Real-time Money Movement is in High Demand

The demand for “real-time” money movement, posting, clearing, and settlement is one that many individuals share. Money and data flow together swiftly in their optimal form.

Faster Payments in the UK (2008) started the trend from some day’ to ‘faster’ to ‘immediate’ and now ‘instant,’ where transactions that took days to weeks to move and settle were reduced to roughly a day. Many other nations, including G3, PIX, NPP, UAEFTS, RTP, and, most recently, RTR and FedNow, followed suit (often as a result of government or central bank mandates) (to name a few).

Real-time is not visible to most customers; it just happens. Real-time is simply offered to the user in various regions of the world. In some cases, it’s an opt-in service; in others, it’s a paid, value-added service for businesses.

The end goal

Both sides of “real-time” payment transactions and the associated data move, clear, post, and settle within seconds (payor and receiver debits and credits) — 24x7x365 — and are irreversible. Only a few people have made it this far. Some systems allow payments to move in seconds, others in minutes, and some appear to move in real-time, 24 hours a day, seven days a week, but are credit and/or collateral-backed transactions after business hours or on weekends (the TCH model).

We’re not there yet

Moving to a 24x7x365 system where payments flow, clear, and settle in seconds with certainty poses issues (i.e., irrevocable). Despite the fact that some systems appear to be fully real-time, very few are. Consider the following scenario:

• Some demand deposit account systems at financial institutions (i.e., DDA, current or core systems)’memo-post’ same-day transactions — such as debit-card transactions or a paper check deposit — so it appears as if the transaction has occurred, but it doesn’t post until overnight processing, and availability can be deferred. You can reverse or challenge transactions in many circumstances if the payment type and account regulations allow it.
• When you use a credit card to buy groceries, your card seems to be charged and you have made a transaction in real-time. However, the credit card payment system takes up to three days to complete the transaction among all parties involved, including the retailer.
• Most consumer transactions appear to be in real-time until you can’t write a check on Sunday to buy a car, or when a check is deposited and the funds are put on hold until they’re “cleared.”

Accounts payable, accounts receivable, treasury management, and/or enterprise resource planning (ERP) systems in many firms only handle transactions during business hours on business days. These systems aren’t built to process and provide positions in real-time, and they frequently have to make changes for transactions made by financial institutions outside of business hours. There may not be enough data related to the payments, restricting real-time insight into payables and receivables positions.

The DDA, lending, card, and other systems used by financial institutions are frequently outdated, expensive to operate, cumbersome, and multi-layered. Fixes, tweaks, and ‘stacked-on’ incremental additions and functionalities to satisfy developing demands and accommodate innovations or new market requirements might be the reason for this. Even if core systems are capable of processing in real-time, upstream and downstream systems frequently are not.

The Clearing House’s RTP rails guarantee “real-time, both sides, in seconds with irrevocability,” however real-time posting and settlement between participating institutions take place only during normal business hours, with banks committing to respect transactions done within such hours.

Are real-time payments made with cash or cryptocurrencies?

Although cash is arguably instantaneous, it is an incredibly costly non-earning asset for a financial organization. It is neither traceable nor readily replaceable, and merchants must deal with significant handling expenses and security issues. Currencies differ over the world, and retailers may not always accept them.

Cryptocurrencies do allow for real-time exchange and payments, and some believe that this is why they were created in 2008 – to enable real-time P2P transactions utilizing blockchain technology. There are already over 4,000 cryptocurrencies in use across the world, with varying degrees of acceptability. Central institutions, notably the Federal Reserve Board of the United States, have expressed opinions on the feasibility of cryptocurrencies and other types of digital money but have not yet reached a conclusion (a question that has been debated since 2012 and will continue to be so for the foreseeable future).

The possibilities

What if, in this new real-time world, every transaction took place in real-time? What if employees who are now paid every month were paid daily? What if we could make all of the payment systems run in real-time, with payroll files produced every day and delivered in real-time for clearing and posting? Instead of net 10/30, what if bills were paid “on receipt/order”? Will there be an increase in Buy Now Pay Later (BNPL) sales? How will the worlds of real-time and credit conflict, compete, merge, or complement?

In contrast to the rest of the world, membership in these programs is optional in the United States; otherwise, a mandate would need an Act of Congress. RTP was freely adapted by the Clearing House banks, and it became operational in 2017. The Federal Reserve Bank of New York (FRB) is now conducting a trial with financial institutions and platform suppliers, with a launch date set for 2023.

In the lack of a complete real-time rail system in the United States, a group of American banks organized a consortium and developed Zelle, a real-time P2P mobile app built on the Early Warning Systems platform, adding another layer. In any case, we need all platforms engaged (both nationally and worldwide), not just financial institutions, to participate end-to-end. All of this will contribute to the world’s larger aims of increased corporate efficiency and client loyalty.

The IBM Payments Center™ can get you there

The influence on liquidity management, cash, cash flow, cash positioning, and cash forecasting for corporations is enormous. As a result, the IBM Payments Center offers our bank clients and their corporate clients both experience and solutions in Payments, Liquidity Management, Treasury, and Cash Management capabilities.

With an analytics layer above the ERP, the ability to “see” incoming and outgoing transactions in real-time offers real-time insight into what is about to happen, as well as the capacity to plan for future investment/debit/cash needs based on current views. In an increasingly global, real-time environment, that degree of openness has become a daily request and a crucial necessity for businesses.

The IBM Payments Center brings a long history of financial markets consulting knowledge, talent, skills, and platforms to bear on payments, including legacy, fintech, mobiles, multichannel, internet, and real-time transactions. We can help with strategic partnerships, local-markets-served insights, regulatory needs, and more cost-effective payments modernization choices, as well as utilizing technology, AI, and cloud to construct either end-to-end or snap-in components to payments ecosystems.

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