The rise of real-time

Real-time payments (RTP) are available 24/7/365, settling and delivering funds with confirmation to the payee in less than 60 seconds.

While real-time has been around in Europe since 2014, there’s now increasing interest for real-time retail payments in North America. It’s gradually making its way into the corporate world as businesses look for alternatives to credit cards and cheques.

There is immense work being undertaken by the governing bodies of the United States and Canada, and by 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 compared to an electronic funds transfer (EFT), in which the funds need to be sent one business day before the value date.

Start using real-time, today

Businesses are now able to enter the real-time payment space with the introduction of payment methods like Interac e-Transfer for Business.

What corporates want

While real-time payments are available, is real-time needed by North American corporates? More importantly, is it wanted?

FIS’ Flavors of Fast survey found that in 2020, “56 countries had a live RTP rail, up from just 14 countries” six years prior.

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. Here is the first and possibly the most important challenge for corporates. Why would a corporate want to ”speed up” payables using real-time payments?

It’s not that corporates want to speed up their payables. It’s 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 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?

Managing your cash flow: traditional payments vs. real-time

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’s dated by the 30th day. This creates cheque float value. The question is, when do you want the payment to physically clear your account?

If you make a real-time or near real-time payment on or before the 30th, what’s in it for you? 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 you could add three additional days to the net terms in order to enjoy the same cost savings as cheque payments.

Can real-time payments work for your business?

Pros

• Receive payments within seconds.
• Available all day and night, everyday of the year.
• Can accelerate the logistics process if the treasury has the ability to capture real-time payments and share it with the appropriate department.
• Real-time payments are cheaper than wires when moving funds between accounts. The real-time payment threshold for ATB is $25,000.
• An opportunity to review payment cycles.
• A risk mitigant in commercial transactions, allowing the seller to receive payment for goods before shipment.

Considerations

• System upgrades. Companies may want to start upgrades early to avoid IT backlogs.
• Once a payment has been sent, it can not be amended. This provides security for the receiver, but requires extra care from the sending business.
• Companies must evaluate their internal liquidity management process to make sure they can receive payments in real-time.
• Companies will keep lower precautionary balances.
• Potential for fraud with increased irrevocability and data-rich payment messages. While these potential risks will require the need for account verification (and likely some cost and time constraints), they will benefit the company as a whole.
• There will be an adjustment to cash forecasting until new payment patterns are identified.

Making the case for stakeholders

Ultimately, you’ll have to make a business case for suppliers, customers, employees and partners for real-time payments being the best option for your company.

Real-time payments vs. wires

• Cheaper than wires. According to the AFP Payments Cost Benchmarking Survey, the median cost of initiating a real-time payment is $0.01-$2.50 compared to the median cost of initiating a wire, which is $10.01-$15.00.
• Real-time payments can be made 365/24/7, while wires are unable to be made evenings, weekends and statutory holidays.
• The largest difference between real-time payments and wires are the value thresholds: $25,000 for real-time payments and $1 billion for wires.

Real-time payments vs. payment cards

• Card payments are subject to chargebacks, which means companies must always hold back cash to cover those payments.
• Card fees are higher.

Real-time payments vs. cheques

• Real-time payments are instant, while cheques are a slow payment method.
• Getting new cheques can be costly and time-consuming.
• Instantly changing details of your cheque is not an option.
• Cheque fraud is on the rise, with fraudsters stealing, altering or forging cheques to steal funds.
• Learn more about using cheques for your business payments.

Explore 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 cashmanagementsupport@atb.com.

This article was originally sourced from a publication in AFP’s Exchange Spring 2020 issue.