By the end of 2017, corporates operating in the US should be able to send payments, debit customers’ accounts, and settle those transactions in real time or at least on the Real Time . They may not be able to make those faster payments with everybody early on, but the institutions building the payment systems have plenty of incentive to achieve ubiquity as soon as possible, given both anticipated demand and the regulator’s efforts to foster competition.
Numerous faster-payment initiatives have sprouted in markets outside the US in recent years, often government-mandated and limited in scope for the types of payments offered and their hours of operation. Canada, for example, has already implemented a real-time business-to-business (B2B) payment system that operates five days a week within business hours, although Payments Canada (formerly the Canadian Payments Association) is pushing for six days.
With fewer than 100 domestic banks and foreign bank branches, Canada’s financial system is relatively simple. The US has more than 6,000 banking institutions that must participate if the payment system is to be ubiquitous, ensuring the predictability of payments that corporates require.
For that reason, the Federal Reserve established the Faster Payments Task Force (FPTF) in 2015 to facilitate market participants’ pursuit of faster payment solutions. A recent progress report stated that it remains on target to complete an assessment mid-year of 19 faster-payment proposals.
Several of those proposals support person-to-person (P2P) payments, including system providers Dwolla and clearXchange, and they have worked with banks to provide payment solutions between individuals. Those transactions, however, are relatively small and often don’t include the detailed information corporates require to process payments.
US Bank and others, for example, have worked with clearXchange to develop a business-to-consumer (B2C) service enabling businesses to pay registered consumers using their email or mobile phone numbers. Laura Listwan, head of the new product development team for US Bank’s global treasury management division, says the clearXchange service works well in the P2P environment and certain B2C situations, such as with infrequent payees where collecting their bank account information is unwarranted.
Only one FPTF proposal focusing on B2B payments has so far been made public; that is The Clearing House’s (TCH) real-time payment (RTP) initiative, which is in the early stages of being rolled out. Although not a FPTF proposal, the National Automated Clearing House Association’s (NACHA) Real-Time ACH initiative was launched last September to enable credit payments and plans to offer the ability to debit customers this autumn.
More work needed
Faster payments appearing in corporate bank accounts in real-time, or close to it, will be a boon in terms of giving companies more control over their cash flow and working capital. However, it’s also going to require a lot of work, adapting financial and enterprise resource planning (ERP) systems to reflect payments and post them to the payment sender’s account.
“A lot of people pay bills Saturday morning, but until the telephone or other service provider adapts its system it probably won’t post to the sender’s account until sometime Monday,” says Linda Coven, a senior analyst with Aite Group’s wholesale banking and payments practice.
Listwan reports that the prospect of more faster-payment capabilities has prompted corporate clients to re-examine their working capitals strategies, in part because they will have more transparency into the reconciliation process. Clients are also excited about the 24-hour, 365-days-a-year nature of the faster payment initiatives, so their customers can make payments over bank holidays or weekends.
Some corporate ERP systems are designed to work on a batch basis and can’t process payments in real time – so while the payment may show up in the company’s bank account, clients may not be able to see it was made until the next day. Even if those companies can’t yet afford to upgrade their systems, they still welcome the new faster-payment capabilities, says Listwan. “They’re still interested in the real-time payment status information it provides, because if customers call in they can immediately say, ‘yes,’ the payment has been made or is in process.”
The currently more prevalent P2P services that consumers are already using are anticipated to push demand for faster adoption of B2B payment services. B2B payments made up 32% of Real-Time automated clearing house (ACH) payments in the fourth quarter; the largest percentage of Real-Time ACH payments, at 52%, were direct deposits – a total of 6.8m – followed by P2P payments at 13.5%.
Direct deposits are B2C payments, such as businesses paying employee payrolls and insurers paying claims, and Real-Time payments serve to put the business in a positive light.
“Customers often call with the expectation that they will not get what they want,” says Chad Hauf, director, premium accounting, at Safety Insurance Company, in a case study published by NACHA. “Being able to say, ‘yes, give us a few hours and the money will be in your account,’ that’s a wow. Getting money into the hands of a customer as soon as possible is a win for us.”
Jan Estep, NACHA’s president and CEO, says it’s unclear at this stage how many of those Real-Time payments would otherwise have been processed overnight and how many were new to the ACH network. Either way, Real-Time payments provide a significant cash and liquidity tool, she adds, noting that a company incented through a 10% discount by paying a supplier by a specified date would have an extra day to ensure it has sufficient funds, for example. Likewise, it would have an extra day to invest cash.
“A good treasury management executive is going to try to leave money invested as long as possible, or send in payments to get discounts whenever possible,” says Estep, adding that Real-Time payments have so far proceeded without a hitch.
Banks have long been connected to NACHA’s ACH system, so adjusting to Real-Time payments was relatively easy compared to the RTP initiative. It is built on a new technology infrastructure provided by VocaLink, which developed both the UK and Singapore faster payments systems.
TCH is now onboarding several of its 24 member banks – the US’s largest banking institutions – to ensure they have connectivity to the platform, and they will begin testing different types of messages, probably in the second quarter. The banks will then shift into pilot mode to conduct actual transactions. Meanwhile, TCH is working closely with other banks to implement the TCH technology as well as an array of bank technology vendors, including Jack Henry, FIS and D+H, that will provide the RTP offering to smaller regional and community banks.
“We expect this will be a multiyear process,” says James Colassano, senior vice president (SVP), product development and strategy at TCH. “We do feel there’s a great deal of value that businesses and consumers are going to get from real-time payments, so once folks start to use RTP, demand will increase pretty significantly.”
Another factor likely to drive corporate interest in the faster-payment initiatives is the additional information they will be able to attach to payment messages, enabling them to better automate the processing of payments in their financial systems. Listwan says corporate clients are particularly interested in RTP’s request for information capability.
“A client may receive a payment that it doesn’t know how to apply and can send a real-time message to the payer to clarify the ambiguity, rather than having to get on the phone,” she says, adding that NACHA’s Real-Time ACH also provides significant information capabilities.
Nevertheless, as long as real-time payment capability isn’t ubiquitous, tracking which counterparty banks can send or receive those payments would be extremely arduous for even the very largest banks, much less the smaller ones, creating risk for their corporate clients who won’t be sure whether the payment will arrive as promised.
Carl Slabicki, senior product manager at BNY Mellon for USD clearing product management, says that the bank is developing “smart routing” capabilities. The technology, also being developed by other banks and vendors, will provide clients with payment alternatives if their first choice is unavailable.
“If a corporate client is seeking to make 10 different payments by one method, and that method isn’t available for six of the payments, the router will give the client the ability to route the payments through clearing channels that are available. As network adoption grows, we anticipate fewer and fewer of those exceptions.” Slabicki says, adding that factors such as cost and speed will likely be other factors in the payment-option matrix.
Another service that will become available to clients will be the ability to debit client accounts, or in the case of RTP request payments from clients. NACHA’s traditional ACH service already permits automated debits, which now make up most ACH transactions, and from September corporates will be able to settle those transactions in the Real Time , with little in the way of additional changes to their systems.
“You have check conversion, web and telephone debits, recurring consumer debits, etc.,” Slabicki says. “So there’s a wider variety of use cases on the debit side, which may make it a bit more attractive from a transaction-volume standpoint.”
RTP has been designed to support only payments, but it will allow companies to request them, and the other party to choose whether to make the payment or not, or set up payment conditions. NACHA’s ACH debits have been criticised by consumer advocates, since insufficient funds in accounts can result in significant penalty fees; RTP’s payment requests will give payers more control over what payments are made and when.
Currently, none of the major US faster payment initiatives are working to extend faster payments across borders, although both TCH and NACHA say they are working with various user groups to evolve the ISO 20022 electronic standard to exchange data so it becomes a true standard in practice as well as name.
Looming competition has prompted the Society for Worldwide Interbank Financial Telecommunication (SWIFT), a major payment rail for cross border transactions, to step up its game. Payments through SWIFT often occur in close to real-time already, but they often must traverse numerous correspondent banks that may tack on fees and can reduce transparency and speed.
Correspondent banks can also truncate critical information attached to the payment, so the long-time payment rail began testing its global payment innovation (gpi) service last year to remedy those deficiencies. SWIFT gpi went live on February 16 with 12 global transaction banks and more banks will follow soon.