As we discussed in the last article, whatever you may call it; immediate, instant, real-time and faster payments* are terms that signify an irrevocable payment type that is available 24/7/365 with value and confirmation of payment delivered to the payee within seconds. This trend is being driven by a number of factors, such as regulation, infrastructure modernisation, and consumer demand for faster, cheaper electronic payments that match their daily experience of ‘always on’ digital services. Faster payments use cases aren't always clear and obvious, however, so let’s take a look at some of the more common applications. Large scheduled batch payment processes, such as standard monthly payroll, or weekly/monthly Accounts Payable for moderately-sized businesses, are not likely to migrate across to faster payments in the short to medium term. With payroll in particular, there are no real benefits of moving it away from the current model.
In fact, having a buffer of time available to fix errors or cancel and resubmit payroll when last minute changes are needed removes some of the stress from the process. Where a business needs to pay an employee or contractor outside of the usual cycle of payroll, a real-time payment allows a payment to be made immediately, at any time. Such payments may help workers in the restaurant sector for example, or where workers are hired seasonally for unspecifiable periods of time. In the area of Travel and Expenses, an immediate payment can allow an employee to be reimbursed before their expenses credit card becomes due. ACH will more than likely prevail in these areas, largely because of item charges and the changes needed to accounting and payroll systems to accommodate on demand payment processes. For small-to-midsized business, however, where cash flow is more critical, relationships with suppliers are less established, or where reasonable credit terms are less available, faster payments is more likely to become a compelling proposition. With e- or mobile banking applications, faster payments becomes a viable alternative to card. It’s more attractive for the merchant/supplier who doesn’t have to deal with an acquirer, and is also attractive to the buyer because it supports “just-in-time” ordering of goods and allows payment of invoices at the last possible moment, which allows for more manageable cash flow.
More ubiquitous use of real-time payments in B2B will come from the ability of new messaging standards that carry more information in the end-to-end payment process, and development of ‘request-to-pay’ services that make it easier for bills to be presented and paid from the same application. In the Business-to-Consumer area, faster payments present opportunities to fix or improve a number of current business processes. In financial services, finance for goods or services backed by a loan, such as credit finance for a car, can be paid immediately to the dealer, allowing quicker or even immediate access to the vehicle, without having to handle cash, pay card fees, or wait for a check to clear. Insurance will also benefit, as pay outs can be released as soon as the claim settlement is agreed. Where the consumer is in control of the payment, real-time payments offer workable alternatives to traditional methods in a number of instances. For a small business or sole trader, having the ability for customers to pay immediately from their bank account eliminates the acquiring bank settlement delay by removing cards from the process entirely. At point of sale (POS), however, the current card process has advantages in terms of ubiquity and customer trust built over many years, not to mention the availability and cost of changing POS hardware. Pay-by-bank services, which try to replicate the card experience at POS but use payments directly from the buyer’s bank account, are gaining traction slowly thanks to growing popularity of near field communication mobile phone payments, but they are unlikely to displace cards.
Open Banking initiatives globally, with banks opening up payment initiation to regulated third parties (enabling the retailer to initiate a payment on the customers behalf, directly from the customers bank account with their permission), may see larger retailers be more willing to offer non-card, non-cash payments to their customers. The uses described here are just a small representation of the overall applications of faster payments that are possible, and regulatory, economic, and cultural, and technology factors will all work towards country specific exploitation of faster payment services. Countries adopting faster payments now are learning from the first wave of mass-use services and are typically implementing the payment scheme with services such as ‘request to pay’ and use of common file formats that are able to carry much more remittance data, making it possible to achieve easier billing and reconciliation. Open Banking initiatives (PSD2 in EU, Open Banking in UK, others globally) being introduced either through regulation or through market demand, will be especially useful in exploiting real-time payments. More to come as the industry continues to evolve and new use cases make themselves apparent. *As before, worth noting that Same Day ACH (e.g. NACHA, and SEPA specific same day schemes), although clearing quicker than standard ACH, do not fit into the general definition of ‘Faster Payments’ which will be the focus of this article.