How real are real-time payments for corporates?
By Farrah Panjwani, CTP, MBA, and Peter J MacIntyre, CTP 17 May 2021 5 min read
The global payments community commonly refers to real-time payments as payments that are available 24/7/365, which settle and deliver available funds with confirmation to the payee in less than 60 seconds.
While real-time has been around in Europe since 2014, there is now the emergence of real-time retail payments in North America, particularly with the advancement of smartphones. It is gradually creeping into the corporate world, as businesses look for alternatives to credit cards and cheques.
There is immense work being undertaken by not only the governing bodies of the United States and Canada, but also by the financial institutions that will need to comply. The cost of such modernization will be measured in the billions.
Real-time payments may speed up the electronic value of the payments when compared to a traditional electronic funds transfer (EFT), in which the funds would need to be sent one business day prior to the value date.
Search for “real-time payments” and you will be inundated by page after page of information mainly referring to low-value retail payments, however, there is and will be a continued push for corporates to follow suit for larger sums.
"Having real-time payments would be great to have for our business as it'll allow us to have instant payments and detailed conversations with our clients and suppliers. However, it is a costly solution and decreases our working capital needs, particularly when we are pushing funds out to our vendors"
What corporates want
The question now is, is real-time needed by US corporates? More importantly, is it wanted by corporates?
“Having real-time payments would be great to have for our business as it will allow us to have instant payments and detailed conversations with our clients and suppliers,” said Imran Gulam, CFO of FYidoctors. “However, it is a costly solution and decreases our working capital needs, particularly when we are pushing funds out to our vendors.”
To gauge the corporate need, we need first to look at the contributing factors that affect payments. Businesses of every size are driven by some type of cash conversion cycle, ideally one that speeds up receivables and delays payables as much as possible.
Wait, did we just say delay payables as much as possible? Herein lies the first and possibly the most important challenge for corporates. Why would a corporate want to ”speed up” payables?
The answer is not that corporates want to speed up their payables—it is that they want to maximize their cash flow cycle, perhaps to delay it to the last second, using the most secure and least costly way to execute the payment, making “real time” payments an option. This allows for more efficient working capital to perhaps reduce debt, invest short-term, or make other purchasing decisions. What other opportunities are available for you to source additional funds or make use of funds with this additional liquidity?
How do you make better use of your money? Say you have a payment with net 30 terms. You need to have it in the vendor’s hands by the 30th day. Some vendors will accept late payments without penalization, as long as it is dated by the 30th day. This creates cheque float value. The question is, when do you want the payment to physically clear your account?
One may ask that if they pay a real-time or near real-time payment on or before the 30th, what is in it for them? Is the vendor willing to accept an electronic payment, valued three days late, to account for cheque float?
Have a look at the following calculation. Say you have a $1 million vendor payment this month, based on Canadian prime + 1 of 4.95 per cent. Assuming a cheque float of three days, you are looking at a savings of around $400 a month, which equates to $4,800 a year. Now say you have 20 similar vendors. You are looking at nearly $100,000 per year purely in interest cost savings by using cheques as your payment method.
Perhaps you want to mitigate cheque fraud or create a more efficient payment process. Instead of cheques, what if you paid electronically? You would look for increased trade terms. You can ask the vendor for a discount that matches the savings of a cheque float, or maybe you could add three additional days to the net terms.
“There is a fine balance to consider between savings from efficiency gains provided by real-time payments, and the impact on cash flow due to immediate execution of payments,” said Norbert Mazenod, CFO of The Lake Louise Ski Resort. “Efficiency gains are not limited to streamlined processes, and measurement should also include time savings from reduction of calls from vendors to our accounting or operational teams when looking for payment date information.”
One of many options
Today, real-time payments are just one of many different payment options for corporates. There is still plenty of work to be done, from processes for monitoring liquidity in the high value payment system to operationalizing a new risk model and framework for the corporate system to safeguard all parties.
Payments are complicated. While simple in concept, they can become difficult to manage and interpret. Corporate treasury professionals need to understand how they affect the business, company culture, and vendor relationships, as well as how they can maximize cash flows.
The modernization of both business and retail payments is feeding a need for faster speed, greater flexibility and peace of mind. With the North American community developing a modern payments system that will provide new opportunities to simplify and enhance daily payment interactions, this will help secure and strengthen our competitive position as a global leader in financial services.
To learn more about how you can position your business to get the most out of your payment solutions and strategies, reach out to ATB’s Business Solutions Cash Management Support Team at 1-877-363-4855 Option 3 or email@example.com.
Farrah Panjwani, CTP, MBA, is senior director of ATB Financial. With
nearly 10 years of consulting in the US, Farrah has provided financial
analysis, strategic planning and expert testimony support on complex
commercial disputes and over 5 years in the Treasury industry in Canada.
Peter J MacIntyre, CTP, is managing director of ATB Financial. With
over 30 years of banking experience at some of Canada's major financial
institutions, Peter brings with him more than 20 years of progressive
experience specifically in the Treasury & Payments industry.
This article was originally published in AFP’s Exchange Spring 2020 issue.