The Federal Reserve Faster Payments Task Force has published their final report, which was the collaborative effort of over 300 industry participants.
The key take-away from the 64-page report was a call to action for US financial institutions to be capable of receiving a faster payment by the year 2020.
Given the short period of time and the more than 11,000 financial institutions who must be prepared, this is an ambitious goal.
The Task Force established a set of Effectiveness Criteria, which covered the full spectrum of needs for a faster payment initiative (i.e.: Ubiquity, Efficiency, Safety & Security, Speed, Legal, and Governance). Speed no doubt receives the most attention. Within the Effectiveness Criteria of Speed, there are five distinct elements:
- Availability of funds to payee
- End-to-end status visibility
What are the implications?
The Task Force set a highly effective goal of 20 seconds from authorization to settlement for a faster payment transaction.
Speed is not a new element for payment execution. Treasury workstations and integrated payables solutions have accelerated the speed of payments. Much of the effort to accommodate faster payments will fall to the risk monitoring and settlement processes between customers, banks, competing faster payment platforms, and the Federal Reserve.
Attainment of the faster payment time goal will require tremendous effort on both the part of payment initiators and their service providers to address risk and security.
What has not been widely discussed is the implications to recipients. To meet the faster expectations of recipients, there is an equal, if not greater amount of effort, for recipients and their service providers to be prepared to receive a faster payment.
The biggest challenge for receiving a faster payment is rooted in the historical convention of receivables processing. One word encapsulates the current norms and the wall: batch.
Receivables, historically once dominated by checks and lockbox, is a batch process for both banks and their customers. Today, corporate customers receive lockbox, ACH and other payment method receipts in a batch file transmission in an end-of-day file feed. Aggressive corporates add additional batch feeds throughout the day to speed the posting of receipts. Adding to the delay of receipt and recognition of payment is the corporate’s end-of-day ERP batch posting to the general ledger.
Although the decision to post receivables in a batch mode may work reasonably well for the recipient of a payment, in the new faster world, the recipient is tied to the initiator’s demand for a real-time acknowledgement of receipt of funds. For better or worse, the current norms require adjustment.
Financial institutions and their corporate customers will each have distinct receivables challenges in the new environment of faster payments.
For most banks, their Core systems define the limits to which they will be able to respond to these industry changes. The major Core providers (e.g. FIS, Fiserv, Jack Henry) have announced their intention to support The Clearing House’s RTP platform. This will address receipt of a faster payment transaction from the current market leader, based on The Clearing House’s progress in rolling out their solution.
On a go-forward basis, this approach has a fundamental assumption that each bank will choose only one faster payment provider to receive transactions, assuming the Federal Reserve or additional providers do not enter the market. A major unanswered question from the Task Force is the interoperability between faster payment solutions.
The fundamental consideration for many financial institutions, outside of The Clearing House member banks, will be their decision to offer a faster payment product to their customers.
The decision to offer a faster payments product raises the question as to the definition of the product offering. For financial institutions, simply posting a credit to a DDA account will no longer suffice. More importantly, what will corporate customers want and what are they willing to do to implement a faster receivables solution?
Corporate customers will fall into two classes.
Naïve Realists will assume their business will not be impacted by the need to receive, acknowledge and post customer payments immediately. This class will lag behind the market and wait until there is overwhelming demand from their customers. This will include millions of small businesses who do not have the resources to up-tier their receivables processing.
Market Performers will be focused on improved liquidity management or are in C2B and B2B industries where customer responsiveness is critical to their financial and market performance. Driven by these characteristics, this class will proactively seek solutions to help them differentiate themselves from their competition. In regulated industries such as utilities, the necessity of compliance will provide additional incentive for early adoption.
To climb the wall of receivables processing, banks and corporations need to recognize the shift that has already begun. Integrated receivables is an industry term, more frequently understood as a technological cure for a bank’s inability to provide data files to their customers, has entered its second phase of evolution.
Technology Evolutions of
|Consolidated data files||Data enrichment||Data connectivity|
The industry practice of separating remittance data from the payment has become a processing burden for accounts receivable posting. The second evolution of integrated receivables technology addresses the enrichment of the payment with the remittance details received in email, spreadsheets, or PDFs.
Given the tremendous labor and processing efficiency benefits derived from artificial intelligence, invoice intensive companies will seek solutions that reduce costs and improve
DSO. The life cycle of this phase will be no more than two or three years and is already underway.
Overlapping this phase will be the need to respond to the faster payment goal by 2020. The need to recognize and acknowledge receipt of payments will bring about IR 3.0.
The transition to IR 2.0 will make the effort of IR 3.0 easier. Most corporations have a straight-thru processing rate of less than 50 percent. The Faster Payment criterion included the use of the ISO 20022 remittance standard. Assuming that A/P counterparts adhere to the standard and eliminate the sending of emails with spreadsheets and PDFs of remittance details, receivables processing should improve.
For faster payments, acknowledgement of receipt can is the most vexing element. The sharing of corporate ERP data and connectivity will be required to complete the last leg of a faster payment acknowledgement.
The race to a solution is on for the Market Performers. Even with this class of motivated corporates, IR 3.0 solutions need to be minimally invasive and not require “rip or replacement” of current receivables technology. Refactoring of current data assets, exchanged between the bank and their customer, will be essential.
The Naïve Realists may not see the need for change. But, the Market Performers will differentiate themselves by making it easier for customers to do business with them, creating a necessity to act for all.