Cash & Liquidity Management

Question Answered: Real-time payments

Published: Nov 2018

This issue’s question:

“Are real-time payments processes really of interest to treasurers?”

Portrait of Jon Williams, Principal Consultant, Mk2 Consulting

Jon Williams

Principal Consultant
Mk2 Consulting

The world is moving to real-time payments whether treasurers like it or not and there are some benefits and some pitfalls. Being able to make immediate payments may help you manage cash and liquidity but most of the benefits are to other business processes.

In 2008, the main corporate use case in UK for Faster Payments was believed to be as a backstop if BACS, the domestic ACH system, failed. I argued that there were far more areas where business processes would change, including forecasting the growth of immediate loans and compensation.

Firstly, the cost of an immediate payment is significantly less than a corresponding RTGS payment and so may be attractive for some types of payment, especially with the UK leading the way by proposing to increase the payment limit to £10m from £250,000. Treasurers could reduce some bank costs by taking advantage of multiple, regional or national immediate schemes.

With immediate payments, reimbursement of expenses and payroll of weekly staff can be made as soon as approved, and supplier payments can be delayed until the date due. While this more dynamic operating practice is far more reactive, it can cause difficulties such as monitoring liquidity more closely, since many immediate payment schemes require pre-funding. Payment on delivery also becomes much more efficient, not only for the customer but also the supplier. Where immediate payments can support your business is limited only by your company’s imagination, and one business uses the references embedded in immediate payments to confirm ownership of the account and, thereby, identity.

Whether or not your business makes immediate payments, consumers will expect your business to receive them efficiently. They expect you to know immediately when they have been paid and to see that reflected on their statements, so efficient cash application procedures and systems are important. Many businesses still work on daily cycles but the always-on, connected nature of commerce does not lend itself to end of day statements and reconciliation. For this reason, open banking or access to accounts via APIs will go hand-in-hand with the new instant payment schemes to bring the instant corporation to life.

Should treasurers be concerned about faster payments? Since immediate payments are generally irrevocable this means you and the A/P team should be on the lookout for errors and fraud, such as CEO or invoice scams where criminals persuade you to make payments to accounts in their control. This has also led to real-time, money-mule networks whereby proceeds of crime, once obtained, are difficult to track and recover. This in itself may be a key reason for a treasurer to think about faster payments.

In short, whether or not we want to make them, real-time payments challenge our businesses to become more real-time immediate themselves and treasury, with its view over the banking relationships, is at the heart of the business transformation.

Portrait of Fabrizio Masinelli, Group Treasurer – Accounting Department, Panini S.p.A.

Fabrizio Masinelli

Group Treasurer – Accounting Department
Panini S.p.A.

I believe that real-time payments are not too much of interest to treasurers, or at least not in general.

They may give an advantage to ‘cash out’ when it comes to retail outlets though. If, for example, a company works with small outlets, and from which it must get ‘cash on delivery’, then there will definitely be an upside to real-time. If, on the other hand, we are talking about B2B operations that are linked to medium and large companies, then immediate payments, in my opinion, will not give any real added value.

In any case, many companies have processes of internal authorisation that can cancel out the advantages of paying immediately. But, above all, most are now using systems that easily allow the execution of payments, regardless of whether they are immediate or not. If we are talking about payments made intra-day, then without a doubt they can be useful. But, for me, the idea of ‘instant payment’ is not yet something I consider to be particularly useful for most businesses.

That said, although real-time payments have a certain utility, and perhaps even an important advantage, if used by companies to cash out from small and disparate outlets, I believe that real-time payments could create new problems around cyber fraud. As such, surely treasurers will have to change the way they work if they want to use these systems?

Indeed, treasury policies are part of the future of the financial management of companies. Each and every change to policy must therefore be taken into consideration. For companies that do decide to use the real-time method of payment, there will necessarily be a lot of policy changes to implement. Those who choose not to adopt this model will obviously not have to completely rewrite policy, but may have to take it into consideration when using this new method for one-off or particular payments – even though I suspect this would only be on very rare occasions.

Portrait of Dino Nicolaides, Managing Director, Head of Treasury Advisory UK & Ireland, Redbridge Debt & Treasury Advisory

Dino Nicolaides

Managing Director, Head of Treasury Advisory UK & Ireland
Redbridge Debt & Treasury Advisory

Portrait of Alexandre Bousquenaud, Senior Director, Head of Treasury Advisory Continental Europe, Redbridge Debt & Treasury Advisory

Alexandre Bousquenaud

Senior Director, Head of Treasury Advisory Continental Europe
Redbridge Debt & Treasury Advisory

Portrait of Manon Balette-pape, Associate Director, Global Payment Card Product Head, Redbridge Debt & Treasury Advisory

Manon Balette-pape

Associate Director, Global Payment Card Product Head
Redbridge Debt & Treasury Advisory

“Real-time” or “instant” payments (RTPS), unlike other traditional payment methods, guarantee immediate availability of funds to the beneficiary of the transaction. Treasurers need to assess the impact of this form of payment on their treasury function and utilise RTPS, where beneficial, while ensuring that they address the accompanying challenges.

Firstly, from the strategic perspective, RTPS can have a significant impact on treasury risks:

  • Organisations can receive incoming flows in real time, enabling them to have their funds sooner, plan outgoing payments based on incoming flows more accurately and hence reduce the liquidity management buffer required to ensure the adequacy of funds for day-to-day obligations. This could result in finance cost savings as well as reduced counterparty and refinancing risks.
  • Instant receipts and payments can facilitate more accurate cash flow forecasting, better cash visibility across countries and faster cash concentration through real-time intra-day sweeps. This enables organisations to put idle cash to use faster, reducing cash management risk and finance costs.
  • RTPS in foreign currency enable the use of spot FX deals rather than risking a rate change in a few days’ time when payments would otherwise be made, reducing the FX rate uncertainty.

RTPS can also have an operational impact on treasury functions:

  • The concept of cut off times and the need to build clearing time into payment schedules is no longer necessary. This also reduces the need for extensive reconciliation processes (eg payment “instruction to execution” reconciliations) and provides the opportunity for greater standardisation and automation, allowing treasurers to streamline processes, improve control and save costs.
  • Even if RTPS are not widely used within an organisation, they can still act as a last resort solution to facilitate overlooked last-minute payments, in order to avoid missed payments that can lead to penalties and reputational loss.

However, treasurers should adequately address the challenges of RTPS in line with the risk appetite of their organisations:

  • Given the instant nature of these transfers, RTPS can be an attractive target to fraudsters. Treasurers should ensure that the control environment is robust not only from external intruders but also from internal staff.
  • Treasurers should adequately mitigate the risk of giving an erroneous payment instruction, as there is little scope to reverse this prior to execution, compared to more traditional forms of payment such as BACS.
  • The value of RTPS will be limited unless foreign exchange exposures are managed using real-time currency conversion.
  • RTPS are yet another type of payment added to the long list of payment options open to a corporate that can further complicate the daily cash management activities. Treasury functions may thus require a regular review and amendment in processes and controls. This will help mitigate new risks and maintain efficiency.
  • Group companies that are net payers may experience an increase in their working capital needs and may require additional external financing and intra group funding or guarantees.

Nevertheless, real-time incoming payments can help improve the client experience as they may enable the faster delivery of products and services to customers, providing the treasurer with the opportunity to play a more commercial and strategic role in the organisation.

Next question:

“To what extent will today’s treasury look like the treasury of ten years’ time?”

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