Think instant payments are only for treasurers in consumer-facing businesses? Or that real-time payments offer just a handful of treasury benefits? Then it’s time to take a fresh look at what these schemes mean for cash and liquidity management, and how market innovations such as request-to-pay and auto-investment solutions are enabling treasurers to extract maximum value from the real-time environment.
To date, 40 instant payment systems have gone live around the globe and more are in the pipeline1. Europe is one of the most active regions in this space, with 10 instant payment2 schemes in operation across the continent, including the UK's Faster Payments Service (FPS) and the Eurozone's SEPA Instant Credit Transfer (SCT Inst). Launched a decade ago, FPS is a great example of an instant payment scheme that has been embraced by consumers, B2C and B2B segments alike.
In Q3 2018, 511 million payments, totalling GBP431 billion, were processed by FPS, representing a 24 per cent increase in volumes and a 22 per cent increase in values year-on-year3. A significant driver of this growth is the rising number of businesses taking advantage of the 24/7/365 near-real time functionality, and GBP250,000 single transaction value limit, that FPS offers4. And in 2017, a successful live test proved that FPS could potentially be used for multi-million pound transactions5 – so value limits could well increase further in the near future, strengthening the case for B2B usage.
This kind of value limit increase is what treasurers in the Eurozone are hoping for too: SCT Inst, which went live in November 2017, currently has a single transaction limit of EUR15,000. This is expected to rise over time, enabling more businesses to take advantage of being able to transfer funds between European accounts in under 10 seconds6.
Delving beneath the surface
While the headline feature of instant payment systems is the near-instantaneous electronic transfer of funds, there is more to them than meets the eye. Real-time payment schemes offer round-the-clock convenience and flexibility, enabling treasurers to move away from batch processing and the constraints of cut-off times. What's more instant payments are irrevocable – and this certainty of payment can help to speed up both physical and financial supply chains, leading to working capital improvements.
"Collectively, these functionalities present corporate treasuries with a number of important new opportunities," says Philip Fellowes, Regional Head of Global Liquidity and Cash Management, Europe at HSBC. "This applies where instant payments are used in their own right, but also where they are combined with other functionality to create new solutions."
In addition, many instant payment schemes make use of the ISO20022 XML standard, meaning fewer formats for treasurers to deal with, and cleaner data. In many cases, instant payment schemes also have extra capabilities, such as extended free form text fields that enable the transmission of additional payment-related data, such as invoice numbers.
Real-time collections through request to pay
One area of opportunity for instant payments that may be of interest to corporate treasurers, says Fellowes, is supporting new collection methods, such as 'request to pay'. "This is essentially an instant direct debit that could improve on existing pull payment processes, reducing costs, lowering the potential for fraud and providing treasurers with more detailed information to help cash flow forecasting," he notes.
Request to pay schemes are being developed in numerous geographies, including the UK. They typically work by the payee sending an electronic payment request to an app on a customer's mobile phone and the customer responding by approving an instant payment from within the same app – all enabled through application programming interfaces (APIs). Customers are often also given the option to delay payment for a few days, and inform the payee of this choice.
While such a mechanism is unlikely to replace cards completely, because cards also have a number of additional consumer benefits, such as loyalty schemes, insurance or credit facilities, if the user experience for the consumer is good, and businesses can incentivise consumers to use this mechanism, then there is a clear cost saving opportunity to be had versus card interchange fees.
"Of course, it is difficult to tell at this stage how request to pay schemes will be welcomed by consumers – even in a single region such as Europe, consumer payment behaviours vary enormously from country to country, with Northern European nations embracing electronic means of payment while many Southern European countries still rely on cheques. Nevertheless, this is an interesting development to watch, especially since request to pay schemes could gain traction in the B2B space as the value limits for instant payments are increased, and as the infrastructure for these schemes matures," says Fellowes.
SWIFT gpi: real-time cross border payments?
Another interesting innovation happening around real-time payments is the work being undertaken by SWIFT to improve the speed and transparency of cross-border payments – which will have enormous benefits for treasurers. As Lance Kawaguchi, Managing Director, Global Head – Corporates, Global Liquidity and Cash Management at HSBC explains, "Tracking international payments is a time-consuming and inefficient task for many treasuries, particularly where correspondent banks are involved. The conventional method of contacting the receiving bank and waiting for it to contact the remitting bank, which in turn may also have to contact the correspondent bank is costly and laborious."
SWIFT's global payment innovation (gpi) initiative could remove these obstacles by giving treasurers a means to track payments themselves in real time. "Especially for just-in-time supply chains, where a payment's speed and the certainty of its existence and location are critical, these could make for radical efficiency improvements. By having this transparency, treasury and accounts receivable personnel will be able to free up time for more productive activities than payment investigations," adds Fellowes.
It is clear that instant payments can deliver a range of benefits for treasurers, whether they are deployed alone or in conjunction with other innovations. Corporate treasuries are seldom over-resourced, so the potential increase in automation in areas such as receivables reconciliation will be welcome.
According to Kawaguchi, other potential benefits for treasurers include: faster invoice reconciliation and greater working capital efficiencies. There could also be intangible benefits to tracking payments in real-time, such as improved supplier relationships, which could ultimately translate into valuable discounts.
Recently, SWIFT announced that it is conducting trials to finalise a new SWIFT gpi instant cross-border payments service, which will extend gpi linkages to other real-time payment systems around the world. At present, 50 per cent of SWIFT gpi payments are credited to end beneficiaries within 30 minutes and over 90 per cent of gpi payments are credited within 24 hours , but the hope is that these timeframes could be reduced down to seconds – heralding the start of truly real-time treasury.
Taking virtual accounts to the next level
An additional solution being talked about in relation to real-time treasury is next generation virtual accounts (ngVAs). "Virtual accounts are attracting growing interest from corporate treasurers, especially in Europe, where SEPA harmonisation has laid the groundwork for such solutions as treasurers look to reap the full benefits of bank account rationalisation and cash centralisation," says Fellowes.
In simple terms, ngVAs add the possibility of payments on behalf of (POBO) or receivables on behalf of (ROBO) and a partial alternative to notional pooling, to the enhanced accounts receivable reconciliation capabilities of 'traditional' virtual accounts. In addition, they give corporate treasuries considerable additional flexibility and efficiency by also providing a significant element of self-service.
Combining these possibilities with the speed and greater data capacity of instant payments opens the door to near real-time cash and liquidity management. Far tighter and more accurate control of payables, receivables and cash surpluses become possible through a combination of better visibility and faster movement of funds.
The self-service element of ngVAs also means that treasuries will be able to partially manage virtual account deployments themselves, potentially further reducing timelines and enhancing efficiency. Furthermore, a high degree of granularity makes it possible to build highly efficient and transparent structures for activities such as ROBO. For example, a treasury could define a two layer structure of virtual accounts where one layer reflected the corporation's legal entity structure and a second layer reflected the customer base. Some retailers are already thinking of taking this concept to the finest level of granularity, such as by allocating a virtual account to each till in each of their stores.
For some businesses, a combination of using ngVAs as outlined above, in conjunction with solutions such as request to pay, could deliver substantive efficiencies across a large percentage of their total receivables activity. Smaller customers could be diverted to using request to pay (thereby improving DSO and reconciliation rates) while larger customers could be allocated ngVAs to improve reconciliation rates and the speed of cash application.
Real world impact
"Instant payments undoubtedly mesh well with other innovations to help create new payment solutions and collections opportunities," says Kawaguchi. "Nevertheless, the extent to which treasurers can reap the value of these opportunities depends on the approach they take to integrating them into their operations, and their choice of strategic partner."
ngVAs are a case in point, with the achievable benefits in conjunction with faster payments being heavily dependent upon the quality and functionality of the individual bank's offering and implementation. All ngVA solutions are definitely not created equal. For instance, some banks may claim to offer them, but on closer enquiry have only rolled them out at very small scale in minor markets. "For ngVAs plus instant payments to deliver the scale benefits treasuries need with certainty, they first need to have been tested at critical mass in highly active major markets to ensure resilience and capability," says Kawaguchi.
A related point is integration. How easy is it for treasurers to access the various components that might make up a particular payment solution? Does the functionality for creating ngVAs reside on the same electronic banking platform as instant payment functionality? Does creating an ngVA in the banking platform automatically create the corresponding ledger in the corporate enterprise resource planning system? "These are all questions that treasurers should not be afraid to ask their banking partners," Kawaguchi notes.
Another area for treasurers to explore with their bank is realtime liquidity solutions. "After all, treasurers may now have access to exceptional cash visibility and velocity, but when instant payments arrive, do they have access to corresponding instant investment opportunities? Having faster access to surplus liquidity is of limited value if it cannot be invested equally quickly," observes Kawaguchi.
"Auto-investment solutions therefore play a key role in the world of real-time payments. HSBC's Liquidity Investment Solutions (LIS) tool enables treasurers to automate the allocation and investment of excess cash across a number of investment options, including a choice of asset managers. Once the treasurer has defined their investment policy, including their risk and liquidity parameters, LIS executes their investments/redemptions accordingly with nominated money market funds – making it easy for the treasurer to manage their liquidity 24/7, without additional headcount," says Kawaguchi.
It is clear that instant payments can deliver a range of benefits for treasurers, whether they are deployed alone or in conjunction with other innovations. Corporate treasuries are seldom over-resourced, so the potential increase in automation in areas such as receivables reconciliation will be welcome. Their value as a component in new collection tools is also considerable, especially if these stimulate additional sales by appealing to particular categories of customer. In the retail sector some of these are already beginning to emerge, such as integrating instant payments with electronic wallets to facilitate spending by high net worth Chinese tourists. In other sectors instant payments add value in their own right, such as in the freight sector where they can be used to minimise dock storage and other costs previously caused by clearing cycle delays to customs payments.
For global treasuries, maximising the benefits of instant payments will depend upon combining transaction volume and geographic scope. As new instant payments systems go live around the globe, treasurers want to be sure they are dealing with a bank that can quickly offer the payment functionality, but also integrate it alongside other instant payment systems and solutions. If they are, then they have the potential to achieve near real-time global visibility and mobility of cash, exceptional automation efficiencies and the ability to adapt their payable/receivable mechanisms to the needs of the business.
Published: November 2018
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