state they plan to in the next 12 months. In comparison, just under half of those interviewed in the UK (48%) say they are using real-time payments, with annual adoption remaining steady at 35%. Although the rates of adoption are impressive, there remains a large chunk of businesses unconvinced of the benefits of real-time payments. It is also questionable whether companies are referencing true real-time instant payment rails or same-day ACH, wire and card payments. In the US, the most popular example is The Clearing House’s RTP network. The Federal Reserve’s real-time solution, FedNow, is due to launch in 2023 and will also fall under the definition of a real-time network.
The Argument for Real-Time Payments
Irrespective of the pace of adoption, many businesses remain skeptical. SMBs typically operate on very thin margins, so the ability to hold on to cash for as long as possible generates resilience, reduces credit risk through near real-time settlement and provides opportunities for innovation to satisfy customer demand. The main obstacle currently is a lack of education, with almost a third of US respondents claiming they have no need for it, and over a quarter saying they are unsure of the benefits. This is similar in the UK, with a quarter of respondents having no need and a fifth unsure of the benefits.
Within the industry, we also hear concerns about fraudulent transactions. Faster payments mean faster fraud. The report shows that fraud is still a genuine concern – and is becoming more of an issue in the wake of the pandemic and changing working habits. While real-time payments are not more vulnerable to fraud than other payment methods, such as checks, credit cards or bank transfers, real-time payments are irrevocable. If the payment has been fraudulently redirected, there is no way of recouping that loss. Real-time payments also have the huge advantage of being fee-free and instant, unlike credit cards where merchants will routinely charge 3% interchange fees per transaction and may not transfer funds until the end of the day.
Clearly, banks and the industry at large need to demonstrate how instant payments can positively impact a business’s liquidity. Banks must ensure they offer real-time payment services as a matter of course so it becomes simple for corporate customers to begin using them. If commercial banks miss the window of opportunity, there are plenty of hungry fintech providers and vendors waiting to lead the charge with their own software.
Real-Time Payment That Embraces Chat
Real-time payments are the only payment method to include ancillary data attached to the specific payment transaction, which means an electronic record is automatically created for each payment rather than a long and complex physical paper trail. This not only eliminates waste, but it also saves the accounts receivable team the time and effort of monotonous paperwork, reconciliation and chasing.
Traditionally, the accounts team would create a paper invoice, file it, fetch it when chasing, and then keep track of its status as they wait for payment – multiplied by however many customers or suppliers they have to manage. It is a draining and repetitive task, prone to human error. By incorporating these messages, real-time payments eliminate all this at a stroke, making every transaction more traceable and transparent.
The Role of the Fed and Interoperability
The Fed has a trusted position in the US as the processor of choice for smaller, regional banks. Following the creation of a Faster Payment Taskforce, it is launching FedNow, a new instant payment service enabling financial institutions of every size, and in every community across the US, to provide safe and efficient instant payment services in real-time, around the clock, every day of the year.
To drive adoption, it needs private-sector alternatives in the market, such as The Clearing House and Zelle. The challenge now is to ensure that this service is interoperable with these private providers. Thankfully, the Fed and The Clearing House have a historical blueprint detailing how to ensure it works, based on lessons learned from creating the national automated clearing house (ACH) network.
The Future of Payments
Real-time is a simple proposition, which boosts user security while increasing speed and system stability. It removes costly interchange fees associated with cards and leaves money in businesses’ accounts until the last moment, instead of having to release it to cater for batch processing dates. Whether it is just-in-time payments, direct remittances, customer refunds, or even daily payroll runs and expense payments, the option of making an instant payment is clearly going to have a significant impact on how businesses manage their money, now and long into the future.