Real-time payments – the opportunities and challenges
The treasury function has steadily increased its strategic contribution in recent years, but it’s set to become significantly more influential
The universe works in real time, so why shouldn’t our payments? That’s the thinking behind the movement towards real-time payments, which is transforming the B2B transactions landscape and bringing corporate treasurers to the forefront of business decision-making.
UK Finance’s August 2022 UK Payment Markets Summary shows that Faster Payments overtook Bacs Direct Credit in 2021 as the most used B2B payment method for the first time.
This trend is set to strengthen, given that the Bank of England is renewing the (currently misnamed) Real-Time Gross Settlement service – the infrastructure supporting all payments in the UK. With this project, the Bank aims to make transactions faster and more resilient, flexible and innovative.
Several other factors are driving the acceleration of payments, as Emma Hollingsworth, a management consultant specialising in payments at PA Consulting, points out.
“The increasing availability of real-time payments and alignment of cross-border payments to [international payments standard] ISO 20022, combined with technology such as the Swift global payments innovation, will allow faster access to funds,” she predicts. “These developments will improve visibility regarding the movement of money and help to drive corporate treasury forward.”
Real-time (or near-real-time) payments will help treasurers to accelerate order-to-cash and working capital cycles, thereby making their firms’ credit and collection efforts more efficient. And improvements in visibility will help them to provide better analytics, real-time liquidity and cash flow management.
Given these developments, treasurers are likely to become even more influential in their organisations. That’s the view of Alexander Ilkun, a consultant specialising in treasury technology and risk management at Moody’s Corporation.
He observes that the role has “grown in importance over the past decade or so. Multiple crises have increased the focus on liquidity management, meaning that treasurers increasingly need to be strategic partners to the business. For example, the recent banking crisis has shown that knowing where your funds are and managing them in an agile way are key for survival.”
Daniel Wong, head of corporate treasury at British American Tobacco, notes that the treasury function has also been crucial in helping firms to understand trade-offs and funding impacts in an uncertain trading environment where investment projects have become more sensitive to cost-of-capital and market volatility. Real-time payments, he adds, are enabling firms to exercise more effective credit control when combating such financial stress.
“Faster payment releases and visibility of cash movements mean quick access to liquidity,” Wong says. “And credit lines to customers can be released more quickly, so more sales can be made without increasing the overall credit risk, which is invaluable.”
Let’s look more closely at the key implications of real-time payments.
Real-time payments help to speed up settlements, because payments are cleared through the day. This enables earlier cash collection days compared with weekly payment runs using systems such as Bacs. If managed well, this helps to reduce days sales outstanding, accelerating the order-to-cash cycle and enabling more informed choices about how cash should be used.
Colin Evans is owner and director of Elite Treasury Services, a consultancy and treasury support provider. He says that in certain treasury functions, such as trade banking, real-time settlement can also accelerate the release of imported goods held in lieu of payment, enabling these to reach the shelves sooner.
It can also help treasurers to make better use of working capital solutions such as factoring and supply chain finance payments, especially those involving developing markets and countries with monetary controls that can delay settlement.
Easing forex processes
Evans says that, as other countries move towards real-time payments, the biggest benefit will be the relaxation of global payment cut-off times, which have been the cause of much frustrating inefficiency. This development promises to make it easier for firms to make payments in any currency at any time of the day.
The advent of real-time payments should also make foreign exchange management more efficient, as it can reduce exposure to rate fluctuations and improve the visibility of conversion rates. But realising these benefits might not be straightforward, because of the need to calculate and hedge forex rates constantly rather than in batches.
Enabling a 24/7 operation
The ability to make payments at all times might propel treasury towards an extended or even round-the-clock service. This could offer a company a competitive advantage by enabling its customers to send and receive payments instantly whenever they choose.
But the concept of 24/7 treasury is controversial and comes with challenges – for instance, finding sufficient resources to expand the service or ensuring that banks and other partners can support the move.
A company’s decision on whether to extend treasury hours on not will hinge on factors such as its business model, its resources and the level of demand from its customers.
Another big benefit of real-time payments is that they enable firms to see receipts instantly. This ability should help them to develop more dynamic strategies with respect to credit, collection and supply chain management.
Reducing the use of cheques and cash
Most companies see real-time payments as a way to reduce cheque and cash usage, which should increase their efficiency and reduce their carbon footprints. But they must take care not to exclude any entity that needs to continue using traditional payment methods.
Driving the automation of treasury
Using real-time payments effectively requires new technology, analytics and workflows to operate effectively. To make maximum use of all the automation benefits that will become available to them, treasury managers will need advanced systems that enable them to, say, configure real-time payments to trigger automatic hedges in line with their firms’ risk profiles.
Evans believes that this will be problematic for many companies that rely on ageing enterprise resource planning systems. Those with advanced treasury management systems are most likely to be able to manage real-time liquidity effectively (as discussed further in article four in this report).
It’s clear, then, that the acceleration of B2B payments will create several chances for the treasury function to increase its influence. The following articles examine such matters in more detail and consider how treasurers can address both the opportunities and challenges arising so that they’re better equipped to drive their businesses forward.
Q&A: How treasurers can help drive B2B customer experience
Treasurers can use a range of innovations to enhance payment journeys, drive customer satisfaction and enhance brand value. Simon Eacott, head of payments; Ritu Sehgal, managing director, head of transaction services sales, corporates and institutions at NatWest; and James Hodgson, chief product officer at Payit by NatWest, explain how they think it will happen
Q: Why are B2B payment experiences important to treasurers?
Eacott: Increased digitisation and innovation are changing the treasurer function to encompass marketing and the customer experience officer role – so they have to get smart on user experience.
Businesspeople have regular personal interactions with ecommerce. When purchasing for their businesses, they ask, “why can’t it be like Amazon?” They want to know where the transaction is in real time, and the value they are getting from it. If you can’t answer these questions, you’re close to losing them.
Q: How can treasurers make a difference?
Eacott: The amount and speed of change in the payments landscape is driven by technological change, rising user expectations, and the moves to real-time, global payments, and message standardisation in ISO 20022. Companies with interests outside the UK will also be looking at a more 24/7 operation. Plus open banking is driving innovation by enabling third parties to access bank data.
This cocktail of innovation helps treasurers, who sit in the middle of all these changes, improve B2B user experiences.
For example, open banking enables companies to improve access to data in a way that helps B2B customers move funds more safely and simply. At NatWest, we already have over 40 APIs that clients use increasingly and will have another 20 by the end of this year.
And ISO 20022 will trigger innovation by enabling treasurers to use data analytics to tailor the customer proposition and improve CX.
B2B take-up of these innovations is in the foothills but will grow exponentially in the UK and Europe. Many treasurers have yet to tap these opportunities.
Q: Why are APIs so important?
Sehgal: APIs allow banks to show their clients a menu of products and services anytime, anywhere through customised integration with treasury management systems (TMS).
Another example is in digital finance or claims management companies, where credit decisions trigger a payment. A large financial services company recently went live with us and moved all their batch payments onto APIs. Now every time there’s a trigger for a payment, such as a credit decision, it happens automatically - in around 150 milliseconds - through an API. That’s powerful.
We have also used APIs to create a proposition around the Confirmation of Payee regulations and embed that in payment systems to smooth payment journeys.
Q: What are the challenges for treasurers?
Eacott: Treasurers don’t usually serve external customers directly but their internal customers will. It’s your responsibility to help your credit control and sales functions, for example, offer great CX. Always ask, do your treasury processes work for your external B2B clients? For example, NatWest had internal APIs around credit patterns, but we started offering them externally because we realised customers would find them useful.
The challenge is then how to become the voice of expertise on subjects such as real-time payments, guide the internal debate, and pick the right providers to help you realise the benefits.
You’ll need to develop soft skills to communicate with your internal investment committees and board, demonstrate the opportunities for improving CX, and articulate the business case.
Q: What technologies will treasurers need?
Sehgal: Treasurers need to be alive to the fact that payments are becoming real-time, 24/7, and using APIs; and they need systems that can handle these needs.
Hodgson: Treasurers also need cloud-native TMS that can support more treasury automation, which should reduce manual errors and improve UX. For example, they can use these systems to auto-reconcile and allocate payments and some systems are already doing this for 90% of transactions. That enables you to make real-time decisions that help improve CX.
Q: What results are companies getting?
Hodgson: In one example, a mid-market business that sells to smaller SMEs has been able to control its payment flows in real-time, using open banking. Rather than waiting for the payment to settle at the end of month, the customer’s credit limit is refreshed immediately, allowing them to make more purchases almost instantly. This accelerated cycle helps the B2B customer service its customers better and faster.
That ability has directly increased sales for the midmarket business, which is also now realising other unforeseen benefits, including cost reduction and reduced friction in the payment journey.
The TMS it uses to handle real-time payments is most suitable for businesses that have some influence over customers’ payment choices - including in financial sectors such as insurance and wealth management; other service businesses; some leisure sectors; and higher-value goods with more involved sale processes.
Such businesses typically save 50% of costs, but some early adopters have saved 90%.
Q: Times are hard for many - can they justify the investment?
Sehgal: To achieve any of these experiences - including API interfaces, real-time and 24/7 payments and automation - investment in a sophisticated, future-proofed, API-enabled payment platform is advisable. The main risk is investing in a platform that doesn’t deliver the customer value expected.
Hodgson: B2B relationships have higher average unit prices and more recurring business, so it’s easier to justify the investment compared to business to consumer (B2C). And though these technologies are in early stages, a growing range of case studies show the savings made.
Companies can also use those cost reductions to invest in incentives for their customers to change payment behaviours, creating a virtuous circle.
Our experience is that many companies are eager to work with open banking early adopters, to help bring it to life.
How to harness the power of treasury management systems
The technology that’s available to treasury teams has advanced in leaps and bounds. What’s the latest functionality that high-end TMSs can offer?
An advanced multipurpose treasury management system (TMS) is like a Swiss Army knife, providing an array of precision tools for corporate treasury teams working to ensure their firms’ success in the B2B payments space.
As other articles in this report have highlighted, numerous developments – including real-time payments, open banking and data standardisation in ISO20022 – are enabling treasurers to wield greater strategic influence in their organisations. Some TMSs are aiding this by offering new functionality with respect to real-time cash management, open banking and application program interfaces (APIs), potentially improving efficiency and visibility.
Advanced TMSs also support more data-driven payments systems, which will help treasury teams to deliver more and better insights – for example, about B2B customers’ interactions – to key decision-makers.
Not all TMSs are created equal. A firm will need one of the more sophisticated systems on the market to maximise the benefits of real-time liquidity by, for instance, automatically placing new liquidity and executing forex transactions instantly to minimise exchange-rate risk.
Alexander Ilkun, a consultant specialising in treasury technology and risk management at Moody’s Corporation, believes that having “the right TMS and reporting and visualisation software is integral to gathering and analysing data for decision support. Near-real-time automated cash visibility, say, is crucial for a larger company, because compiling bank-balance lists manually is not an option.”
James Leather is a director and consultant at Corium Treasury, a provider of advisory and interim management services in corporate treasury. He is impressed by the ability of some advanced TMSs to use APIs to connect to banks and send them all kinds of instructions efficiently. It enables them to, say, instruct a foreign bank to pay a local supplier, avoiding cross-border transaction fees.
“That gives treasury greater control of outgoings and visibility of bank fees for payments,” Leather says. “This can drive the function forward by, for example, managing cash flow better and reducing costs.”
Interconnectivity is another key aspect of a sophisticated TMS. This helps treasurers to make more comprehensive analyses, which should result in deeper insights and, in turn, better decisions.
Colin Evans, director at Elite Treasury Services, explains: “TMSs offer many services, such as cash forecasting; liquidity management; forex and derivative management; banking and cash management; and trade banking. A highly functional TMS would be an all-round, modular system that offers most, or all, of the above and can be tailored to your organisation.”
He adds that the providers of high-end TMSs tend to be more able to design new modules that will enable, say, real-time liquidity analysis.
Open banking and enhanced data
The fact that advanced TMSs can handle open banking and data collection and analysis gives them huge potential to transform the world of B2B payments. Open banking enables APIs in a data-driven payments ecosystem to offer their users significant efficiency gains. APIs also make it possible to connect international payment systems in real time. This allows better and faster decisions to be made about liquidity management and investment, as well as the automation of several processes to create safer, simpler and faster solutions.
Emma Hollingsworth, a management consultant specialising in payments at PA Consulting, predicts that “enhanced data – for instance, purpose codes, legal entity identifiers and structured addresses – will transform treasury operations, improving their efficiency. New data will enable automated processing, including the matching of payments with invoices to ensure correctness, and also improve analytics capabilities. The more data that treasury has, the better decisions it can make.”
She adds: “You need an advanced TMS to use the full set of data available from payments systems via direct API integration with banks’ systems.”
Potential challenges and risks
Evans observes that, while some TMSs can be modified to accommodate innovations such as real-time payments, implementing the required functionality tends to be a costly process.
“Treasury teams must possess a level of sophistication to identify and harness the opportunities of such developments,” he says. “For example, they will have to make multiple intra-day liquidity reviews. They’ll also need the rest of the organisation to understand the benefits and justify the investment in an advanced TMS.”
Hollingsworth points out another risk that firms may need to address: as they share more data more quickly in a concerted effort to improve the customer experience they offer, their ability to secure that material and identify possible cases of fraud can be compromised.
“To address this, organisations need future-proofed, flexible platforms that can balance CX and security,” she says. “Incrementally modernising legacy technology won’t be enough – a full-scale transformation is required.”
Treasury’s ability to influence corporate strategy will depend on how the function overcomes such challenges. Nonetheless, there is a clear opportunity for treasury teams to make the most of the latest TMS tech at their disposal and become better business partners in the process.
Cash: no longer king
The way we spend has changed for good, it seems, with cash taking more of a backseat as time goes on
Regulations and standards propel a wave of creativity
The increasing international adoption of ISO 20022 and rules governing open banking is encouraging many corporate treasury functions to work smarter
By triggering innovation in B2B payments, certain industry regulations and standards are giving treasury teams a new sense of freedom. In particular, global payments messaging standard ISO 20022 and open banking regulations are prompting treasurers to digitalise and improve processes ranging from liquidity decision-making to fraud detection. Such advances should help them contribute significantly to the success of their organisations.
Open banking and APIs – climbing the B2B foothills
Open banking regulations started in the EU in 2015 and the UK in 2018 (the US is still working on proposals). Many systems that innovate around these rules are being implemented in the UK, with Europe close behind.
Open banking aims to improve transparency by letting third-party developers use application programming interfaces (APIs) to build applications and services around financial institutions. This development is already transforming retail payments and has started to affect B2B transactions, promising to benefit treasurers hugely by enabling automation, cost savings and greater access to data.
ISO 20022 opens a world of possibilities
ISO 20022 is an open standard for consistent, rich and structured data that businesses can use for all kinds of financial transactions. The standard, which organisations are adopting around the world, will enable improved interoperability, data sharing and fraud prevention.
Mark McMurtrie, fintech expert and director of Payments Consultancy, predicts that ISO 20022 will “open a world of innovative possibilities for treasurers. Allowing more data to attach to each transaction will allow simplified payment reconciliation and improved reporting and analytics. The ability to link an invoice to a payment is incredibly valuable.”
He adds: “Many businesses are looking to create a unified payments hub that can handle all transaction types to automate processes and deliver operational efficiencies. This hub will use the ISO 20022 thanks to its global adoption and payment-type agnosticism.”
Emma Hollingsworth, a management consultant specialising in payments at PA Consulting, agrees about the standard’s potential.
“With the right implementation, ISO 20022 can enable strategic cash management and improve firms’ relationships with their B2B customers through better data sharing and interoperability,” she says, but adds that “organisations are still largely unaware of these benefits, often because of the complexities in global implementations of the standard. Treasury functions should assess the potential benefits and work these into their ISO 20022 transformations.”
UK Finance, the trade association for the financial services sector, points out that the Bank of England is pursuing opportunities to make several settlement efficiency improvements. These include better messaging via ISO 20022; enhanced liquidity options; and the use of APIs to increase transparency.
UK Finance says that its members “are keen to see these operationalised and delivering benefits”.
The profession’s view
A survey of treasury managers published by the Association of Corporate Treasurers (ACT) in April 2022 indicated that, although all respondents were aware of ISO 20022, only 38% were preparing for it.
“Engagement has improved marginally since then, but it’s still at a low level,” reports the ACT’s associate policy and technical director, Naresh Aggarwal. “ISO 20022 can benefit organisations by allowing structured remittance information to accompany any payment, enabling the automatic reconciliation, uploading and updating of customer information. The standard will also make it much easier to use robotic process automation or machine learning to extract relevant information and update customers’ records.”
He adds that automatically processing payments on to customer accounts “will provide powerful opportunities for treasurers by enabling those funds to be applied more quickly to general corporate activity”.
For example, a financial consultancy may receive a £1m payment, of which £100,000 is a management charge and the rest is for paying a reinsurer. That £100,000 could be allocated immediately and made available for corporate activity. Or a retailer could ship more products to a B2B customer immediately without that customer exceeding its credit limit, so it can sell goods more quickly.
But, to achieve this, “you would need a treasury management system that can read such information and allow you to apply it to a customer account. Without it, you’d have to allocate customer receipts manually,” Aggarwal says. “So, if you have a legacy system, you probably won’t be able to access the benefits of ISO 20022.”
He predicts that the move to ISO 20022 will create some challenges for treasurers and their businesses, such as the need to reform some instructions on vendor payment lists and remittance data to align with the new standard.
“Some treasury management systems may not allow that, so you need a system that enables you to load this information,” Aggarwal adds.
It seems likely, then, that a smart investment in such high-end tech will help treasurers to exploit innovations in the new world of ISO20022 and open banking, potentially bringing huge financial benefits to their companies.