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Pros & Cons of Real-Time Payments

  • By John Hintze
  • Published: 12/13/2019
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Corporate treasury executives have experienced firsthand the complications that can arise from settlement delays, prompting them to turn up the dial on their own companies’ payment speed. As such, the prospect of adopting real-time payments is alluring—however, many organizations are still on the fence due to several key issues.

KEY BENEFITS  

Companies always prefer getting paid faster, and immediate settlement reduces or eliminates the “day-two processes” they establish to correct complications stemming from longer settlement periods. That is especially relevant for consumer-to-business (C2B) payments, where a company may process most of its payments without a hitch but the relatively few exceptions add significant costs.

In terms of business-to-consumer (B2C) payments, services including Zelle and Same Day ACH have already given businesses and consumers a taste of speed, and The Clearing House’s Real Time Payments (RTP) network only improves it. Promoters of RTP often bring up the example of an insurance adjuster satisfying claims immediately for a damaged home, rather than the customer, often desperate for funds, waiting for a check to arrive in the mail. They also note that workers in the so-called “gig economy,” whether drivers for ride sharing companies such as Uber or Lyft or independent software developers, are likely to gravitate toward employers who pay sooner.

Refunds are another popular B2C use case. Bob Sneed, executive vice president at TransCard, which provides disbursement-management platforms to corporate clients, is testing the ability for a pharmaceutical company client to immediately provide rebates to consumers presenting coupons at the point of sale. “By simply putting in the necessary information, including the consumer’s bank information, the money can arrive in his or her bank account right now, and not six weeks later,” he said.

For B2B payments, speed may be less of an inducement, given that companies often prefer paying vendors later rather than sooner. However, retailers seeking a vendor shipment right away to restock shelves could use RTP rather than a costly wire. Plus, RTP operates 24x7x365, enabling payments outside of regular bank operating hours. And electronic payments, transmitted through highly regulated and secure banks, should dramatically reduce the fraud so prevalent with checks.

Perhaps RTP’s biggest benefit, however, is the rich and standardized messaging that it provides along with the payment, which is superior to checks, wires and ACH payments. In addition, members of the RTP network are now testing a request-for-payment (RfP) function, which enables billers to send alerts to customers that payments are due. Using RfP, a company sends a request through the network to an organization or individual for payment. The other party then has a choice of either sending the payment via credit transfer or declining the request. Since RfP messages contain all the relevant biller information, they ensure the customer-approved payment will be recorded correctly by the biller.  

KEY CHALLENGES

Before those benefits arrive, organizations must consider several issues potentially impacting their organizations. Many of them stem from batch processing. In the case of ACH payments, even same-day ones, companies send payment information in files to their banks, and then payments are processed and settled in batches at regular intervals by the ACH system. RTP, instead, aims to settle each payment individually and right away. For most companies, this requires major changes to their technology, operations and even business structures. Thus, banks are building solutions to bridge that disparity and facilitate corporate customers’ ability to use the most appropriate channels and payment types.

Ultimately, some companies will want to execute those payments through their treasury management systems (TMS). Initially, low value real-time payments will likely be executed from bank portals or bank-connected ERPs and TMS. But some companies will want to manage all payments through their TMS, including payments initiated from their ERPs, to centralize payment visibility and controls. In this case, the TMS will take file formats from the ERP, transform those to ISO 20022 XML formats required by each bank, and deliver payments to financial institutions via application programming interfaces (APIs). APIs allow instant delivery of payment instructions and immediate confirmation of payment.

Companies that have yet to implement a TMS may in some respects come out ahead. Thomas Spataro, treasurer at transfer-agency Computershare, said his company is in the final stages of signing on a new TMS provider. Unlike companies that have already adopted a TMS a number of years back, he anticipates the new versions will incorporate the ISO 20022 standard that is designed to accept all the new payment methods, including RTP, and the connectivity will start to move to real-time as well.

“The TMS will help us manage money and also have a pipeline for businesses to run payments through to the banks,” Spataro said. “As payments move faster, the TMS will need to move balance and transaction information faster, as well to help us manage our liquidity.”

Ideally, payment information will be collected by a company’s ERP, migrate to the TMS and ultimately on to the banks—all in real-time. However, Frank D’Amadeo, director of treasury operations at energy-company Consolidated Edison noted that none of the payment systems he is aware of support real-time payments and settlement unless they have been customized—a costly endeavor.

“I want to emphasize that until the bill payment and bill processing systems natively support RTP, it will be a challenge to support billing and receive a payment through the network, because companies’ back-end systems can’t create or ingest real-time payments,” D’Amadeo said. He added that in the meantime, companies will have to rely on their banks and potentially fintechs to convert payment data from their legacy ERP systems to ISO 2022, to enable RTP.

Beyond technology, a key consideration is how companies’ various functions must adjust to real-time. A key issue to digest is the irrevocability of RTP transactions, since upon immediate settlement those funds are gone, without the ability to cancel or contest payments. Controls already in place to approve payments may have to be enhanced, said Transcard’s Sneed.

“It’s also important to monitor the user experience,” Sneed said, adding that just like implementing any new payment process, a feedback loop must be put in place. “Anytime a company introduces a new payment modality, it’s important to look at every stage of the process to make sure all the parties have a good experience.”

For more insights on how real-time payments could impact treasury departments, download the new AFP Payments Guide, Electronic and Real-Time Payments in Practice, underwritten by MUFG Union Bank.

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