Real-Time Payments: Complex, but Crucial

Real-time payments, also known as instant payments, promise faster processing times and improved security compared to traditional methods. Despite its potential benefits, its impact on the finance industry remains an area of concern that requires real planning. Understanding the current state of real-time payments and analysis of its future potential and challenges is critical to making those all-important next steps.

From a payer’s perspective, a real-time payment is functionally instant – when a payment is made, funds are immediately debited from the payer’s account and credited to the payee in a matter of seconds. The experience behind the scenes is much more complex, however, requiring the functionality of a modern, digital payment infrastructure available 24/7 every day of the year. And that complexity goes beyond the ability to handle processing – one of the other major promises of the technology is in the capability to carry more than just payment instructions.

Taking full advantage of that, and the automation opportunities it presents, through the kinds of APIs that are emerging requires careful thought for merchants.

“When you’re talking about APIs, that gives you the ability to collect funds real-time, but what’s funny is you need to analyze the rest of the processes and solutions of your organization,” said Javier Orejas, Head of Banking Management EMEA and the Americas at the International Air Transport Association (IATA), in a recent meeting of the TMI Webinar Club. “It doesn’t make too much sense to do these things in a batch process. You need to carefully arrange all these processes to take advantage of making all the pieces work in real time as well.”

There’s also a lot less room for error. The double-edged sword of the instant payment is, fundamentally, its speed – it’s irrevocable and settled within seconds, making it all the more critical that payments are sent to the correct counterparties.

Other traditional concerns, on the other hand, may prove less relevant as time goes on and the system matures. Transaction limits started low but have continued to be raised as the scheme matures – The Clearing House’s RTP network is currently at $1 million – and fees continue to decrease to a point where there are use cases where they may be the cheapest option for a company.

“Clients that make a significant number of wire payments valued under the scheme’s transaction limit can move many such payments to real-time payments at a much, much lower cost,” said Rishi Munjal, Vice President of Product Strategy at Kyriba Payments. “So many of our clients have been able to reduce their costs by moving away from wires over to real-time payments. Now, depending on what your payment mix looks like, this could really be material for your business.”

For treasurers, this means empowering a fundamentally new approach, built on a combination of real-time balances and real-time transaction reporting. It can vastly improve cash visibility, as well as liquidity, which is especially important in the current economic environment.

“There are a lot of other payment scenarios that are run into quite often, like for instance, if there are any activities contingent on treasury receiving funds,” Munjal said. “For example, a company may want to wait until certain funds have been received before releasing a particular payment. From a cash visibility perspective, it’s beneficial, especially if you’re being charged by your credit or financial institution.”

If you look beyond what treasury needs, broader business functions within an organization can also benefit, beyond contingent payments to even scenarios where there’s a need for cash advance or cash on delivery. Buyers could make a real-time payment after inspecting delivered goods. That empowers both parties; the buyer can reduce operational risk, and the seller is reducing inventory and improving their working capital position.

The biggest stumbling block for the system may simply be its incredible complexity: there is no unified global solution for international business in real-time payments right now. More than 70 countries have developed independent systems, which makes for a huge challenge if clients try to leverage real-time payments globally on their own.

“I would strongly recommend companies to talk with their technological provider,” Orejas said. “There are many, obviously. We have a large team behind the scenes taking care of all the complexities market by market because there are many challenges that I honestly don’t recommend a corporate to undertake.  Unless you’re offering this service as your business, it’s not cost effective.”

— Jessica Purdy