Something that many people have in common is the need for “real-time” money movement, posting, clearing and settlement. In its best state, the money and the data move together quickly.
The trend from ‘same day’ to ‘faster’ to ‘immediate’ and now ‘instant’ started with Faster Payments in the UK (2008), where transactions that generally took days to weeks to move and settle were brought down to about a day. Many other countries subsequently followed suit (often government or Central Bank mandated), including G3, PIX, NPP, UAEFTS, RTP and, most recently, RTR and FedNow (to name a few).
For most consumers, real-time is not very visible; it just happens. In some parts of the world, real-time is simply provided to the consumer. In others, it is opt-in; and often for corporate organizations, it’s a priced, value-add service.
The end goal
The bar has been set so that both sides of “real-time” payment transactions and the corresponding data move, clear, post and settle within seconds (the payor and receiver debits and credits) — 24x7x365 — and are irrevocable. Not many have reached it yet. Some schemes allow payments to move in seconds, others in minutes, and some have the appearance of moving in real-time, 24x7, but are really credit and/or collateral-backed transactions after business hours or over the weekend (the TCH model).
We’re not there yet
There are challenges in moving to a 24x7x365 system where payments move, clear and settle in seconds with finality (i.e., irrevocable). Even though some schemes already appear to be completely real-time, very few are. For example:
- For same-day transactions — such as debit-card transactions or a paper check deposit — some demand deposit account systems at financial institutions (i.e., DDA, current or core systems) ‘memo-post’ so it looks like the transaction has occurred, but it doesn’t actually post until overnight processing, and availability can be deferred. In many cases, you can reverse or dispute transactions within the payment type and account rules for such reversals.
- If you buy groceries with a credit card, your card appears to be charged and you have purchased in real-time. However, the system behind that credit card payment does not settle the transaction among all the parties involved, including the merchant, for up to three days.
- Most consumer transactions feel like real-time, until you can’t write a check on Sunday to buy a car or when a check is deposited and the deposited funds are placed on hold until its “cleared”.
Many businesses have accounts payable, accounts receivable, treasury management and/or enterprise resources planning (ERP) systems that only process transactions during business hours on business days. These systems are not designed to process and provide positions in real-time and often must make adjustments for transactions posted by the financial institutions outside of business hours. The payments may not have sufficient data attached, preventing real-time visibility to the payables or receivables positions.
Often the financial institutions’ DDA, lending, card and other platforms are dated, costly to maintain, bulky and multi-layered. This may be because of fixes, patches and ‘stacked-on’ incremental features and functions to meet evolving needs and accommodate innovations or new market requirements. Even if core systems can process in real-time, the upstream and downstream systems often cannot.
The RTP rails of The Clearing House promises “real-time, both sides, in seconds with irrevocability” but the real-time posting and settlement between participating banks only occurs during normal business hours, using an after-hours credit/collateral-based model with banks pledging to honor transactions made during those times.
Are cash or cryptocurrencies real-time payments?
Cash is arguably real-time, but it is an extremely expensive non-earning asset to a financial institution. It is not traceable or easily replaced and entails high handling costs and security concerns for merchants. Currencies vary globally and are not universally accepted by merchants.
Cryptocurrencies do facilitate real-time exchange and payments, and some would argue that this was the reason for their creation in 2008 — a real-time P2P using blockchain technologies. There are now over 4,000+ cryptocurrencies with varied acceptance around the world. Central banks have also opined on the viability of cryptocurrencies and other forms of digital currency (including the U.S. Federal Reserve Board) and haven’t yet come to a position on its viability (a question that has been debated since 2012 and will continue to be so for the foreseeable future).
What if, in this new real-time world, every single transaction moved in real-time? What if employees, who currently get paid on specific dates, got paid daily? What if we could transform all the systems behind payments to work in that instant with payroll files generated daily and sent in real-time time for clearing and posting. What if invoices were “paid on receipt/order” instead of net 10/30. Will we see a spike in Buy Now Pay Later (BNPL)? Real-time and credit — how would these worlds collide, compete, combine or complement?
Unlike the rest of the world, in the United States, participation in these schemes is voluntary, otherwise it would require an Act of Congress for a mandate. The Clearing House banks voluntarily embarked on RTP and it went live in 2017. The U.S. Central Bank (the FRB) is in the middle of a pilot with financial institutions and platform providers, with a planned launch in 2023.
In the absence of a comprehensive real-time rail in the US, a group of U.S. banks formed a consortium and created a real-time P2P mobile app called Zelle, built on the Early Warning Systems platform, creating yet another layer. In any case, we need all platforms involved (both domestically and globally) to participate, end-to-end — not just financial institutions. All of this will help move the world toward the greater goals of business efficiency and customer loyalty.
The IBM Payments Center™ can get you there
For corporates, the impact to liquidity management, cash, cash flow, cash positioning and cash forecasting is huge. As such, the IBM Payments Center brings both experience and solutions in Payments, Liquidity Management, Treasury and Cash Management tools for our bank clients, and for the banks’ corporate clients.
The ability to “see” incoming and outgoing transactions in real-time, with an analytics layer over the ERP, provides real-time insight to what is about to happen and further enables the ability to plan for future investment/debt/cash needs based on right-now views. That level of transparency has become a daily ask and is a critical need for companies in an increasingly global real-time world.
The IBM Payments Center brings a rich history and wealth of financial markets consulting expertise and talent, capabilities and platforms to bear around payments — including legacy, fintechs, mobiles, channels, online and real-time. We can advise on how to take the existing rails and create either end-to-end or snap-in components to payments ecosystems, not only leveraging technology, AI and cloud, but helping with strategic partnering, local-markets-served insights, regulatory requirements and more cost-effective payments modernization options.
To learn more, check out the IBM Payments Center.