A significant majority of CFOs want to adopt real-time transaction solutions, also known as instant payments, within the next two years. This indicates a substantial increase compared to the adoption rate, which is less than half.
As of September 1st, The Clearing House (TCH), the operator of the RTP Network that has been operational since 2017, reported that around 150,000 businesses are actively utilizing its network. Additionally, in July, the Federal Reserve introduced its instant payment rail called FedNow.
Despite these advancements, it is worth noting that real-time payments are still in their early stages. These solutions enable transfers of funds between consumers and businesses by allowing them to instantly send and receive funds from their bank or credit union accounts at any time of day or year. This ensures that recipients have access to these funds instantly. But CFOs are cautious about real-time payments, let’s see why.
Key Takeaways:
- Growing Adoption of Real-Time Transaction Solutions: CFOs are cautious about adopting real-time payments for now but are planning to adopt real-time transaction solutions within the next two years, pointing to an increasing trend in the use of instant payments.
- Real-Time Payments Enhance Transparency and Cost Efficiency: Real-time payments offer a transparent view of payment information, providing details like the recipient’s name and a thorough breakdown of the invoice. When compared to wire transfers, instant payments are more economical, often resulting in reduced transaction expenses.
- Anticipated Functionality Enhancements: The inclusion of Request for Payment (RfP) in the RTP networks services and its future integration into FеdNows offerings showcase the expected enhancements in functionality. These improvements aim to provide access to transaction details and improved measures against fraud activities.
- Improved Cash Flow Management: Real-time payment solutions give businesses control over their payments. This allows for timing and instant confirmation of payments, which helps with managing cash flow and could potentially lead to early payment discounts.
CFOs Are Cautious About Real-Time Payments in a Changing Financial Landscape
In the past, there was a lot of uncertainty when it came to online payments. It was difficult to know for sure if the money reached its intended destination. Now, both parties involved can easily track the payment journey. This is an improvement compared to the ways of delayed settlements and complicated notification processes with traditional ACH and wire payments.
The rise of embedded finance has made things much simpler for buyers. They can now order the inventory they need and settle invoices all on one single platform. Payment orchestration platforms offer Account Payable (AP) services that take away the burden from clients and companies dealing with outbound payments.
Real-time transaction solutions offer CFOs the ability to swiftly settle payments with their suppliers, providing the potential for enhanced efficiency. Despite this capability, many CFOs are exercising caution in adopting these systems within their back offices, assessing whether the benefits ultimately surpass the associated costs.
In July, the Federal Reserve introduced FedNow, an instant payment designed to enable businesses and consumers to transfer money immediately. This initiative seeks to broaden access to rapid payments for a larger network of financial institutions and their clientele. Similarly, TCH, a payment network owned by major financial institutions, initiated a comparable payment system back in 2017. Both services enable instantaneous clearing and settling, operating seamlessly 24/7. In contrast, other payment methods may take longer or may not be available 24/7.
One of the key attractions for CFOs regarding real-time payments is the ability to meticulously manage working capital. By leveraging these systems, companies can delay bill payments until the last possible moment, effectively retaining their cash for an extended period. Additionally, real-time payments can furnish finance chiefs with the assurance of precise settlement and clearance timings for their transactions.
But why is there still hesitation among CFOs about using this as a go-to service? Why CFOs Adopt Cautious Strategy for Leveraging Instant Payments?
The reason why CFOs adopt a cautious strategy about real-time payments is that while some may require this type of service based on the industry, not all B2B sectors may require the swiftness promised by FedNow and other similar services (like RTP by TCH), the potential for enterprises to leverage faster payments as a cash management tool is apparent. Some CFOs opt to hold onto their funds until the eleventh hour, still managing to make timely payments. However, altering long-established payment processes can be challenging, and a compelling business case is necessary to justify the transition effort.
Treasurers typically rely on the ACH system (which is also cheaper compared to instant payments) for batched electronic payments, like employee payroll, and traditional wire transfers for significant or crucial transactions.
Yet, neither system operates round the clock.
Digital payment ecosystems offer enhanced security compared to paper-based checks, eliminating the risk of mail losses. This secure environment incentivizes companies to modernize their payment practices. Suppliers increasingly prefer non-check payment methods, compelling buyers to adapt to these evolving preferences like instant payment (even if they have to pay a little extra).
FedNow and RTP Adoption Trends
A recent survey indicated that currently, 3% of treasurers are utilizing the FedNow payment system, with an additional 39% planning to join in the future. The remaining respondents were either uncertain or had no intentions of utilizing FedNow. The survey, encompassing 310 treasury executives, had almost 80% representation from publicly traded and private U.S. companies, with the rest comprising nonprofits and government agencies.
On the other hand, 12% of treasurers reported using TCH’s RTP network, with an additional 20% expressing their intent to adopt it.
Presently, the FedNow service is connected to over 120 banks and credit unions, while the RTP service by TCH is available at 400 financial institutions. It’s worth noting that there are approximately 9,000 banks and credit unions across the United States.
Reasons CFOs Should Consider Instant Payments
Transparent Information and Data
Information and Data within the ACH file typically include the payment amount, recipient details, and some basic particulars. However, the information obtained post-payment is often more restricted, as it relies on the recipient’s initiative to provide feedback through the network, which many suppliers do not consistently do.
Consequently, reconciling the payment becomes challenging since the payer may lack comprehensive information on the recipient, the exact payment amount, and the timing of fund reception. In contrast, a real-time payment incorporates crucial elements such as the supplier’s name and detailed invoice information, including an itemized breakdown of expenses. Real-time payments enable the transmission of payments along with this comprehensive data, facilitating seamless confirmation without requiring any additional action from the recipient.
Cost Efficiency
When compared to wire transfers, instant payments offer a significantly lower cost while maintaining, if not improving, the same rapidity. Traditional wire transfer charges generally range from $15 to $30, contingent on the financial institution. Instant or real-time payments, depending on the specific bank, can incur costs ranging from 25 cents to $1.
Similar to the use of commercial or procurement cards, incorporating real-time payments for a portion of back-office expenses can prove beneficial. These payments are not only more cost-effective than wire transfers but also offer a heightened value proposition compared to ACH transactions.
Anticipating Enhanced Functionality
TCH recently announced the expanded availability of RfP through the RTP network. This enhancement enables businesses to request payments directly. For instance, payroll providers can leverage RfP to prompt corporate customers to fund payroll on the same day as payday, instead of the customary three to four days prior, leading to improved fund management for employers.
Furthermore, FedNow is set to include RfP in its services, along with additional risk management and operational enhancements focused on bolstering fraud prevention capabilities and ensuring streamlined access to account and transaction information. To leverage the benefits of real-time payments, businesses should proactively engage with their financial institution to determine their participation status in the program.
Currently, around 400 financial institutions are active on the RTP network, with community banks and credit unions constituting 90% of RTP participants. FedNow has boarded 108 financial institutions thus far.
Enhanced Control for Cash Flow
RTP provides businesses with the capability to manage the timing of their outgoing payments accurately, ensuring a better grasp of their cash flow, a critical aspect for small and mid-sized enterprises.
Additionally, RTP enables businesses to obtain instant confirmation of each payment’s receipt, facilitating improved cash flow management and the potential to leverage early payment discounts.
Conclusion
The “digital” finance sector is experiencing a notable shift toward the adoption of real-time transaction solutions, as CFOs adopt a cautious strategy for leveraging instant payments within their operations. While the availability and advantages of real-time payments, such as enhanced transparency, cost efficiency, and improved cash flow management, are becoming increasingly evident, some finance leaders remain cautious in fully adopting these systems.
The cautious approach is driven by several factors, including industry-specific requirements, established payment processes, and cost considerations. Despite the benefits of real-time payments, CFOs are carefully evaluating the potential impacts on their current financial landscapes, assessing whether the benefits outweigh the associated costs and complexities of transitioning to these new systems.
As both the Federal Reserve’s FеdNow and TCH’s RTP Network continue to expand their services and functionalities, the potential for enhanced financial control and streamlined payment processes becomes more apparent with more and more people adopting this solution despite the current payment environment where CFOs Are Cautious About Real-Time Payments With the anticipation of additional enhancements and functionalities, businesses arе encouraged to actively engage with their financial institutions to explore the opportunities and benefits of integrating real-time payment solutions into their operations.
