Treasurers who believe they have no need for instant payments should ask their business colleagues what they think.
Global Head of Payments and Receivables
Instant payments are to the benefit of all, if only everyone realised it. When the UK’s Faster Payments mechanism went live in 2008, it could so easily have become a costly exercise in cannibalising existing payments methods.
By 2017 the system had broken the record for the highest amount of payments processed in a single year (at over 1.7bn, 16% up on 2016). But it had also become an integral part of the country’s payment infrastructure, creating additional volumes through new channel activity and new ways of doing business.
While the consumer sector seems to be enjoying the benefits of immediate, secure and irrevocable payments through the host of wallets and instant payments systems deployed in several countries around the world, there is work still to be done in the corporate space to ensure these mechanisms are being leveraged by treasurers to tap its potential, says Bruno Mellado, Global Head of Payments and Receivables, BNP Paribas.
For some corporates, it will become a different way of settling debt or of enabling customers to pay. For example, traditional payments models had required one major manufacturer of food supplies to secure payment before delivery or agree on a credit risk exposure with its smaller retailer buyers, says Mellado. “Cash was risky and cheques were rarely a practical option. With instant payments, payment-on-delivery will be easy, allowing the manufacturer to receive payment straight into its systems, fully reconciled.” All parties win and the economic activity is being supported by efficient and less cumbersome payment processes; at some point, the action of making a payment will just become a simple notification to release the goods at point-of-sale or to be shipped.
Despite this and other examples, the adoption by corporates of instant payments has, to date, been somewhat driven by “niche use-cases”, he admits. To this point, he says treasurers should now be asking how instant payments systems can fit in with, and even advance, the wider digitisation programmes that their companies are almost certainly undertaking.
The reason, says Mellado, is simple. “Instant payments can be the enabler of new models of business. E-commerce players, seeking an alternative to card payments – where interchange costs, cardholder inconvenience and lower credit limits may be holding back sales – are likely to drive its greater adoption, but other sectors will follow as new business models are realised.”
Indeed, with the advent of payment APIs, where payments can, for example, be triggered from a third-party account, Mellado predicts that the use of instant payments will soon deliver a “totally new payment method, beyond cards”.
For an e-commerce business that operates through one of the global retail sites, if that site facilitates the payments process, instant payments enables the business to be paid faster for goods it has sold; this frees up credit with its own suppliers, facilitating greater sales volumes. Other businesses can also enjoy this benefit.
With new use cases changing business models, for Mellado, this is an opportunity for treasury to support the development of such models, enabling the means of handling new customer and supplier payment methods supporting direct selling strategies.
From a purely treasury perspective, the ability to have immediately-banked funds presents an obvious working capital advantage. However, relatively low instant payment transaction limits (€15,000 in most countries) mean treasury payments themselves are some way off in most jurisdictions, says Mellado. The example of the UK, which has now reached £250,000 for individual payments as system integrity is proven, suggests those limits will soon reach practicable levels.
However, the idea that instant payments will replace all other forms of payment is a fallacy, declares Mellado. After a decade of operation, the UK system now covers just 25% of UK credit transfers, suggesting that they are complementary to existing mechanisms. Indeed, treasurers may prefer to continue with well-timed slower batch payments via these mechanisms. “To change a system wholly to real-time will probably require more treasury effort to keep balances and positions under control,” he comments. “I see instant payments being used only when needed.”
This comes with a caveat. Treasurers who do not wish to explore instant payments at all will be doing their organisation a disservice, as the worlds of commerce and information exchange become fully digitised and 24/7. “You may not want real-time operations but your clients may want to pay you after hours or at weekends; you need to prepare for the coming reality of real-time,” he advises.
Instant payments are not perfect, and some issues are beyond treasury’s control. One operational issue of which treasurers will be acutely aware is the lack of cross-border payment standards. Even within SEPA, Mellado acknowledges that local requirement ‘interpretations’ can cause disruptions.
“What is interesting is how different countries and communities are now organising to adopt interoperable instant payments, especially the local clearing systems which seek to harmonise processes,” he says. In this respect, the ECB’s TARGET instant payment settlement (TIPS) service is a significant advancement; as a regional real-time gross settlement system, it should provide for higher-value transactions going forward.
Banks are building this infrastructure for euro in Europe at this time, with several countries going live in 2018 (Spain and Belgium), others in 2019 and many others probably in 2020. There is no competitive advantage for a bank to be alone in a local market with this service as it only works with full reachability. It is the community that decides on the timing. Mellado says that BNP Paribas is building its instant payments platform for both a local community initiative and a pan-European ambition.
The ‘standard’ experience may, however, come via a different route. Domestic uptake is being driven hard by person-to-person behavioural changes, where individuals want to be able to pay each other in a frictionless way for small amounts, notes Mellado. “As growth and demand continues apace, it becomes a commercial imperative for merchants and the Payment Service Providers to develop Person-to-Business or Business-to-Person use cases. Development of harmonised cross-border instant payments must follow, not least as e-commerce seeks to flourish fully.”
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There is a way to go yet but being able to offer an end-to-end payments process and new payables and receivables options to customers and suppliers, while improving visibility over cash and customer credit positions, is a compelling proposition.
Of course, treasurers need to look at their own processes to see how instant payments will affect these. But Mellado suggests that long-term success lies in understanding the wider possibilities derived from changing business models, rather than focusing on the impact on treasury processes.
“As momentum gathers, treasurers should be reaching out to the business units within their organisations to see how instant payments can help improve outcomes for all,” says Mellado. New complexities may be created but the global trend for digitisation and real-time is not about to reverse. Indeed, he adds, “as the idea of the ‘value-date’ slips into history, treasurers who assess the risks and adapt now to instant payments will be best-placed to support their organisations’ strategic goals”.