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The Opportunities and Challenges of Real-time B2B Payments

By Kyriba

Recently real-time B2B payments have attracted a lot of attention from corporate clients. As a payments practitioner, I have spent over a decade helping clients adopt innovations that digitize the entire customer journey in which B2B payments management tends to be one of the most important steps.

For example, in the B2B e-commerce context, a bad payment experience can equate to a lost sale at checkout. In the B2B corporate context, a missed or delinquent payment can mean losing a deal, damaging your reputation with strategic suppliers and even scrutiny from regulators. Such challenges often arise from limitations like long clearing and settlement windows, cut-off times, and payment system unavailability. The finance processes have evolved around limitations posed by traditional payment types through workarounds that have become orthodoxies in finance organizations.

The evolution from payments infrastructures from traditional batch-based retail systems (e.g., ACH) in the 1960s and 1970s, to real-time-gross-settlement (RTGS) systems (e.g., wires) in the 1980s and 1990s, to real-time payments, or instant payments, in the 21st century is a significant if not the most important development in the history of payments. The innovation diffusion curve¹ for real-time payments looks very similar to RTGS systems when looked at on a common time scale². However, on a 15-year time horizon since implementation of first the RTGS and the first true³ real-time payment system, instant payments cover twice as much of the world population compared to RTGS systems at the same point.

Conceptualizing, implementing and operating real-time payments is a complex endeavor and requires coordination across public and private sectors and collective decision-making. Therefore, it is no surprise that it took decades for payment infrastructure to get to where we are today. We may very well be at an inflection point for the adoption of real-time payments. The topic is strategic for Kyriba and our clients who rely on our capabilities to seamlessly access both traditional and real-time payment infrastructures. Awareness has been one of the major barriers to adoption of real-time payments for corporates and this blog post aims to cover the key ideas to help navigate corporates through their real-time payments journey.

What Are Real-time Payments?

The terms “real-time payments“, “faster payments”, and “instant payments” are often used interchangeably to describe relatively new small-value (i.e., retail) account-based payment types that use modern payment infrastructures. These infrastructures are generally domestic (e.g., Zelle, RTP® in the U.S.) and sometimes regional (e.g., SCT Inst) in scope where the transmission of the payment message and the availability of final funds to the payee occur in real time or near-real time and on as near to a 24-hour and seven-day (24/7) basis as possible.⁴

The payment messages enable the exchange of not only the payment instruction between payer and payee but also rich information about the payment, such as invoice attachment, making them ideal for straight-through processing. In contrast, traditional retail payment infrastructures like ACH and large-value payment systems like wires have cut-off time restrictions, are unavailable on weekends and bank holidays and limit the extent of data available within a payment instruction.

Another key characteristic of real-time payments is payment certainty. Traditional payment rails like ACH do not offer certainty that the payment will clear and settle at the time of initiation. Notification about failed payments often takes days to arrive. With real-time payments, the bank is able to send a success or failure acknowledgment within seconds.

It is important to note that real-time payments still have lower transaction size limits in comparison to wires. For example, with the current limit for RTP® is set at $1 million. These limits continue to increase, making real-time payments more and more relevant for large-value payments.

Real-time B2B payments can be enabled via API or SFTP and even via SWIFT gateway into the domestic payment infrastructure. The choice of connectivity depends on customer needs and mechanisms offered by the financial institution that the customer wants to use for initiating real-time payments.

Different Types of Real-time Infrastructures

Behind the scenes, real-time payments differ in many ways based on whether they are open or closed or whether they settle on an immediate or deferred basis.

Closed loop systems are offered by a single provider where both payer and payee must maintain an account with the same provider. In this case, if the money is moving from a one closed loop wallet account to another wallet account, then the transfer and availability of final funds can happen instantaneously. If the transfer involves multiple FIs, the final funds availability may take a few days.

Open loop systems on the other hand allow payees to get access to a broader set of payers—even those who may not have an account at the FI of the payee. Typically, payment and settlement involves multiple FIs over a shared network (e.g., UK Faster Payments).

Some systems that settle on a deferred basis (e.g., IMPS in India) where the FI makes the funds available before the final settlement of funds. While the lag may only be few minutes, it can be longer. In the latter case, the FI takes credit risk by making funds available instantly.

For systems that settle on an instant basis, FIs make funds available at the same time as final settlement. Real-time systems do so within a matter of seconds.

Why Real-time B2B Payments Matter to Corporates

There are several factors to consider to understand the importance of real-time payments for corporates.

On the supply side, real-time payments are becoming ubiquitous. Back in the 2008-2010 timeframe, there were about a dozen countries that had real-time payment infrastructures. The launch of the UK’s Faster Payment System in 2008 was the inflection point that led to the proliferation of real-time payment infrastructures globally. If I were to take an educated guess, more than 75% of the world’s population has access to real-time payment systems. By extension, these infrastructures are available to businesses that operate in these regions.

There has been a significant commitment from governments and private entities to enable access to real-time payments as evidenced by launches in Saudi Arabia and Bulgaria last year despite the pandemic, and more countries like Indonesia and Kazakhstan are slated to go live by 2025.

On the demand side, there has been growing interest in adopting real-time payments. Market surveys consistently show that a high proportion of corporate decision-makers consider an FI’s ability to offer real-time payments as an important factor in choosing their banking partner.⁵ The majority of the mid-market customers in various surveys (i.e., companies with revenues in the $250 million to $1 billion) express high interest in using real-time payments for their day-to-day operations.⁶

The table-stakes expectations from real-time payments are becoming clear. Finance organizations moving towards real-time payments realize lower costs and, in some cases, drive greater service innovation. Most of Kyriba’s top 10 countries by revenue show double-digit growth in real-time payment volumes, indicating growing interest and adoption.

Common Use Cases For Real-time B2B Payments

By virtue of being immediate and having 24/7/365 availability, real-time payments solve business needs that involve urgent payments. For example, emergency and disaster payments, urgent payroll payments, late supplier payments, etc.

Real-time payments can also create strategic differentiation in certain industries. For example, the ability to disburse a claim instantly can give companies in the insurance sector a strategic advantage. Another good example I have seen is gig economy companies that offer instant wage payments upon service delivery.

Intercompany transfer is another common use case for efficient deployment of working capital across subsidiaries using the domestic or regional real-time payment option.

Real-time payments in the future will extend beyond borders and involve cross-border, multicurrency payments. This will bring several benefits, e.g., better relationships, reducing the operational risk associated with international strategic suppliers, or even reducing the risk associated with securing cross-border deals in sectors such as investment management, where timing and certainty of payment are paramount.

How Kyriba Supports B2B Payments Management

Real-time B2B payments are at an inflection point globally and present an opportunity to create value across several use cases that can bring tangible benefits to customers. With its market-leading format library and diversified connectivity options including APIs, SFTP and SWIFT, Kyriba offers flexible access to global real-time payments infrastructures and has enabled over 150 clients to initiate real-time payments from 35 countries to over 90 destination countries. We are continually adding new banks and customers to our instant payments landscape across all major markets, including the U.S., Europe, Asia, and Latin America. Book a meeting with our payment experts to review your B2B payments challenges and needs and find out how real-time B2B payments can benefit your business.

References

Diffusion of Innovation (DOI) Theory, developed by E.M. Rogers in 1962
The quest for speed in payments, BIS Quarterly Review, 2017
While Japan has had a real-time payment system since 1970s, the first system in accordance with the CPMI definition of faster payment system (Korean Electronic Banking System) was first launched in South Korea in 2001
Committee of Payments and Market Infrastructure (CPMI), definition of Faster Payment System (FPS)
Citizen’s Financial Group Survey, 2021
Fast Track to the Future of Corporate Payments, PAYMTS.com, The Clearing House