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Instant Payments

Instant Payments

Impacts on Treasury Organization and Processes

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The world of payment operations is in upheaval. The concept of “real time” is bandied about and banks as well as corporations are engaging with this topic more and more. Things that are already practiced in other countries (among them the UK with its “Faster Payments”) should become everyday in the eurozone as well with the help of SEPA Instant Payments.

For Treasury organizations and processes, this “new standard” brings with it many already well-known advantages but also pitfalls. The first thing that comes to mind are the adjustments to payment systems as well as treasury management systems necessary to be able to perform payments in real time. Beyond technical developments, however, there will also be changes to Treasury departments’ daily business and the organizational structure and workflows.  It is exactly these aspects that we would like to highlight in this article. Whether you use SEPA Instant Payments, Faster Payments or another, local standard, this makes no difference at all. What’s of importance is that it is “real time”.

Status Quo

“Instant” implies immediacy. While an instant could probably be summed up with a flutter of an eyelash, for payments, an instant (still) is about 10 seconds, at least for SEPA Instant Payments.

In any case, it is hard to generalize in this aspect as the time necessary to perform a payment depends on the connectivity as much as the transactional limits, not to speak of the formats between the different local software. The term “instant payment” therefore is used rather loosely. To make things easier, this article will focus on the definition given by the SEPA solution. Instant payments can thus be considered as a mass payment solution which is available 24/7 and which enables an instantaneous (or practically instantaneous) settlement or credit of payables between banks, the payers and the payment recipient.

At this time, there are several banks (such as HSBC, Deutsche Bank and JP Morgan) that support instant payments for private as well as business clients. In theory, it is therefore possible to already send real-time payments today. However, it will take some time until most companies are up to speed as far as systems are concerned. Apart from the technical mapping of payment transactions, ERP systems (for instance, have real-time bank accounting in order to be able to directly record incoming payments to accounts receivable, produce intraday bank account statements using MT942 or using APIs made available by banks to facilitate data transmission) or the reporting landscape (e.g. in-memory databases) also have to be maintained at state-of-the-art level in order to benefit from all of the advantages of instant payment.

The changes necessary are clear. Current discussions often revolve around technical aspects, with a special focus on banks’ connectivity. But how will the daily business change with the advent of instant payments once the technical upgrades are in place? To answer this question, we have taken a closer look at the various functional areas of a Treasury department:

Impact on the Treasury department

Release of payments and sanction and embargo screenings

By using instant payment at the point of sale, payments are settled immediately. While this is highly advantageous for distributors, marketers and credit risk managers because they can promptly ship goods upon receiving payment without having to go through credit cards or payment service providers such as PayPal, it is a new challenge for Treasury departments: The immediate release of payments circumvents well-established risk mitigation measures, such as the four-eye-principle.

A practical example from a logistics company shows the extent of the challenge called forth by a new concept: payment release at the loading bay. In this example, the idea was to cart the load to the buyer before the actual payment was made, and to release the goods only once the truck is actually standing in the loading bay and payment is received. If using the traditional payment release and payment methods, this could cause considerable idle time for the truck, thus incurring costs. Such a process could be streamlined substantially with instant payment if for instance the employee who is accepting the goods could also release the payment at the loading bay. However, this will only work if the entire payment release process has been set up in such a manner that the final payment release has been authorized beforehand already.

Risk mitigation for outgoing payment transactions, such as the multiple review that payment data has been transferred correctly,   therefore takes on a whole new meaning. The near-immediate payments make it impossible for the bank to retract payment in case of errors or fraud. The recipient’s account is credited immediately with the amount released. Effectively, this means that before you have the time to dial your bank’s number to talk to your customer relationship manager, the payment has already passed through numerous accounts and been debited to your account. So in the case of fraud, this would mean that the money is gone. Intended fraud is practically a daily occurrence. Recently, there was a “fake president” attack where the fraudsters simulated a call from the British subsidiary of a German group with the help of artificial intelligence and a voice-imitation software, bagging more than EUR 200,000 in the process. This means that upon the introduction of instant payment, employees will have to be made even more aware of fraud. However, merely making employees aware of such “deep fake” attacks is not enough. This is where the use of machine learning comes in handy: it can automatically detect fraud by performing a real-time analysis of outgoing payments by noticing anomalies.

However, compliance is not only important in relation to erroneous payments or intents of fraud. In order to combat money laundering and the financing of terrorism, screening for sanctions and embargos is also becoming more critical for any corporation. As a rule, the following applies: In order to review embargo and sanctions’ lists in real time, the screening has to happen just before the payment file is sent to the bank. Simply performing a regular review of the master data has been insufficient for some time now. The introduction of instant payment does not change this premise one iota. On the contrary, it is important to make sure that the system landscape used can also provide this.

Cash Management

The ECB has again lowered interest rates on bank deposits, and there is no amelioration in sight. In times of negative interest rates, making sure that cash is being redistributed efficiently in a company’s daily cash disposition is increasingly gaining in importance. In this context, the use of instant payments means that funds are constantly flowing onto accounts. Therefore, the automation of treasury management is of the essence, even in times not normally considered business hours (especially on weekends and holidays). Incoming funds will certainly not wait until your employees have arrived at the office at 8.30am on Monday.

It has become considerably easier to trace outgoing payments because of the immediate feedback from the bank on the successful depositing of funds on a recipient’s account.  The emphasis here is on “depositing of funds on a recipient’s account”, i.e. in the future, you will not only know whether the bank has accepted the payment but also whether the funds could actually be deposited in the recipient’s account. Reviewing whether yesterday’s payments have actually gone through therefore becomes superfluous and makes the daily cash management processes that much easier.

Most likely, cash forecasting and liquidity planning will hardly be affected. On the one hand, intraday balances will become more volatile because cut-off times no longer exist, on the other hand, this has little impact on the financial planning. In the future, payments can still be planned on the terms of payment stored in the system. Having said that, the use of instant payments easily enables adjustments to improve working capital management. By using real-time payments, unsettled liabilities can indeed be planned for the actual due date and no longer need to be paid a couple of days earlier in order to remain on the safe side.

Nonetheless, some questions remain unanswered, which will remain so until further notice. How will your bank account’s debit/credit balances be calculated, especially concerning cash pooling? The lack of cut-off dates will require radical thinking in regard to calculations. On which balance will we have to base our calculations? The balance at 16.00h? At 23:59h? Or even 23:59:59h? In view of the high risk of manipulation, even the definition of virtual cut-off dates by the bank will not be a true option. Account balances can be “corrected” to become more relevant for interest within seconds. And even if a virtual cut-off is defined: which bank will define the cut-off date? Or should we say, cut-off time? Will each bank define its own cut-off or will we see the introduction of a uniform and global standard in payment operations? Of course, we could claim that cash pools will no longer exist in three years to close off this blog but that would not be serious because in fact, it is not at all clear whether cash pools will indeed disappear.

Conclusion / Looking forward

In summary, all that remains to be said at this point is that instant payments offer great opportunities at points of sale and that their audit trail offers much greater transparency and efficiency in daily payment transactions. Reporting also becomes easier with instant payment. Because cash in transit no longer exists, cut-off balances can now be determined down to the cent on a cut-off without having to consider outstanding revenue. Specifically in view of monthly or annual financial statements, processes will become easier.

In other areas, on the contrary, you will have to rethink certain aspects: How will you handle the release of payments? Do current workflows actually bring the agility of instant payment to the purchase-to-pay process? And will the currently much used concept of cash pooling actually survive?

However, what is true for all accounts is that for the ideal use of instant payments, nearly all internal and external processes have to be feasible in real time. In order to meet this challenge, treasury, banks and system providers must be on the same page. It is only then that instant payment can become the “new standard” in payment operations.

We will also speak about instant payment at our Digital Treasury Summit in Frankfurt on 22 October 2019. We look forward to holding a stimulating conversation with you. Be sure to register today for this get-together.

Source: KPMG Corporate Treasury News, Edition 94, September 2019

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