The emergence of multiple new payment rails provides treasurers with much more choice when effecting payments.
Wider choice brings significant benefits, not least the ability to make a same-day payment without having to pay the high cost of a traditional wire. However, more choice also means more complexity. With more payment rails to choose from, there are multiple rules to follow and different cut-off times to meet.
To remain efficient, treasurers will want a process that allows them to take advantage of new opportunities without becoming overburdened by unnecessary procedures. In other words, is there a best practice for developing efficient payment routing in today’s marketplace?
Ultimately, being payment efficient means being able to select the most appropriate payment instrument for each transaction. This doesn’t mean that wholesale change is required to take advantage of new opportunities.
Rather, most companies will continue to use the established payment rails, notably ACH. Companies typically have clear procedures in place to manage these payment types, which are well understood by those who use them (e.g., the accounts payable team), and major changes will be disruptive and costly, especially given the limited potential gain at this point. If a change is to be made, it will be to adopt instant or same-day settlement for certain exceptional (or miscellaneous) payments.
From a best practice perspective, it is certainly worth reviewing existing processes to see what can be improved. Are there scenarios in which a same-day capability could be beneficial? If so, take measures to implement a solution (whether through same-day ACH, RTP or both) as a precautionary measure.
If new capabilities are added, it will be necessary to review existing procedures that determine when to use which type of payment. While the focus will be to ensure a payment gets to the intended beneficiary safely, any revision to procedures on payment selection should also consider the liquidity implications of that choice. In other words, just because the company can make a same-day payment, it does not follow that, in every case, it should.
Many procedures may not change. Payroll and vendor payments will continue to be managed according to established processes, typically with an ACH credit effected on weekly, bi-weekly or monthly cycles. Treasury (high-value) payments may still be made via wires.
However, there is scope for change when an urgent payment does need to be made. A new employee may have been missed off the payroll, or there may have been an error in a critical vendor payment. Treasurers can pre-determine their preferences in anticipation of the need to make an urgent payment.
Payments can be routed according to value: Payments above a preset threshold may be routed as a wire, while others can be sent via a lower-cost rail, such as same-day ACH or RTP. Routing instructions should also incorporate cut-off times so that payments that meet the same-day ACH cut-off will be routed that way, while others are sent via RTP.
Workflows can be configured in the company’s treasury management system or payment initiation engine so that payments are always routed according to pre-determined preferences. This provides access to same-day/real-time settlement while minimizing the need for manual intervention (and the increased risk of fraud that intervention represents). Some banks can also route payments in the same way, according to pre-determined preferences.
Efficiency comes from considering choices before they need to be made and automating decisions wherever possible so that the exceptions are dealt with manually. As the payment landscape continues to evolve, regular review of workflows will be key to developing efficient payment routing.
Want to learn more? Check out the AFP Payments Guide to ACH: What Corporates Need to Know.