Michael Knetsch, Director, Business Product Expert - Payments, Deutsche Bank
In this “Instant payments demystified” series, we offer insights into what can be expected from the next major evolution in the payments sector, while keeping you up to speed with recent developments around Instant Payments.
The first article took a rather holistic approach – exploring why instant payments are so different and why this payment method has the potential to change the way we think about making payments. In the second article, we discussed India’s already fairly developed instant payments market and identified areas we see as further evolutionary steps in other markets, such as the SEPA zone. In the third article, we explored the potential of the latest technology trend in banking – application programming interfaces (APIs) – and how they can be used in combination with instant payments to ensure safe, real-time connectivity and interactive collaboration between different entities.
In this fourth and final article of the series, we propose to look into the near future and inspire you with some ideas and thoughts on the broad usage by corporates of instant payments in combination with batches.
Market infrastructures around the world have developed instant payment clearing solutions of varying descriptions since the early 1970s. However few have had the 24/7 functionality that is growing in prominence today, while business-to-business use of these schemes has often been restricted by low upper limits on transaction amounts. Demand for these instant payments schemes has typically been driven by the retail and peer-to-peer sectors.
This is now changing. More and more corporates are integrating the schemes into their payments processes to benefit from increased visibility over funds, as well as certainty and finality of payments especially when combined with API technology (as described in the third article). But what about the majority of payments that have to be made, which are not directly associated with a use case that requires an instant payment?
Let’s take the example of an invoice due to be paid. In most companies, it is usually processed through several steps that take some time from the moment an invoice is received and has to be paid until the payment is reported and the invoice can be closed. The chart below gives an example of the steps taken within most companies to execute payments through batches.
Source & Copyright©2019 - Deutsche Bank
So what could be the benefits in combining Instant Payment and batches? Let’s follow each step of the process outlined above and see what benefits could be achieved.
Each invoice received has a date associated for which the payment is due and must be paid. When entering the payment, determining the right execution date can be a difficult task as many aspects have to be considered, such as duration of the payment process, valid business operating days, cut off times etc. Once it is known that the beneficiary is reachable with Instant Payments, which can be can be processed any time, the payment due date can just be set as the execution date. The fact that a beneficiary can be reached with an instant payment depends on the reachability of that bank and the amount, as the scheme limit is currently set at €15,000. To increase the number of payments that can be processed instantly, Deutsche Bank is one of the banks that have joined the so-called “Closed User Group” that has agreed to accept higher amounts for instant payments. This makes it possible for our customers to initiate instant payments up to €1,000,000.
For recurring payments that have to be paid weekly or monthly (like salary payments), Instant Payment makes it possible to pay out on the same day of each month, regardless of weekends or holidays. Shortly it will even be possible to indicate, in addition to the execution date, the exact time of executing! No more cut off times to consider or “business working days”, as the payment will reach the beneficiary at the exact moment that was indicated at the required execution date and time.
When using Instant payments in batches, the exact moment of execution can be controlled in this way. As the exact moment of execution is known upfront, that information can be used to optimise the funding process - and with that liquidity management. Funding can be triggered by the moment the batch will be processed, and therefore the required money has to be available on the account.
Instant Payments can, of course, be used to transfer money within a company to cross fund accounts. For this purpose the standard scheme threshold of €15,000 is insufficient, and therefore Deutsche Bank will support a higher limit for these “intercompany” payments - currently set at €1,000.000 as described above but soon to be raised even further. Combining Instant Batches and Instant Fund Payments will make it possible to fund accounts in a ‘just-in-time’ (JIT) manner, operating liquidity management in real-time, with liquidity automatically deployed in the right place, time and amount.
Just in time (JIT) liquidity management explained
Also known as the Toyota Production System after the pioneering Japanese carmaker, JIT is a common inventory management technique and type of lean methodology designed to increase efficiency, cut costs and decrease waste by receiving items only as they are needed. JIT was originally developed in Japan in the 1970s as a response to the country’s limited natural resources, leaving little room for wastage.
Instant or real-time payments, which will become quite distinct from the familiar territory of cut-off times, end-of-day processing, and periodic updates to intraday liquidity positions, will have a fundamental impact on liquidity and collateral management. With Instant payments, money is always available on an account; it is never ‘in-flight’ between accounts for a couple of hours or even days. It’s this aspect of irrevocable available funds that will make it possible to increase the efficiency of your cash and liquidity management using Just-in-Time (JIT) techniques to increase and optimise your available working capital.
Although the industry has started on the journey towards real-time – or just-in-time – cash and liquidity management, there is still no map and no common view of what the destination might look like. Addressing this lack of standardisation and defined industry practices, which will differ across industry segments and sizes of organisation, will be essential to create a new real-time liquidity framework.
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In some cases, the only requirement is that payments have to be executed as quickly as possible. Even when it is not known upfront if all payments can be processed instantly, the batch will be processed completely whereby the majority of payments will be executed instantly. For those payments that cannot be processed instantly, the default is to redirect these payment to the SEPA “classic” processing. In this way the majority of payments in the batch are paid as soon as possible, with others paid in the traditional way. As Instant Payments becomes the “new normal” over time, the number of transactions processed instantly will grow.
Creating an “instant” batch file is straightforward as the same formats and channels can be used as for “classic” SEPA batch files. A simple indicator needs to be added to indicate that the preferred way of processing is instant. Sending the Instant batch to the bank is exactly the same as for the current batches.
Every payment of the batch that can be processed as Instant will be directly processed and a direct feedback can be provided of the result. This feedback is final as the result of the payment is either positive or negative. As the feedback is final and available directly after the moment of execution, it allows companies to react directly. In case of a positive feedback the invoice can be closed that same day. In case of a negative feedback (reject), based on the reason of the reject follow up actions can start immediately to ensure timely payment of the invoice and the related funds of the reject can be deployed to be of use elsewhere.
Another advantage of using instant batches is that the available processing window is much wider than with classic batches. Processing windows of batches are currently limited by the settlement cycles and cut off times before which batches have to be processed in order to exactly predict when the payment will be received by the beneficiary; same day or the next day - or even later when weekends or holidays are involved.
As most process steps in the creation, sending and reconciliation of batches are fully automated, the timing on which they run could be any time during the day. Therefore scheduling the processing of batches without the need to do that before a specific cut off time will spread the batch execution moment across the day, week and month to benefit the complete end-to-end processing chain involved.
The current limitations of batch processing have influenced the way that businesses can operate their cash management and also where they are able to handle frequent and recurring payouts. Using batches in combination with instant payments will give corporates the opportunity use batch payments in a more flexible and constructive way.
This article concludes the recent series on demystifying instant payments, but technological innovation means that it is unlikely to be the last word for very long. Watch this space for further developments.
Instant Payments de-mystified – part 1
How the “new normal” in payments is starting to transform corporate treasury
Instant Payments demystified part 2 – what can we learn from UPI in India?
How the “new normal” instant payments are spreading worldwide
Instant payments top of treasury wish list
Real-time payments in online banking is the innovation that will have the greatest positive impact on corporate treasury