With a number of domestic instant payment schemes already in place, the scope of these payments will soon cross borders. Deutsche Bank’s Jose Buey and Paul Cuddihy examine the impact of what has been a consumer phenomenon in the business-to-business space
Instant payments (also referred to as real-time or immediate payment schemes and shortened to ‘RTP’) come in many different forms. Typically, however, they share a few common characteristics: they offer (near) real-time crediting of a payee’s account (usually meaning under a minute), they operate 24/7/365, and, when successful, are final and irrevocable.
Currently, domestic instant payments are live in 17 countries across three continents worldwide, and there are at least 11 additional countries planning or building systems, and 13 more exploring possibilities. Once SEPA Instant Payments (SEPAinst) goes live as planned in November 2017, and as banks will progressively adopt it, consumers and businesses will have cross-border payment capabilities across the 34 countries in the SEPA zone.
The Euro Retail Payments Board 1 explains that SEPAinst will provide cross-border instant payment capabilities, “irrespective of the underlying payment instrument used (credit transfer, direct debit or payment card), and the underlying arrangements for clearing (whether bilateral interbank clearing or clearing via infrastructures) and settlement (e.g. with guarantees or in real time) that make this possible.” 2 Figure 1 summarises the payments infrastructure involved by looking at what is involved in processing a credit card payment.
Too fast for corporates?
For consumers, small businesses and retailers, a shift to ‘instant’ could not come sooner. The faster a payment can be made, the faster working capital and credit becomes available, allowing further revenue to be generated. In contrast, for large corporates, seeking predictability and managing liquidity around daily cut-off times, the draw of instant payments is perhaps less obvious. Many corporate treasurers remain apprehensive about instant payments, in light of – likely – internal process changes associated with their adoption, and the inevitable technical and IT challenges. Some even question the point, “What use is it to me as a treasurer if I can now receive €500 at 02:00 as opposed to 09:00?”.
However, with the world of commerce moving towards an increasingly instant environment, corporates should prepare themselves. What are the challenges and opportunities of instant payments for corporates? How will instant payments impact back-office operations, sale opportunities and supply chain relationships? What about fraud – do faster payments mean faster fraud?
The instant payment revolution
Relevant only to retailers and consumers – or corporates too?
However, that does not mean corporates should dismiss these schemes. For example, the UK Faster Payments Scheme, implemented in 2008, has already increased its maximum threshold for individual payment transactions to £250,000. Similarly, while the maximum limit for SEPAinst is only €15,000, the ‘SCT Inst Rulebook’ stresses that this is only an ‘initial’ limit, “which can be changed for a higher maximum amount if individual banks agree bilaterally or multilaterally”.
In 2015, business use of the Faster Payments Service grew by almost 20% to reach 379 million payments, mainly driven by business-to-individual accounting for two thirds of this volume. Over the next decade, the volume of one-off faster payments is forecast to grow rapidly. UK Automated Payments 2016 forecast 1.9 billion one-off payments made using the Faster Payment Service in 2025.
Outside Europe, for instance in India, where some instant payment schemes have been live for more than five years (initially IMPS, later UPI), the cap on the amount is currently set to INR100,000 (US$1,500) for the UPI platform and INR 200,000 for the IMPS, thus starting to make the transaction attractive for businesses too.
Instant payments are a paradigm shift – not a fad. Analogous to the rise of the smartphone, or electronic banking, the global trajectory towards instant will not be reversed. Corporates operating in the UK, Europe and Asia, can expect wider, easier access to a faster payments service in the near-medium term. So what does instant really mean for corporates?
Working capital management capabilities
Cash forecasting will undoubtedly become more difficult with instant payments. With funds coming into the payee’s account within seconds of being issued, 24/7/365 (compared to cheques, for example), treasurers will no longer have the luxury of a time-buffer to decide how best to utilise the cash they are about to receive. In this sense, treasurers’ apprehension around instant payments can be forgiven.
On the other hand, real-time kills float time, and the amount of time cash is stuck within banks clearing processes. From a funding perspective, killing float time offers numerous advantages – both on the receivables and the payments sides.
For example, on the receivables side, if funds are accessible to the payee in seconds, as opposed to days, the amount of credit facility a corporate has to use will be reduced, potentially even improving net debt – think of retailers when their cash is in transit at year end. Equally, if a payment takes seconds, as opposed to days to clear, potential interest on cash collected can be maximised. For example, if a corporate receives €100,000 per day in cheque payments, and the daily interest would be 0.01%, the corporate loses out on €10 for each day the payment is delayed. The examples also set further challenges on banks to adapt their interest booking systems and practices.
On the payments side, killing float time will allow corporates to very accurately time the disbursement of their payments to ensure purchases can always be made ‘just in time’ (reducing the carrying costs of inventory and helping to maximise working capital).
Yet one area of potential usage is still under scrutiny – the one pertaining to time-sensitive, high-amount treasury payments, also called urgent or same-day payments, typically deployed for short-term investments, loan repayments, intercompany financing and company acquisitions. Corporate treasurers may find it difficult to view the advantages of an instant payment (even without current amount limitations), where the same-day urgent transaction serves the same purpose effectively and reliably for a moderate fee.
The impact of “instant” on counterparty relationships
Instant payments and collections will not only impact the operations of the corporate treasurer, but also corporate sales and supply chain relationships.
For corporate sales, instant payment adoption could potentially facilitate sales, and grow company revenue. Take the example of an automobile manufacturing company that has been approached by a dealership wanting to buy €1m worth of cars. The automobile manufacturer is more likely to reach their credit limit with the client (and therefore be reluctant to cater for such a large order) if there is a delay of one or two days before the wholesaler payment comes in. However, if the manufacturer has the security and irrevocability of money in their bank within seconds, they can maximise their sales with an individual client, without having to worry about the risks of bad debts.
Another example would be a bar or restaurant anticipating more business for the weekend due to a sports event. The owner ordered stock up to his credit limit but this was not going to be sufficient to meet demand. Real-time collections from customers would provide instant funding to the owner’s bank account. This means the owner would be in a position to make an instant payment to the beverage supplier, which in turn releases credit to allow more stock to be ordered for just-in-time delivery.
Equally, consider the example of a container shipping company offering spare capacity to a one-off corporate customer. Usually, the customer is required to pay up front for such services. If standard credit transfers or direct debits were used, there would be a delay in service provision, and an opportunity could be missed. However, with instant payments, the forwarding agent would be able to obtain the fee within ten seconds, and release their space capacity more quickly. The same would be applicable to other areas of logistics and transportation in the maritime space, where fees for harbour space and unload services, as well as fuel and food supplies are usually paid by physical cash-on-delivery. Instant payments could prove to be the solution both for the supplier of the goods and the receiver.
There is no question that banks’ ability to filter for criminal, fraudulent or sanctioned transactions becomes more of a challenge when payments are (a) cleared within a matter of seconds and (b) irrevocable once complete. Indeed, when the UK first introduced Faster Payments,3 the annual value of fraud losses from online banking nearly tripled.4
However, this challenge is not impossible to overcome. Considerable efforts from UK banks, who collaborated on managing new risks inherent in faster payments, resulted in the UK Payments Council finding that, per £1,000 of spending, faster payments fraud was a mere seven pence by 2013. At Deutsche Bank, our investment in the necessary additional security to give our clients peace of mind once instant payments enter the cross-border arena sustains this effort.
Future industry innovations, such as new banking services based on open APIs (Application Programming Interfaces) to facilitate payments to online retailers directly from their customer account in real time will generate a new source of traffic for instant payments. In this context PSD2 (see page 24) supports payment innovation and competition by enabling individuals and businesses to give Third-party Payment Providers (TPPs) access to their payment accounts in order to initiate an instant payment on their behalf to complete an online purchase.
At Deutsche Bank we are fully committed to the global deployment of instant payments as an integral part of our payment transformation initiative. We have actively participated in the development of the new RTP infrastructure led by The Clearing House in the US as well as the Pan-European Instant Payment Solution (IPS) from the EBA – which will go live in November 2017. Deutsche Bank joins in 2018, along with the majority of other players. In addition, the bank is already participating in other key IP initiatives in Singapore, Sri Lanka and India – these get underway in 2018.
Paul Cuddihy is Director of Working Capital Advisory and Jose Buey is Regional Head of CMC Client Product Solutions EMEA at Deutsche Bank
1 Launched in December 2013. See http://bit.ly/2mnKWfO on www.ecb.europa.eu
2 See further explanation from the European Payments Council at http://bit.ly/2mo6FU0
3 See https://www.ecb.europa.eu/paym/retpaym/instant/html/index.en.html
4 See ACI Universal Payments ‘Immediate need for fraud prevention’ at http://bit.ly/2mG785y
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