Treasury Today talked to some of the best and brightest from the world of academia, corporate treasury and banking to find out what impact instant payments are having on the financial ecosystem as part of our ongoing Expert Voices podcast series. We also find out what a real-time treasury operating model looks like and how to achieve this.
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Payment innovation is arguably the big trend right now. In the past decade, activity in the payments space has exploded. Driving this first were regulators looking to build more robust, faster and unified digital payment rails – SEPA and the emergence of instant payment systems are two prime examples.
More recently, fintech firms have delivered a new wave of innovation, building platforms to improve the payments experience. M-Pesa in Kenya, Alipay and WeChat Pay in China are examples of companies that have significantly disrupted payments, especially in the C2C and C2B spaces where they have essentially killed off the use of physical cash.
What’s behind the real-time revolution?
To set the scene and understand the drivers behind the real-time revolution in payments, Treasury Today spoke with Jonas Hedman, Associate Professor at the Copenhagen Business School, who is an expert in how digitisation is transforming businesses and society and currently working on a research paper on real-time payments for the SWIFT Institute.
Treasury Today: What impact are instant payments systems having on businesses and the economy?
Jonas Hedman: Instant payment systems are having big implications. Most notably they are helping to create a smoother and more efficient economy.
Instant payments are changing how corporates think about cash flow and cash flow planning. This means treasurers must be proactively engaged to ensure that they are managing their cash effectively.
The same is true for banks. The old world was defined on batch processing and cut-off times, meaning that banks could predict how much money would be on their books at the end of the day. In the real-time world, payments happen 24/7 so this is no longer the case. And the implication is that if banks cannot get a control over this, it might make them a bit more reluctant to lend to individuals and businesses.
So, while instant payments are a positive development for end users, there are risks and challenges that the financial ecosystem needs to think through and solve.
Treasury Today: How might the instant payments space evolve in the coming years?
The world will become real-time and we will see all countries operating an instant payment and clearing infrastructure. There will also be the emergence of more cross-border instant payment systems. What will be most exciting is the value-add services that banks and fintechs build on top of these payment rails. This will be where the next revolution happens.
The development of instant payment systems is changing the game for corporates and creating plenty of new opportunities. Already, multiple companies have leveraged fintech payment solutions or real-time payment rails to improve their operations, cut costs, mitigate risks and enhance revenue. Companies are also using these payment rails to enhance their customer experience by offering services like real-time refunds.
We are also seeing the emergence of entirely new business models based on real-time payments. For example, in the insurance sector, companies are starting to offer micro-insurance to clients where previously this wasn’t cost effective.
Treasury Today spoke with Carola Schmitz-Becker, Vice President Corporate Treasury at Deutsche Post DHL, to find out how instant payments are providing the foundation for DHL’s treasury to operate in real-time.
Treasury Today: Why has real-time become such a big topic for your treasury team in recent months?
Carola Schmitz-Becker: We started investigating this topic last year. Particularly, we are interested in implementing a real-time zero-balancing system that would enable us to do intra-day sweeps from local subsidiary accounts into a master account. This would give us an immediate overview of our aggregated liquidity positions across countries, which would help us better forecast cash flow and deploy free cash.
Treasury Today: Will using instant payment rails for payments and collections be useful for DHL as well?
Carola Schmitz-Becker: Yes, instant payments enable us to speed up our operational processes. For example, the earlier we receive a payment from our customer, the sooner we can make the delivery. Also, parcels often get held up in customs because there is a surcharge that must be paid. Instant payment means there is no additional lag introduced to this process and the shipment can get back on the move.
Instant payments are also very applicable to eCommerce. We operate several online shops and I see instant payments and the fact you can debit directly from a customer’s bank account potentially replacing expensive credit cards schemes in this domain, or at least putting pressure on their pricing.
Treasury Today: What is stopping corporates adopting instant payments?
Carola Schmitz-Becker: The transaction limits that exist in most instant payment schemes currently limits their applicability to most treasury operations.
Banks must also develop their instant payment offering further. For example, I am yet to find one that interfaces with our ERP system. This is crucial for us in order to deliver efficiency and promote straight-through processing.
Treasury Today: What will the trend of real-time mean for corporate treasury in the years to come?
Carola Schmitz-Becker: It is hard to say for sure but I imagine there will be a lot more standardisation and automation in treasury departments. This will likley be driven by new technologies that are fully integrated using APIs, building a digital ecosystem. It might reach the point were treasurers are just dealing with exceptions and spending most of their time focusing on pure strategic matters. It is all very interesting and its an exciting time to be involved in corporate treasury.
Staying on top
The impact of instant payments is as big on the banks, who are working hard to bring innovative solutions to their clients. Lothar Meenen, Global Head of Corporate Cash Management Sales at Deutsche Bank outlines the bank’s thinking on this crucial subject.
Treasury Today: What impact are instant payments having on your clients?
Lothar Meenen: Instant payments are having a huge impact on our clients. The ability to be paid faster has a positive impact on their working capital metrics, it also helps with liquidity management. Beyond this, instant payments are reshaping our clients’ business models, giving them the opportunity to move into new geographies and business lines.
Treasury Today: How are instant payments transforming your clients’ business models?
Lothar Meenen: Instant payments are a game-changer, I can’t stress this enough. And we are already working on some revolutionary projects with clients. For example, we are working on a pilot project with the International Air Transport Association (IATA) to reduce the cost of processing payments for airlines. This includes using instant payments and is spurred by the European Union’s Payment Service Directive 2 (PSD2). The result is a payment process that creates much more visibility, reduces cost, enhances control and is quicker for clients.
Treasury Today: How can treasurers best prepare to operate in a real-time world?
Lothar Meenen: The real-time world is about more than just payments; it is about real-time FX, liquidity management and other treasury processes. What this means is that it is incredibly important for treasurers to analyse what is happening in their industry to stay ahead of their competitors. There is also a need to engage stakeholders in the business, especially around IT, to make sure that the business is ready to adapt and change in line with market forces. On top of that, treasurers need to develop a real-time mind- and skill-set.
This is a lot of work, but instant payments and real-time treasury are not passing trends, they will become the ‘new normal’. Treasurers must prepare for this.