Real-time payments represent a step-change in the evolution of payment instruments. Although they are often viewed as just another type of faster payment, they have some distinct characteristics that stand them apart from others, such as Same-Day ACH.
These characteristics are important for two reasons. First, some companies have already adopted real-time payments for some specific use cases, transforming business processes and giving them a real competitive advantage. Second, as with any change, an increased use of real-time payments will alter the operational risk profile of relevant transactions, meaning treasury practitioners have to fully understand the implications of their use.
The core characteristics of real-time payments are:
- Instant settlement. Real-time payments allow the beneficiary to receive payment within a few seconds. This is functionality shared with wires, but offered at a much lower cost, so it opens a wide range of potential use cases, such as “cash-on-delivery” payments, insurance payments and customer refunds.
- Irrevocability. Unlike ACH and card payments, real-time payments are irrevocable. This means that companies will have to have robust disbursement management processes in place when using real-time payments. Beneficiaries gain because they have certainty that funds cannot be recalled; payers benefit because any actions contingent on cleared funds being received (such as the shipping of goods) can be accelerated.
- 24/7/365 operations. Unlike traditional payments, real-time payments are always available, including in the evenings, over weekends and on public holidays. This means companies can make a range of payments (such as employee and supplier payments) securely as they fall due, rather than having to either pay in advance or wait for Monday morning.
These characteristics will have major implications for payment management and treasury operations as the use of real-time payments increases. In particular, the following areas will be affected:
- Cash visibility. Much of the value associated with processing real-time payments depends on treasury, and the wider business having real-time visibility over cash flows and positions. Specifically, while it is possible to make real-time payments, the bigger question for many treasury practitioners is whether they can access information in real-time about their balances and transactions on their accounts, particularly incoming payments.
- Liquidity management. Companies may have to review their internal liquidity management processes to recognize payments can be received in real-time to be able to take advantage of the many potential benefits.
- Cash forecasting. Adjustments to real-time payments both internally and across companies’ customer bases will be reflected in the cash forecasts.
- Certainty of funds. Irrevocability provides beneficiaries with certainty of funds which may be valuable in some circumstances. Irrevocability also means companies will need to review their disbursement controls, as there is no opportunity to recall payments.
- Operating hours. Finally, with real-time payments always available, allowing companies to make payments at any time, how will they be controlled?
Treasury practitioners need to understand these implications, both to get the full benefit from an increased use of real-time payments and to manage the resultant changes in operational risk.
Learn how real-time payments compare to existing practices. Download the 2022 AFP Payments Guide: Making a Business Case for Real-time Payments, underwritten by MUFG.