Instant payments, or real-time payments depending on your preferred nomenclature, have come a long way in the U.S. There was a time when the only “instant payment” was the exchange of physical cash from one person to another person in close proximity.
However, the past few years have seen payments innovation go into hyperdrive. Arguably these last five years have seen more payments innovation than in the last five decades combined.
A recent whitepaper from Wells Fargo, titled “Instant Payments: Enabling Better Business Experiences,” outlines how much of that innovation has been driven by digital, real-time payments. Instant payments began in earnest in the consumer space with digital, peer-to-peer (P2P) payments services such as Venmo and Zelle. Consumers now expect payments to be digital, instant, reliable, and secure.
That’s why it is imperative businesses of all sizes take advantage of real-time payments. This is not only to please customers but also to help with their own cash flow and liquidity. It will make employees happier and more loyal.
The Massive Growth of Digital, Instant Payments
The average consumer has been increasingly trained to use digital payments services in recent years. Even those who resisted this trend became digital payments adopters during the pandemic. The physical exchange of cash was discouraged. It’s perhaps no surprise then that 92% of small businesses now accept contactless payments — up from 67% in 2019. This is according to Mercator data outlined in the Wells Fargo whitepaper. Meanwhile, three-quarters of consumers have taken advantage of P2P instant payments service in 2021. Instant payments are now the expectation.
According to Wells Fargo’s head of Enterprise Payments Strategy, Ulrike Guigui, “Today’s customer expects a payments process that is simple and immediate. Now that digital, instant payments are widely available, consumers — as well as a business’s suppliers and partners — expect to be able to use them across almost all transaction types and businesses.” In response to their customers’ changing expectations for speed and convenience, businesses must embrace instant payments to meet customer demands.
Instant payments also provide greater data options so businesses can have a plethora of new information that can accompany these payments, helping businesses reconcile the payments more quickly and gather greater data intelligence about the transaction, added Sarah Grotta, Director of Debit and Alternative Products at Mercator Advisory Group.
Types of payments are based upon a different type of data standard, Grotta continued “and that gives you a little bit more information you might see in your statement or your summary of transactions that involve cards. You might see the merchant name or an abbreviated name of the merchant. You know the date, the time, that sort of thing — faster and real-time payments take it up to the next level.”
Liquidity and Cash Flow
In the current economic climate of rising interest rates and inflation, cash flow is more important than ever, especially for small businesses. Some estimates say that the average small business has around 30 days of cash on hand. The ability to receive payments instantly — from not only customers but especially suppliers — can greatly ease this concern. For example, the average outstanding invoice for businesses is 36 days, according to Trade Finance Global. This means many businesses may have to take out loans to cover expenses while waiting to get paid. Meanwhile, there is also a lot of manual, time-consuming work involved: accounts teams generally create a paper invoice, file it, fetch it when chasing, and then keep track of its status as the team waits for payment — multiplied by however many customers or suppliers the team has to manage.
According to Wells Fargo, the ability to have instant access to incoming payments can give businesses cash when they need it. “Timely access to working capital gives a business more options for payments and operations,” said Guigui. “Instead of borrowing capital or delaying spend, businesses can use liquidity to help pay down debt, fund strategic initiatives, or simply strengthen the balance sheet in order to be in a better position to pay suppliers and employees.”
Simply put, instant payments can reduce uncertainty from payment delays and boost working capital.
“Merchants may be taking different types of card payments at a merchant terminal,” added Grotta. “There are use cases and solutions in the marketplace today where that merchant could … [receive] the deposits from those card payments that same day … rather than waiting until the next day or waiting over the weekend until the following week.”
Instant Payments to Employees
Current economic conditions don’t apply only to businesses, but workers, too, especially low-to-middle-income employees and gig economy workers. Many employees need immediate access to cash, which has driven the rise of earned wage access services in recent years. Many employees simply do not want to — or can’t afford to — wait every week or two to get paid.
Increasingly, employees want to get paid daily or even hourly, accessing their pay in real time as they earn it. These workers may have varying daily needs that require instant access to earned wages right after the work is performed, at the end of the shift, or upon completion of a project. In fact, 78% of U.S. workers said that no-fee access to on-demand pay would increase their loyalty to an employer, according to the whitepaper by Wells Fargo.
Finding the Right Instant Payments Solution
In the U.S. there are several instant payments solutions to choose from. There are several factors for businesses to consider when choosing. First you must consider what meets your business’ needs. Some solutions, for example, settle payments instantly and others settle the next day.
It’s also important to determine what solutions best meet customers’ needs, which include factors such as user experience (UX) and specific features. The analysis of which solutions customers are most likely to find valuable is a worthwhile exercise in settling on the right solution.
Finally, businesses must determine which solutions will be the easiest to integrate. Setting up the instant payments process should be seamless and easy for not only customers but businesses as well. Ultimately, solutions that are straightforward and seamless are the ones that will win in the coming years.
In the next 12 to 18 months, Grotta predicted there will be more and more announcements from financial institutions “on new ways to utilize real-time and faster payments that have benefits for businesses and consumers.”