A new faster payment system is scheduled to arrive in the United States by 2020—an aggressive timeframe that suggests corporate treasurers should start thinking sooner rather than later about the potential ramifications.
That timeline was set by the Federal Reserve Faster Payments Task Force (FPTF) in its second and final report released in late July, which posed plenty of questions but provided few definitive answers. The task force’s report does nevertheless set out 10 recommendations to achieve a ubiquitous faster payment system, in areas including governance and regulation, infrastructure, and sustainability and evolution.
The governance framework
The report notes that a governance framework is “essential for diverse participants of the ecosystem to effectively collaborate and make decisions,” whether to achieve interoperability between the several faster payment systems anticipated to emerge, to address weak links and securities concerns, or to effectively collaborate and make decisions. To that end, the Interim Collaboration Work Group (ICWG) was created as a “critical first step” to establish the governance framework.
“Completion of the work of the ICWG will lay the foundation for a substantial amount of critical work to take place as soon as possible in 2018,” the report notes, including the fulfillment of most of the report’s recommendations.
Stephen Ranzini, president and CEO of University Bancorp and a steering committee member of the Federal Reserve Bank’s Secure Payment Task Force, a separate body from the FPTF that is seeking to design a faster and more secure internet-based, bank-centric payment system in the U.S., reiterated the importance of establishing baseline requirements and enforcing them with rules. “When robust and industry-tested rules are incorporated into baseline requirements, the systems will be more robust and easier to adopt,” Ranzini said.
Given the ambitious timeline, corporates may be wise to monitor the ICWG’s progress in developing a governance framework and subsequently how faster-payment solutions, 19 of which were reviewed by the FPTF, are unfolding in the context of the task force’s other recommendations. Magnus Carlsson, manager, treasury and payments for AFP and an FPTF member, emphasized that unlike faster-payment initiatives in Europe and elsewhere that were largely mandated by a central authority, adoption of the U.S. system will be voluntary.
From an operational standpoint, Carlsson said, one of the challenges will be implementing standards and baseline requirements in a way that is not overly burdensome and costly. Corporates and other market participants, after all, could instead choose to stay with checks and other existing payment forms. “This is crucial. If a company needs to change all of its files to another format, that can be very expensive, even for a large organization, and senior management may say there’s no way the company can do it,” he said.
Finding a winner
Another issue for corporates is that the faster-payment initiatives reviewed by the FPTF vary widely. “How do you make these systems interoperable, and as a corporate what do you do with that [uncertainty]?” Carlsson said. “Companies may have to put their money on what they foresee as the likely winner. You want to invest in something that is going to be durable for a long time.”
One of the likely winners is The Clearing House’s real-time payment (RTP) system. The TCH has been testing it with large banks since last fall and more recently with the technology vendors supporting regional and community banks, in preparation for a launch anticipated later this year. The system enables payments and settlement in real-time. The TCH’s existing businesses, including an electronic check clearing and settlement system, already connects it to most of the banks in the U.S., giving it a significant leg up over other faster payments initiatives.
The RTP system should be especially attractive for B2B payments, since it will permit companies to send significantly more data along with the payment to provide information on what the payment is for and where it must go.
TCH plans to operate RTP 24 hours a day, seven days a week, 365 days a year, and ultimately that’s the goal of faster-payment proponents. So even if the faster payment system emerging over the next few years is sufficiently easy to implement from an operations standpoint, there are still big questions that corporates should start considering.
“What happens when there isn’t an end of the day?” said Linda Coven, a senior analyst at the Aite Group. “When do you sweep these accounts and move monies to cover shortages in one account and overages in another? How does the organization make sure in each individual account or line of credit or investment it has the right amount going in there, and it’s not sitting with extra cash?”
She noted that is done automatically now, at the end of the day. But a faster payment environment has no end to the day. Resolving that issues would appear difficult for an individual bank or corporate, but so far this has only been mentioned in passing and not thoroughly addressed.
Carlsson said there’s nothing stopping a corporate from deciding on a specific time to reconcile its transactions and invest funds. Nevertheless, companies will have to consider how to deal with transactions that arrive and are settled at any time in the day or over the weekend.
“How and where do you park that money, and how will that affect cash management,” Carlsson asked, adding those issues will become more relevant when interest rates inevitably rise. “This is something companies may want to start talking to customers and suppliers about, to set up specific times for payments.”