By Russ Banham
Today’s gotta-have-it-now mindset often seems more ingrained in the United States than anywhere else. It’s odd, then, that the country has lagged behind many others in building the infrastructure to make near-instantaneous electronic payments.
Finally, though, change is underway, in the form of a new inter-bank payments system dubbed RTP, for “real-time payments.” Lightning-fast settlements — versus next-day automated clearinghouse (ACH) transactions, wire transfers (which can take days to clear), or, worst of all, checks — could provide a host of benefits for businesses.
The advantages range from freeing up working capital sooner for strategic investment to accelerating supply-chain operations.
It’s not all about speed, though. In fact, other aspects of RTP, including the provision of standardized data relating to payments and transaction confirmations that payments are final and certain, may hold greater appeal.
At the same time, don’t expect to see hordes of companies rushing to update their internal systems to accommodate the new payments technology. Reasons for caution abound, at least in these early days.
The new payments era launched on Nov. 13, 2017, when BNY Mellon initiated the first-ever real-time payment in the United States. Faster than you can say “show me the money,” $3.50 was successfully transferred from an account at BNY Mellon to one at U.S. Bank.
Those two banks and four others — Citibank, JPMorgan Chase, PNC Financial Services Group, and SunTrust — now have the capability to execute inter-bank payments within three seconds. Nineteen additional large commercial banks are working toward joining the party by 2020.
RTP is the first new core payments structure in the United States in more than 40 years. In developing it, the 25 banks are partnering with The Clearing House (TCH), a banking association and payments company. TCH wrote the code for RTP and is the system operator.
RTP exemplifies the unceasing movement toward real-time execution in business. Many activities are in that mode now, from the gathering of customer transactional data for gauging buying preferences, to the second-by-second analyzing of social media imprints, to the continuous accounting (in some companies) that automatically reconciles millions of transactions each day.
Speeding up electronic payments is particularly ripe for this environment, given the “just-in-time” supply chain pressures that companies sometimes face. If a company buys a product from a supplier with which it doesn’t have a credit relationship, but the buyer needs the product to ship right away, RTP can ease the concerns of a seller worried about the timeframe in which it will get paid.
Payment speed is especially attractive to midsize and small companies, which generally aren’t very adept at cash-flow forecasting.
“The instant availability of funds and the fact that payments are final and irrevocable are great things,” says Andrew Kirk, CFO of Trion Solutions, a provider of HR outsourcing services. “You’re getting immediate liquidity, as opposed to waiting for funds with crossed fingers. It gives you the opportunity to invest the dollars sooner to grow the business.”
The near-simultaneous transfers can occur 24 hours a day, every day of the year, as opposed to banks’ current Monday-through-Friday systems.
Need for Speed?
A business technically can receive RTP payments without doing anything, as the money will be in its bank account. But as a practical matter, it must update its accounts receivable system to automatically apply the payments.
Speed usually ranks third among the factors that may drive a company to adopt RTP, says Steve Ledford, senior vice president of product and strategy for TCH. He polls groups of corporate officials on that question when he makes presentations on the new technology.
Better handling of data and certainty of payment typically come out on top, Leford says. Indeed, he notes, TCH named the new system RTP rather than Real-Time Payments because “we’re trying to inch away from the focus on speed.”
With RTP, a standard set of data is guaranteed to arrive simultaneously with the payment. That eliminates confusion and creates efficiency.
“Some wires lack the necessary details explaining what the payment is for, creating accounting delays for the recipient company as it researches days of transactions,” says Patrick Villanova, controller and principal accounting officer at software provider BlackLine.
Notes Jennifer Lucas, executive director of financial services advisory for the payments practice at Ernst & Young, “The beauty of RTP is that the amount paid, what it was for, who paid it, and confirmation of payment are all transmitted without any manual processing.”
The information associated with a payment can be as simple as an account number, but it can also be specialized and complex. For example, automotive manufacturers buy a variety of parts from multiple suppliers, and they often claim allowances for parts damaged in transit or for other reasons.
RTP’s standard message format, ISO 20022, is based on the way data is handled in web and mobile applications. Every piece of information is tagged to facilitate automating much of the back-office payment-processing work. That “saves labor costs, reduces errors, and accelerates the entire purchase-to-pay cycle,” says Ledford.
A set of real-time messaging functions related to payments is also part of the value proposition for finance. In addition to “Payment Confirmation,” these include “Request for Additional Information,” “Request for Payment,” and “Remittance Detail.”
“The notifications create frictionless customer-facing interactions, replacing today’s frustrating and costly back-and-forth interactions between payers and recipients,” says Villanova.
For example, a payment confirmation can free the accounts payable department from the familiar exercise of paying a bill and then contacting the recipient to make sure it received the payment.
“Such operational hassles eat up money and time and adversely affect customer and trading-partner engagement,” says Ledford. “The bane of cash management is inherent uncertainty. Neither side knows exactly when the cash will be there.”
Taking It Easy
Here’s what the new payments model is not: a wholesale replacement for ACH transactions, wire transfers, checks, credit cards, and good old cash.
Rather, RTP is an option.
“CFOs now have more tools at their disposal insofar as how they want money to settle,” explains Carl Slabicki, director of immediate payments at BNY Mellon. “If they want a payment to clear within seconds or on a weekend or at night, they now have the opportunity.”
But while it’s likely that RTP will be used increasingly, there are good reasons why business adoption will occur at a gradual pace.
First, there’s currently a $25,000 limit for RTP payments. That might make the technology a big yawn for CFOs of large companies, notes Art Brieske, head of faster payments at JPMorgan.
The ceiling eventually will be lifted, however. “That makes now a good time to do what’s needed internally to get ready for opportunities, like improved cash forecasting, that RTP provides,” Brieske says.
Second, while RTP has features that make it well suited for a variety of applications, businesses may prefer other, existing payment methods for certain kinds of transactions, similar to how consumers particularly like using credit cards for travel and dining.
Third, RTP is new. A company may want to try it on a small scale before committing to it as a primary payment method.
But the biggest limiting factor of all is resource constraints. “If an existing process is working well with established payment options, it may not make sense to divert budget and IT staff to convert the accounts receivable function to accommodate RTP,” says Ledford. “ACH is cheap and effective, especially for recurring, low-risk payments.”
Frank D’Amadeo, director of treasury operations at electric utility Consolidated Edison Company of New York, acknowledges that RTP could improve the utility’s cash flow. “But,” he says, “and this is a big ‘but,’ it would require us to customize our ERP system.”
An alternative solution would be for the major ERP vendors like SAP and Oracle to modify their systems. But D’Amadeo isn’t high on that either.
“Unless they could provide a cookie-cutter, out-of-the-box customization, we’d have to pay them to modify our internal systems, which would be costly and chaotic,” D’Amadeo says. “We need standardization in the ERP industry without the vendors looking to nickel and dime us for customization. Until that happens, we’re going to do nothing [to move to RTP].”
Aware of the issue, TCH is addressing ERP integration in several ways.
For one, it’s reaching out to ERP vendors through its member banks to reinforce the importance of RTP to the payments industry, notes Jim Colassano, the organization’s vice president of product development and strategy.
TCH is also educating some vendors about the opportunities RTP offers them and their corporate clients.
Further, it’s teaming with several partnering banks to test the concept of an industry utility for B2B payments. The utility would support integration of RTP across vendors’ platforms, obviating the need for customization.
SAP and Oracle are huge, influential organizations, but the sheer clout of TCH’s member banks may well force the vendors’ hands. “It will come. It’s just a matter of time,” says EY’s Lucas.
Another stumbling block to widespread adoption of RTP is the need to link it to a directory of databases for purposes of verifying user identities. Without that capability, banks may run afoul of strict Know Your Customer (KYC) regulations.
“Without a business directory maintained by an independent third party that verifies the authenticity of customers, RTP is just a dream,” says D’Amadeo.
TCH is tackling the issue on two fronts. At the retail end of the banking spectrum, it’s working to integrate its platforms with an existing directory operated by Zelle, a digital payments network owned by seven large banks.
On the wholesale banking side, TCH is looking to develop a secure model that would allow banks to reliably access one another’s business credentials.
Yet another perceived hurdle to RTP relates to cybersecurity. For RTP, security must be embedded in a company’s operational processes at the item-based level rather than at merely the batch-based level.
A related issue is fraud. “One benefit of today’s somewhat antiquated system is that we have traditional checks and balances to detect fraud in funds withdrawals and transfers,” says Villanova. “Banks have at least a full day to make that assessment.”
If those hurdles are overcome, RTP may have a lasting effect, moving organizations closer to real-time accounting.
“If everyone migrates to RTP and uses a cloud-based finance and accounting solution that provides real-time transaction matching — identifying cash in and out and then linking it to the corresponding invoices and payables — a business could theoretically do a virtual close of the books at the end of each day,” says Villanova. “A company would know every single day exactly where it stood from a financial standpoint.”
Armed with this data, organizations could make better, more strategic expense-control and resource-allocation decisions and adjustments. In fact, if enough U.S. businesses combine RTP and continuous accounting, they could arguably have a positive influence on the entire economy.
“A country’s economy is heavily dependent on the velocity of money—the speed at which the same dollar bill turns over,” Villanova points out.
Similarly, notes Ledford, “Every company deals with the problem of stranded cash that can’t be used. Making working capital more accessible instead of idle will have a big impact.”
And it’s not just the U.S. economy that may benefit. Many nations are looking to support platforms that enable real-time payments across all accounts globally.
That vision may come to pass—eventually. In the meantime, cautious though CFOs may be, RTP offers plenty of potential for achieving a less-glamorous but just-as-important goal: saving finance departments time, money, and endless headaches.
Russ Banham is a Los Angeles-based freelance business journalist and author
sidebar: Better Now Than Never
U.S. banks were in no rush to develop and adopt the RTP system.
U.S. companies have long awaited real-time payments. Early RTP-like systems were in place in Japan in the 1970s and Switzerland in the 1980s.
The United Kingdom has been out in front technologically since 2008 when it introduced its Faster Payments Scheme Limited, or FPSL. Today, 400-plus U.K. financial institutions offer the service to more than 52 million accountholders.
Within the past few years, India, Sweden, Singapore, and Thailand are among at least a couple of dozen countries that have adopted real-time payments, according to Steve Ledford of The Clearing House, operator of the new U.S. RTP system.
The U.S. system, launched last November, is part of a new wave that includes the European Union’s SEPA Instant, introduced a week later, and NPP, initiated in Australia and New Zealand early this year.
It wasn’t until 2015 that the U.S. Federal Reserve Bank created its Faster Payments Task Force, to identify and evaluate different approaches to speeding up payments.
Why so late to the party? The need in other countries was more urgent. They lacked ACH-type capabilities and were coping with three-day settlements. In the United States, in addition, the vast number of financial institutions—more than 100,000 entities in all—was an impediment.
“We wanted to learn what we could from other countries’ experiences with real-time payments to create a model that suited all U.S. financial institutions,” says Ledford.” | R.B.