Immediate payments and the impact on corporate treasurers
|Barry Kislingbury||Lead Solutions Consultant, Consumer Banking, Europe, ACI Worldwide|
We live in an instant world, where two-year-old children know the ‘finger swipe’ used on mobile devices and, as adults, we get frustrated if we have to wait more than three seconds for a web page to load. This demand for immediacy is now ingrained in our way of life, and the same expectations are increasingly held about payment services.
The purchasing world already largely functions online and in real-time. However, the payment industry that underpins it – and historically lagged behind when it comes to modern technology – is now preparing to respond to this demand for speed.
Mostly due to regulatory, technological, behavioural and cultural drivers, immediate payments are about to enter the corporate transaction space – with benefits to corporates and their customers. As with any major change, these new developments are likely to create significant impact.
Revolutionising the UK payments industry
In the UK, we have four main payment schemes that process transactions worth a total of £72 trillion each year. These are:
- BACS: via the Automated Clearing House (ACH) for batched low-value, high-volume payments
- CHAPS: via the Real-Time Gross Settlement (RTGS) systems for high-value, low-volume payments
- C&CCC: the Cheque & Credit Clearing Company for cheques
- Faster Payments: the UK’s immediate (or real-time) payment scheme, which takes the best elements of ACH and card payments, delivering speed, information and cost effectiveness
It is the last of these that is driving change. The Faster Payments scheme, initiated by the UK government in 2006 and launched in 2008, reduces traditional low-value payment clearing times from three working days to a matter of seconds. Previously, members of the scheme were able to send and receive immediate payments up to a transaction limit of £100,000. However, this limit is in the process of being raised: first to £250,000 in 2015 and then potentially to £1m in 2016, opening up the scheme to expanded use by corporates.
Faster Payments Scheme Ltd (FPSL), working with the UK’s new Payments Systems Regulator (PSR), is also opening up the Faster Payments scheme technology and infrastructure to new entrants, be they challenger banks or other payment service providers (PSPs). This ‘New Access Model’ encourages increased competition and innovation by opening the scheme to new directly connected bank members, to PSPs and to technology providers (such as ACI Worldwide) to offer aggregator services (a Faster Payments service bureau) – reducing barriers to entry for enterprises with lower annual transaction levels.
There is also a third initiative that will further revolutionise the UK payments industry, called the ‘World Class Payments Project’. Launched to review the UK’s payment schemes and look forward ten years to 2025, this project will set out a vision of how to achieve a world-class payments environment. This is intended to keep the UK at the forefront of financial services and to support consumer and corporate payments requirements which, in turn, help to drive the UK’s economic growth. The project has already identified that there are too many access points, schemes and processes and that customers’ needs are not at the heart of the current payments environment.
The ultimate goal of this project is to simplify and improve the end-to-end experience, driving innovation and competition and standardising interfaces – providing the ability to change core processing schemes without affecting services or stability. As a result, over time, we can expect to see a reduction in the number of payment schemes, with the provision of additional products and services using modern, internationally accepted messaging standards such as ISO 20022 – now the standard for new payments schemes and financial services, globally.
How are financial institutions responding?
It is not just changes to the UK payments infrastructure that are driving the banks to provide real-time payment services – consumer demand is increasing as well. A 2015 YouGov survey1 conducted on behalf of ACI Worldwide highlighted that:
- 45% of bank current account holders would be tempted to switch account providers by the offer of faster electronic payments
- 41% expect electronic payments to reach their destination either immediately or in less than five minutes; 64% expect them to arrive in up to three hours
- 66% want to make immediate payments to friends and family; 65% want to pay utility bills and other regular monthly bills immediately; 57% want to make immediate purchases online or in-store
The banks realise they need to respond to this demand, or risk being disintermediated by more competitive PSPs and Trusted Third Parties (TTPs). There has been a plethora of announcements confirming this – news that Lloyds is building a digital bank, for example – as leading banks start infrastructure renovation, silo breakdown and digitalisation projects to enable them to meet the needs of customers and regulators in what is now a far more competitive, global and real-time world.
Implications for corporates and corporate treasurers
So, what is the relevance to corporate treasurers? Well, we are all consumers and, as personal banking services develop, we will become accustomed to real-time payments, positive confirmation of funds transfer and new, innovative services. We will quickly come to expect them in our working lives as well.
The banks are aware of this expectation and, as they modernise their systems to respond to consumer demand, they will also be renovating systems servicing corporate treasurers. Banks use essentially the same underlying payment systems to service their corporate and consumer customers, albeit with different products and services offered over the top.
The changes in the UK payments industry will affect corporates in a number of direct ways: through the potential removal of BACS and cheques, the reduction or replacement of direct debits with the rise of e-invoicing, the opportunity to use new service providers, and the use of real-time order processing, invoicing, refunds, payments and reconciliation.
Removal of BACS scheme
It has been proposed that the payments traffic currently running through BACS could be routed through Faster Payments, making BACS redundant. The Direct Debit scheme currently runs via BACS, so this makes the future of direct debit somewhat uncertain, although we know other countries are planning to move direct debits to their real-time payments schemes. Adding to this, consumers do not like the lack of control they have with direct debits, while the banks are not fond of them due to high levels of associated complaints and the Direct Debit Guarantee. Although direct debits provide a level of security to merchants, because the scheme runs via BACS, it takes the money three days to enter their account, making cash management more difficult. There are a number of proposals as to how this could be handled, including a move to instant direct debit via the Faster Payments scheme and a move to standing orders, which currently already run over Faster Payments. Either option would have significant impacts for those who utilise direct debits currently.
Rise of e-invoicing
E-invoicing (or Electronic Bill Presentment and Payment) could be another alternative to the Direct Debit scheme. Already widely used in the US, these systems issue an invoice either directly to the customer, or via the customer’s bank, enabling payment to be authorised with the click of a few buttons. This gives control back to the customer, reduces complaints and costs for the bank and provides the funds to the corporate immediately, improving cash management for both the consumer and the corporate. Alternative service providers Under the New Access Model, if your current bank does not provide the services you need to grow your business, you may well be able to turn to an alternative (bank or non-bank) provider. It is envisioned that there will be multiple aggregators within the Faster Payments New Access Model, and that many of these will provide services specifically designed to meet the needs of particular types of enterprise, including merchants. Service providers will also compete to offer additional services, such as tighter integration with enterprise resource planning (ERP) systems and better reconciliation using the remittance data available with ISO 20022 standards, allowing instant reconciliation with purchase order or invoice numbers.
Benefits of immediate payments for corporates
Corporates stand to reap significant benefit from immediate payments, particularly when combined with the richer transaction data available using the proven ISO 20022 standard. CFOs increasingly see treasury processes as strategically important, and immediate payments will give the corporate treasurer the tools to better manage cash-flow forecasting, purchase orders, invoicing and ultimately supply-chain risk, improving financial control and, ultimately, profitability.
Benefits to treasurers include:
- Discounts: with improved cash flow and positive payment confirmation, corporates could obtain discounts for settling commitments early.
- Terms negotiation: one step further, if a corporate had a history of paying invoices on time or at pre-agreed events, such as shipping and delivery milestones, better contract terms could be negotiated with suppliers, totalling significant savings.
- Reduced borrowing: better cash flow management and information could reduce funds borrowed from banks, saving money by paying reduced levels of interest.
- Reduced reliance on cash, cards and cheques, which are expensive to process.
- Tighter integration between corporate ERP systems and banks’ trade finance and payment systems provides better control, reconciliation and forecasting.
Customers, too, will see benefits. For instance:
- An insurance company can approve a claim and have the payment in their customer’s account within seconds.
- A retailer could refund a return in real-time, leaving their customer happy with the service and the money in their bank account.
- Loyalty cards' could be linked to a customer’s bank account, enabling the customer to actually pay with the loyalty card. Faster Payments are cheaper than cards for retailers, so they could reward their customers with more loyalty points as they will have the funds instantly. Only the card schemes lose out.
- Goods can be shipped or taken home as soon as payment is received.
- Immediate payments are cheaper than cards, giving more options for customers. Those who need credit can still use cards, but will pay a premium for the credit, while those who have budgeted for a purchase can use an immediate payment and benefit from lower charges.
Benefits exist for employees too, especially temporary or hourly paid employees. Firms will be able to calculate pay, then initiate payment on a Friday afternoon knowing staff will have the money in their account for the weekend. Similarly, firms will be able to pay employees’ expenses as soon as they are approved.
The UK payments industry is on the cusp of a revolutionary change. With the imminent increase in Faster Payments transaction value, the New Access Model and a forward-thinking mind-set, the UK will be at the forefront of electronic payments. Corporates are right at the heart of this change. Those who spot the opportunities and move first will increase customer, supplier and employee satisfaction, reduce costs and free up resources for investment – in the process, staying one important step ahead of the competition.
1All figures, unless otherwise stated, are from YouGov plc. Total sample size was 2,074 adults. Fieldwork was undertaken between 12th-15th June 2015. The survey was carried out online. The figures have been weighted and are representative of all UK adults (aged 18+).
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