How to Prepare Treasury for Instant Payments in 2023

With the U.S. Federal Reserve set to launch its FedNow system soon, 2023 is going to be a big year for real-time and instant payments.

A panel session at KyribaLive 2023, moderated by Mike Gwozdek, Principal Consultant, 3PO Consulting, explores some of the potential real-time payments milestones that could come to fruition this year, as well as how treasury professionals can prepare for them. The panel overviews four key themes:

• Instant payments defined
• Key benefits of instant payments
• Current instant payments implementation experience
• Considerations for incorporating instant payments into your process

What are Real-time and Instant Payments?

In simple terms, instant payments are domestic and regional payment systems that are able to move money from the payer’s account over to the payee’s account and clear and settle all of that money movement within a matter of seconds. Instant payments have finality upon settlement, and they go through the clearing house.

There are over 50 countries that currently support instant payments and approximately three-quarters of the world’s population has access to real-time payment systems, in some shape or form.

Globally, real-time payments are enabled by modern payment systems that can clear and settle payment instructions within minutes, or even seconds. Businesses internationally are using or transitioning to modern payment formats, which are standardized under ISO 20022.

Instant payments come with transaction limits that put them in the lower value payment system, with the different systems having different transaction limits. For instance, the RTP® network has a $1,000,000 transaction limit, while the FedNow limit is even lower at $500,000. As these systems mature, the transaction limits will likely increase.

While instant payments will not replace wires or other payment systems, their benefits guarantee they will have their own role to play in transferring payments. Real-time payments in the U.S. are a small but fast-growing payment rail, with major upcoming developments in 2023.

What are the Key Benefits of Instant Payments?

Many capabilities of instant payments were highlighted in the session, including:

• Speed: Instant payments are fast and ideal for any urgent payments you might need to make
• Rich data: Real-time payments are data rich and able to carry more than just the payment instruction, allowing organizations to feed that data into their downstream processes
• Finality of payments: Instant payments offer the same finality as a wire system
• Lower-cost option: If you are seeking to send a payment of $1,000,000 or less, an instant payment will cost less than a wire or ACH
• Immediate notification of issues: You don’t have to wait for days to find out if a payment is rejected and can immediately take the necessary steps to make any corrections.

The benefits of instant payments will continue to unravel as these payment systems mature.

What is the Impact of Instant Payments to Corporates?

Stephen Kincaid, Vice President & Assistant Treasurer, Walker & Dunlop, believes the impact of instant payments for corporates is significant. His organization processes thousands of payments each month, which can become costly.

Kincaid explains several reasons why instant payments are important to corporates:

• Cost savings: Organizations can save significant amounts of money by sending real-time payments vs. a wire
• Instant movement and acknowledgement: With real-time payments, the money moves instantly and senders receive immediate acknowledgement from the bank letting them know whether or not the payment was successful
• Perfect for emergency payments: Instant payments are 24-7-365 and settle immediately, making them a way to move money right away regardless of the time of the day
• Opportunity for input: As early adopters of these newer capabilities, organizations have a lot of opportunity for input with banks along the way. Banks offer some flexibility with creating payment systems, partnering with organizations to create payment-related products. For example, Kincaid mentions the positive experience working with a bank to develop intelligent payment routing services to support real-time payments.

When asked if there are any drawbacks to being early in the payment adoption process, Kincaid notes that he sometimes needs to educate people who are receiving the instant payment, as they don’t necessarily understand how it works. For example, many people don’t realize that instant payments offer the same finality at settlement as wires.

To educate payment recipients, Kincaid plans on having one-on-one conversations with people, as well as sending them real-time payments literature to help them understand how these payments work.

Fortunately, the challenges around real-time payments education within the industry are also being actively addressed by the Faster Payments Council, who publishes educational materials regularly to promote the awareness.

Another challenge is the idea of ubiquity, which essentially means being able to send and receive payments from across all of the 10,000 banks in the U.S. Currently, the network reaches 65% of U.S. direct deposit accounts (DDAs). That number is growing–and the FedNow launch later this year will help to increase it.

Despite these challenges, more and more instant payment capabilities are becoming available and will revolutionize how payments are made.

How to Implement Instant Payments?

Zach Bessega, Implementation Consultant, 3PO Consulting, believes that the experience of implementing real-time payments is similar to that of implementing traditional payment systems, with the stages of developing, testing, and going live. Organizations should consult bank teams to decide scope, use cases, testing scenarios, etc.

While an instant payment project will in many ways resemble a traditional payments project, one difference is that an instant payment project will have more checkpoints to successfully achieve the rapid speed of real-time payments. Because real-time payments require more checkpoints during the payment processing and testing period before they can be used, it can take longer to set up and use real-time payments.

Bessega stresses that while the ultimate goal of instant payments is speed, you cannot rush through the implementation process, especially the testing/adjustment phase.

Further, Bessega explains some banks have dedicated teams specifically for real-time payments, while others use the same teams that work on traditional payments, creating some challenges as there are fewer resources available. Therefore, it is beneficial to get started with real-time payments sooner rather than later so that companies can be in the front of the line to work with bank teams.

How can you Incorporate Instant Payments into Your Process?

Deidre Gayheart, Advisory Manager, Treasury Advisory Services, Deloitte, suggests  some considerations companies should think about as they evaluate moving forward with adopting instant payments. She advises treasurers who want to incorporate real-time payments into their processes to assess the following:

• Bank capabilities: Learn the capabilities of the banks you work with
• Payment thresholds: Consider the FedNow ($500,000) and RTP® ($1,000,000) thresholds
• Team on-boarding: Allocate time to on-board multiple teams

As with any project, make sure to prioritize and phase in items accordingly.

Prepare for the Future with Instant Payments

Instant payments come with many benefits, including speed, rich data, finality of payments, lower-cost options, and immediate notification of issues. As with any innovative solution, there are some challenges to be addressed with instant payment adoption, such as education about real-time payments and the desire for ubiquity.

While there is much to consider with instant payments, it is clear that real-time payments are the future of finance and companies should be aware of the necessary steps to implement real-time payment systems.