The pressure is on. The treasurer of a German computer manufacturer that employs a just-in-time stock management model has just received a large order. To fulfil the order, they look to another European supplier to import numerous specialist parts. The manufacturer immediately initiates the payment, but with traditional payment methods it could take several days to process – putting a strain on the supplier’s working capital or, in the worst instances, delaying the shipment of goods.
Cases such as this are commonplace and, until recently, represented an unchecked inefficiency in the workings of many global supply chains. The rise of instant payments schemes around the world in recent years, however, stands to close the door on these issues. By leveraging instant payments, which facilitate the transfer of money within seconds, the supplier can receive both the order and payment in real time – allowing them to immediately arrange delivery without risk.
This kind of efficiency can be compounded. For instance, they may find that a logistics company has spare capacity in a truck due to leave for Germany later that afternoon, but an upfront payment is required to secure the space. Here, they can initiate an instant payment of their own to book this spare capacity straight away, ensuring the goods can be dispatched that same day.
Such scenarios are already playing out on a daily basis for corporates, bringing numerous benefits to a wide range of transactions. But further developments are still to come, with infrastructure, product features and complementary technologies, such as application programming interfaces (API), distributed ledger technology (DLT) and request to pay, set to further improve the corporate experience.
Corporates can generate significant efficiencies from sending and receiving instant payments. Traditional payment methods, which can take two or more days to process, have seemingly become incompatible with modern business models. In particular, these lengthy payment execution times can prove costly for corporates. Businesses predicated on delivering to the customer in a timely manner, often dispatch goods or open access to services before they receive the money. They therefore rely on payment methods, such as credit cards, that provide a degree of certainty that they will receive the funds. To compensate for this added risk mitigation, however, these methods are typically more costly.
In contrast, instant payments will arrive in the recipient’s account within seconds. The payments are irrevocable, which removes the risk of non-payment while negating the need for additional transaction fees. They also operate 24/7/365, which means that companies can initiate payments at the exact moment they are due without concerns about weekends or bank holidays, thereby allowing liquidity to be put to better use elsewhere.
Next steps for instant payments
Awareness of these benefits has grown steadily in recent years, but there is more to come. When used in combination with other emerging technologies, instant payments can unlock a host of further benefits for corporates and their clients.
For example, API technology can be used to foster real-time connectivity and interactive collaboration between businesses, such as online marketplaces and their banks. For example, when a customer decides to buy a sofa from an online marketplace using an instant payment, the funds will arrive in the marketplace’s account within seconds and the item can be swiftly dispatched. Should the sofa arrive only for the customer to decide that it does not fit into the living room as expected, returning the money is also a simple process. APIs channel the request to return the sofa from the online shop to the marketplace’s payment services department, which immediately initiates the refund – also via API. The refund arrives in the buyer’s account in seconds.
Instant payments can also be combined with DLT to reduce payment processing service errors, all while further accelerating the transaction. Smart contracts – contracts stored on a distributed ledger that can initiate a payment once certain conditions are met – are becoming increasingly prevalent, featuring in a number of industry pilot schemes. For example, using this technology, companies could immediately send confirmation of the arrival of goods under the smart contract, which would then trigger a payment that would arrive instantly in the supplier’s account and ensure a far more efficient and safe settlement process.
The trend towards open banking is also enabling the further development of easier and more convenient payment solutions. For example request to pay – a solution that allows corporates to instantly send the payer a payment request – can increase certainty, transparency and convenience of payment processes by, for instance, speeding up the end-to-end process, reducing risk, and easing reconciliation for corporates.
As these developments become more widespread, corporates can only benefit from adoption. In the same way that instant payments proved to be a decisive advance from traditional payment methods, these burgeoning technologies will likely prove yet another step forward for corporates – and for the industry as a whole.
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