Advances in computing power have produced truly transformative technologies, like drones, robots, virtual reality and 3D printing. However, if you work in treasury management, or accounts payable or receivable, faster payments are the technology you may find the most intriguing.
According to the Association for Financial Professionals (AFP), 94 percent of businesses still use checks to pay suppliers, and almost as many (93 percent) still receive checks from customers.
“Companies want to make payments more efficiently, and they want more control over those payments,” says Adam Kruis, senior vice president and manager, working capital consulting with Global Treasury Management at U.S. Bank. “And on the receiving side, companies want to be able to receive payments quicker, and accurately apply them as close to real-time as possible.”
While traditional payments are still widely used, faster payment platforms offer the additional benefits that Kruis describes. Automated Clearing House (ACH) and wire transfers are excellent for making automated electronic payments, but they can take additional effort to implement. Meanwhile, checks restrict efficiency gains for both the sender and receiver. And checks can be difficult to sufficiently control.
To accomplish their payment objectives, organizations may need new options to supplement their existing tools. To this end, in 2015 the Federal Reserve established a Faster Payments Task Force charged with identifying “end-to-end faster payments solutions that could address the need for safe, ubiquitous, faster payments.” The task force, which concluded its work in July 2017, received 16 proposals intended to shape the future of payments.
Four solutions have gained traction:
• Same Day ACH
• Visa Direct and MasterCard™ Send
• Real Time Payments (RTP®)
Anyone whose paycheck deposits directly into a bank account is using the ACH network, an electronic network through which money moves directly from one bank account to another. Although setting up instructions for a payment can be time consuming — payees must provide banking information, which is easier to acquire from existing payee relationships — transfers are easy thereafter.
ACH deposits are also subject to a 1-3 business day turnaround, which might not work in time for critical situations.
Enter Same Day ACH payments. Introduced in September 2016, Same Day ACH uses the existing ACH infrastructure but processes payments within the same business day instead of one to two business days. Same Day ACH transactions are easy to execute for those already familiar with ACH.
“Same Day ACH is certainly the easiest new solution to capitalize on, as it doesn’t require new technology investment”, says Kruis. “It makes sense to utilize Same Day ACH when the standard 1-3-day settlement time will not suffice, but an irrevocable payment is not required."
For example, imagine a manufacturer receives a panicked call from a supplier who’s made an error and needs to send payment that day. The manufacturer can accept a Same Day ACH transfer to help the supplier pay the bill on time and avoid harming their relationship with the manufacturer.
Same Day ACH does have requirements you need to consider. It’s limited to domestic transactions, and payments are capped at $25,000 ($100,000 effective March 20, 2020). Also, there’s the risk factor, Kruis notes. “Keep in mind that you still need to collect and store bank account information. So, if that’s a risk for companies with traditional ACH, it remains a risk with Same Day ACH."
Two other B2C payment options attracting attention are Visa Direct and Mastercard Send, which leverage the Visa and Mastercard debit networks, respectively, to make deposits to consumer bank accounts.
Two of the biggest positives for Visa Direct and Mastercard Send: They provide instantaneous deposits and don’t require separate registration.
Kruis paints a scenario many of us are familiar with: You’ve been approved to receive an insurance payment on a recent claim. “As opposed to waiting for a check to be delivered via mail, you can simply provide the adjuster with your debit card number and he can initiate payment, possibly even from the location of the inspection,” Kruis says.
Another advantage: Both Visa Direct and Mastercard Send support payees outside of the U.S., as well as non-banking customers, who can receive payments without a bank account if they have a prepaid debit card.
“In order to reap the benefits of increased efficiency through debit card payments to individuals, there are certain safeguards that must be in place to show you’re protecting that debit card information appropriately,” he says.
With RTP, consumers and businesses can transfer funds directly between financial institutions. Unlike wire transfers and ACH payments, however, funds can move at any time — and settle instantly. This can provide significant value for organizations that can benefit from 24/7 payment processing.
“The largest pain point with current electronic transactions is often the exchange of information associated with the payment – when will the payment be made?" Kruis says. "Facilitating this communication digitally should provide significant process efficiencies.”
Though traditional payment options remain viable, faster payments technologies may open possibilities that are too good to miss. By applying new and emerging tools, organizations across a wide swath of industries have an opportunity to address many of their payments pain points.
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