Companies are increasingly leveraging the power of instant payments to help settle transactions more efficiently. But these payments aren’t just an attractive option due to speed alone; their increased transparency over traditional formats helps promote greater payment precision, among other advantages.
In this article, we’ll explore the benefits of instant payments beyond speed of execution, how to decide whether they are the right fit for your treasury needs, and how to prepare your infrastructure to support instant payment technology.
Beyond Speed – Additional benefits of instant payments for companies
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Bilateral communication and increased transparency:
Traditionally, payment communications were exclusively made from the payer to the payee. Bilateral communication was only available outside of the payment platform, which contributed to lag times in both payments and settlements. Instant payments, on the other hand, promote transparency and two-way communication via instant confirmation of payments. This finality of payment offers peace of mind that a payment has been made successfully. And if it hasn’t been, the treasury team can leap into action to investigate and resend the payment while still meeting any critical deadlines.
If substantial time is lost to manual tasks, begin reevaluating what is being delivered from your bank, in which formats, and whether this information makes it easier to accomplish day-to-day tasks. While this examination may take more effort than simply defaulting to current processes, it has the potential to yield substantial improvements over time.
Taking time to reassess can also provide clarity when evaluating potential banking providers. Having a deep understanding of where the greatest business needs exist within an institution enables the selection of a provider uniquely suited to best fill them.
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Improved liquidity management:
Fast payments, payment confirmations, and payment finality allow for full control over cash positions by way of the ability to monitor cash flows and balances in real-time. This also offers un-interrupted, real-time view of cash positions to allow for more strategic decision-making, such as the best time to pay down debt or unwind an investment.
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24/7 availability:
Instant payments (via both The Clearing House’s RTP network and the Fed’s FedNow network, discussed in more detail below) are available 24/7/365 vs Same Day ACH which is only available Monday-Friday with specific cutoff times that may not meet your needs. Instant payments provide a competitive advantage when competing for talent in a tight labor market, where employees often want to be paid at the end of the day (e.g., early wage access for gig workers – all made possible through instant payments). Additionally, the immediacy of the payments reduces the risk and concerns of a late payment, such as preventing supply chain disruptions and helping to maintain favorable credit terms.
Examples of how payment precision can make an impact
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Make just-in-time payments to suppliers:
This can be very helpful for companies who are facing financial constraints or need to manage their cash closely. For example, if a supplier asks for cash on delivery, it can allow the corporate to send an instant to the supplier to release the raw goods, allowing the corporate to continue operating.
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Instantly pay bills on a timely basis to avoid late fees:
Instantly paying bills can help avoid late fees and/or help companies take advantage of discounts (e.g., paying early for utilities or rent or taking advantage of a 10% discount for same-day payments). This can incentivize making payables earlier rather than holding on to them until the last possible moment.
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Emergency payments during crises:
During a disaster, timing is critical for disbursing disaster relief funds or urgent payments anywhere in the country where needed.
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High-profile transactions:
In the normal process of real estate closings or mergers and acquisitions, waiting for Fed reference numbers to track payments can slow down completion of transactions.
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Ability to instantly request payment:
With instant payment precision, you’ll have peace of mind knowing you can initiate a request for payment allowing the recipient to rapidly respond and initiate the payment – enhancing and improving your DSO/receivables.
Instant Payment Providers
The U.S. has the following two instant payment networks:
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The Clearing House’s RTP® Network:
Available since 2017, it provides instant payments through a network of over 120 participating banks across the U.S. for payments up to $1 million USD.
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FedNow® Service:
The Federal Reserve launched FedNow in July of 2023 as an alternative to the Clearing House's RTP Network for initiating instant payments. Like The Clearing House’s offering, there are 120 participating U.S. banks. Currently, the maximum payment is limited to $500,000.
How to prepare your infrastructure to support instant payments
Implementing instant payments requires careful consideration of various factors, including the following:
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Assess your existing system’s capabilities
System capabilities may impact the adoption of new payment methods. Organizations with flexible payment options might find it easier to embrace instant payments while those facing technological constraints (e.g., inflexible ERP or payment platforms) might experience challenges with implementation that can impact user acceptance.
It is also important to examine your technical architecture to ensure you have the best foundation established for connectivity. While instant payments can be initiated manually or via host-to-host connectivity, APIs enable companies to realize the enhanced capabilities of instant payments. The Straight-Through Processing rate refers to an automated and seamless electronic transaction system. Holding a higher STP rate ultimately leads to more efficient and timelier payment process.
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Ensure appropriate fraud controls
Because instant payments via both RTP and FedNow are irrevocable, clients must have procedures in place to validate the account details prior to payments being initiated. The right fraud controls can stop fraudulent transactions prior to processing.
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Review your corporate workflow and ensure it follows the bank’s recommended instant payment process
It is important to understand your banking provider’s capabilities when it comes to instant payments to ensure they will meet your needs. To evaluate if your banking provider is the correct fit, consider the following:
- Which instant payment networks are used by the connected?
- Is processing available 24/7?
- Are payment responses sent in real-time?
- What APIs are available to support the end-to-end payment lifecycle?
- Can real time proof of payment be provided?
Barriers that companies might cite for not using instant payments
Companies with inefficiently managed cash flows may be reluctant to adopt instant payments owing to their preference to make payables as slow as possible until they are certain funds are readily available, often resulting in holding excess cash longer then desired. Additionally, corporations that operate exclusively within U.S. business hours may not see the advantage of 24/7/365 payment availability - especially in view of the internal hurdles in getting buy-in to such a radical change. Barriers aside, companies should consider the benefits of instant payments as those benefits go far beyond speed. Using real time payments can improve communication and liquidity management, in addition to providing a competitive advantage.