Living in a world where information is frequently shared in “real-time”, both consumers and businesses are increasingly seeking to keep their payables and receivables aligned in order to have a better handle on their fund inflows and outflows. While digital processing of payments makes this a reality, it also transforms money management by opening them up for disruptive innovations. Real-time transfer of money also supports the economy in several ways.
Over the years, digital payment technology has evolved from cash to cashless through various instruments, viz., writing checks to payments through debit cards, mobile payments and digital wallets. Electronic transfer of money has made life easier for both consumers and businesses. However, there is also the fact that when it comes to digital technology, enterprises have been proactive in most cases, except money. This risk-averse behavior was often justified with a “why fix something that’s not broken” argument.
How else can we explain that US banks last adopted a new electronic payment on a large scale back in the 1970s with the Automated Clearing House (ACH) network. Till date, the slow settlement time of these payment methods are spoken about as business payments often take hours and even days to settle, creating cash flow issues for small businesses that are constantly seeking instant capital. To suggest that cash flows are a challenge for small businesses is stating the obvious as research indicates that 40% of all such enterprises could shut down in two months if their cash flows dried up. Let’s see how real-time payments can make a difference
Are real-time payments the new cash?
Precious metals, coins and currency notes constituted the earliest medium of exchange, and facilitated commercial transactions for hundreds of years. As financial markets became more mature and connected, hindrances in payment became a norm. Monetary instruments like promissory notes and bank checks delayed settlements. Later, although the mainframe computers built a world of opportunities for e-payments, the batched processing system defined clearing times, and disbursements became scheduled.
Real-time payments (RTPs) do away with such technical issues and build a domain where customers, merchants, banks and other financial institutions can pay entities, clear bills and send money immediately, round-the-clock.
Besides boosting the speed of value transfer, RTPs usher in a new age of contextualized commerce – efficient payments that can be made precisely when and where they are required. Today, a digital experience sans prompt payment tends to fall short of customer expectations and also puts businesses at a disadvantage.
Reasons for small businesses move towards real-time
From the consumers’ perspective, RTPs make it convenient to complete transactions, whether it is paying a utility bill, buying groceries from a store, or booking a travel ticket online. They can initiate the payment via a computer, smartphone or tablet and claim the service / product they pay for. At the other end, the enterprises that use these systems get the funds into their bank instantly, unlike earlier where they had to wait for a check to clear.
Being an open-loop solution, the RTP is connected to a bank account and not prepaid balances – this creates the possibility for money to be transferred to anyone with a bank account in any country. It allows businesses to request or make payments faster and at lower costs, enabling them to hold on to their cash for longer periods. The small and medium businesses (SMBs) can now access the money they receive much faster, thus enabling them to clear their own bills faster – be it from suppliers or paying out salaries. In fact, the sustainable benefits of RTPs for small and medium enterprises (SMEs) are quite sizable. Let’s take a look at some here:
- Improved cash flow
Real-time payments make funds more readily available to businesses – this in turn helps them maintain stronger liquidity. As payments get cleared within seconds and not hours or days, an organization can be more agile in its budgeting and working capital management. It becomes easier to pay suppliers on time and support revenue generating operations more effectively. In addition to meeting its short-term commitments, a business that has real-time data on its cash position can also avoid unnecessary borrowing and can utilize surplus cash optimally.
- Boosted efficiency
SMEs proactively try to keep their work processes uncomplicated and minimize the time and resources involved in them. When they deploy a real-time payment system, they can eliminate the extra efforts that go into processing paper-based and other traditional methods of payments. With RTP, it is easy to maintain up-to-minute data of financial transactions and account balances.
- Turning financial transactions into customer and business relationships
An important characteristic of RTP is its ability to enable messaging between payee and payer with:
- A request for payment
- Payment acknowledgement
- Push payments or credit transfers
- Remittance advice services
Such stages allow payees and payers to include information that improve transparency of their transactions and mutually build a dialogue. In practical terms, real-time processing forms a secure payment ecosystem where merchants, customers and financial institutions subtly exchange information to build trusted relationships and create value in the economy.
- Support for business growth
In a digital-first world, enterprises that have planned and prepared for their growth know that using innovative ways to handle routine workflows and build customer experience will give them a competitive edge in the market. RTP is an example of such innovative systems. As startups strategize to become unicorns and the business landscape becomes more globalized, instant payments for new deals will play a bigger role in supporting national and international transactions. The focus should be on getting ahead of the curve now.
Summarily, an SME could be trying to boost revenues and stimulate consumer spending or reduce payment costs and improve long-term relationships with customers. In either case, the RTP models provide them with the business benefits they seek. Such setups also make payroll on demand more realistic to drive employee engagement.
Understanding RTP infrastructure around the world
The switch-over from a traditional payment process to a digital one is largely seamless, provided an SMB spends some time to ascertain their requirements and match them with the available solutions. Besides reviewing the terms and conditions as well as the costs, businesses also need to check for any potential limitations or exclusions. Another factor relates to the overall impact that a new RTP has on the existing approval systems and processes, though most providers guarantee an easy transition to the new system. To get a better grip, it would be worthwhile to understand some key aspects of real-time payments. These are:
- Authorization – Payment process gets certified
- Posting – Funds are immediately transferred to fuel the transaction
- Settlement – There is an instant settlement of outstanding obligations between financial institutions
- Notification – The payee receives the funds and payer receives confirmation on the amount transferred
All the four processes have to happen instantly in succession for an RTP to be complete. And there are multiple setups to support their usage around the world. In the US, The Clearing House (TCH) system is used by large financial institutions to settle payments. Within minutes, customers of connected organizations can transfer funds using the TCH RTP system. After consulting several authorities, the US Federal Reserve has also announced that it will launch FedNowTM Service in 2023-24 for round-the-clock RTPs through smaller banks.
The Immediate Payment Service (IMPS) and Unified Payments Interface (UPI) are the major RTP systems currently used in India, with the latter now being used by Singapore. Elsewhere in Asia, Thailand’s PromptPay, Singapore’s Fast And Secure Transfers (FAST), and Hong Kong’s Faster Payment System (FPS) are examples of instant payment models that have been built under the supervision of the respective monetary authorities.
While RTPs are now managed and actively used worldwide, banks must also modernize their backend systems for cross-country integrations as commercial transactions – even for SMEs – are crossing international borders. More importantly, they need to manage the inherent risks and deploy comprehensive cybersecurity measures to make this payment mode more reliable for all involved parties. And such efforts have to become a part of other digital transformation initiatives that are being strategized by businesses and financial institutions of all sizes. While real-time payments continue to develop, the fact remains that any solution in this area would help SMBs in erasing operational challenges.