MARCH 2018 SPECIAL REPORT • treasuryandrisk.com
SPECIAL REPORT: ACCELERATED PAYMENTS
Sponsored by Citi
PAGE 2
Real-Time Payments Have Arrived
treasuryandrisk.com MARCH 2018 SPECIAL REPORT TREASURY & RISK 32 TREASURY & RISK MARCH 2018 SPECIAL REPORT treasuryandrisk.com
P repare for payments transformation. In November 2017, The Clearing House (TCH) and 25 partnering banks launched the first new core payments structure in the United States in more than 40 years. The new system permits real-time payment clearing, marking a major
change for treasury operations that have been using the one- to two-day Automated Clearing House (ACH).
Qualifying payments are domestic,
interbank electronic transactions. Their
payment messages are transferred, and
funds are available to the payee, in real time
—literally within seconds—on a 24x7 basis.
The new system, dubbed RTP for “real time
payments,” was designed and built through
the collaborative efforts of TCH and its
partnering financial institutions. RTP meets
the objectives of the Federal Reserve Faster
Payments Task Force, which has been tasked
by the Fed to identify and assess alternative
approaches for implementing safe,
ubiquitous, and faster payment capabilities
in the United States.
The new system follows late on the
heels of the Faster Payments Scheme
Limited (FPSL) launched by the United
Kingdom in 2008. FPSL moves mobile,
Internet, telephone, and standing-order
payments quickly and securely, in nearly
real time, 24 hours a day. Seventeen banks
and building societies are participants
in FPSL, with more than 400 financial
institutions now offering the service to over
52 million account holders.
Why has the U.S. lagged behind the U.K.
by a full decade in developing RTP? “The
clearing cycle prior to FPSL in the U.K. was
three days, giving them significant impetus
to improve the status quo,” says Steve
Ledford, senior vice president of product
and strategy at TCH. “In the U.S., we
already had ACH and next-day payments.
There was less of a gap to make up.”
Another factor slowing implementation
in the United States was the sheer volume of
financial institutions dotting the American
landscape—more than 100,000 entities in
all. TCH and its partnering banks needed
extra time to design a payments model that
could scale to address all these institutions’
different capabilities. As Ledford puts it,
“We needed to find a model that worked for
everyone.”
Worth the WaitSimilar to wire transfers and ACH,
RTP is another component of the core
industry payments infrastructure, with
the potential to support diverse use cases.
In a business-to-business context, RTP is a
credit “push” system. Payments are pushed
from the bank account of the business
making the payment to the bank account
of the company receiving it. In between,
RTP supports the financial institution’s
customer-facing systems for services like
bill payment, cash management, peer-
to-peer (P2P) payments, and emergency
disbursements. Messages such as requests
for payment, payment confirmations,
requests for additional information,
and remittance detail are used to create
frictionless customer-facing interactions.
TCH is working with a wide array
of industry stakeholders, including
community banks, credit unions, and
financial institution service providers,
to drive adoption of the long-sought real
-time payments system. “The reality is
that we’ve been talking about payments
transformation for the past 25 years,” says
Alberto Casas, managing director and
North American head of payments and
receivables at Citi, one of TCH’s partnering
institutions and one of six banks currently
processing payments through RTP. The
(continued on page 6)
Real-time payments—and receivables—are
a reality, already benefiting some treasurers’
supply chain and reconciliation processes.
Real-Time Payments Have ArrivedBY RUSS BANHAM
others are JPMorgan Chase, BNY Mellon,
SunTrust, U.S. Bancorp, and PNC Financial
Services Group.
“However, we wanted a model that
didn’t just promise immediacy and faster
payments,” Casas adds. “We also wanted to
create ‘smarter’ payments—a standardized
data set that allowed for clean interactions
between parties to send and accept
inbound or outbound payments. Today,
payments and payment information don’t
always travel together perfectly, with
the receiver often misunderstanding the
purpose of the payment, culminating in
costly and frustrating interactions.”
An example is a wire transfer that lacks
details indicating the purpose of the payment.
Without the right payment guidance, the
recipient company may not connect the
payment to the right receivable. RTP obviates
this possibility by supporting the transfer of
critical information about a payment along
with the transfer of funds, to efficiently deal
with back-office reconciliation issues.
“By providing transparency and
certainty, through immediate confirmation
notices that a payment has been sent,
received, and instantly settled, both sides
can see if a transaction went through,” says
Casas. “Having these confirmations gives
treasurers the ability to free up working
capital by more precisely managing their
cash flow.”
This unique capability was designed
and developed using technology from
Vocalink, the software vender that built
the U.K.’s faster payments system and
which is now owned by Mastercard. TCH
wrote the code for RTP and is the system
operator.
Heightened payment security was
another factor weighed carefully in the
development of RTP. The new payments
system is the first to be built and launched
in the United States since the advent of the
Internet. Over this period, incremental
changes have occurred in payments,
beginning with the gradual reduction in
the use of cash and checks, and continuing
forward with the digitization of payments
and standardized messaging.
“Previous fast payments systems were
based on older-generation technology and
payments standards,” Ledford says. “An
advantage for us being later to the game is
that we could learn from and piggyback off
of the previous systems’ upgrades. We’ve
developed a system using secure, digitally
capable Web-based protocols. So we’re not
just fast, we’re also safe.”
Treasury Opportunities Treasurers who leverage the RTP
system may help their companies achieve
competitive differentiation in their
markets.
“With RTP, the payments system can
actually become a customer engagement
tool,” says Casas. “An insurance company,
for example, can provide instant claims
payments to a company devastated by a
natural disaster.”
Now that the United States and
several other nations have introduced
independent systems for faster payments,
other countries around the world are
expected to follow suit, resulting in
significant changes in how businesses
and consumers send and receive
payments globally.
“Today’s payments systems are
the building blocks upon which future
payments innovation will be built,”
says Casas. “Nevertheless, we’re not
predicting that all payments will
move to a real-time payment channel
overnight. RTP is an additional option
for payers and receivers to support
unique use cases.”
He provided the example of a consumer
who has not paid his or her electricity bill
on time. “RTP will allow for a request
for payment to go from the utility to the
consumer’s bank,” Casas says. “When the
bank receives the request, it can instantly
forward a detailed message through
RTP to the consumer that the payment
is now overdue. There are multiple
benefits, including the avoidance of late
6 TREASURY & RISK MARCH 2018 SPECIAL REPORT treasuryandrisk.com
fees and/or service disruptions while
simultaneously helping to build trust and
customer loyalty.”
The business owner sees that if
the bill isn’t paid immediately, the
electricity will be turned off. “If the
person chooses the ‘click to pay’ option,
the money is moved from the bank to the
utility in real time to avert a shutdown
in power—and possibly even a late
payment fee,” he says.
Treasurers’ Next StepsTreasurers interested in adopting
RTP need to first determine its value in
the context of their current business
operations. Moving to RTP might require
new payment technology, particularly if
the company’s current system releases
batch payments periodically to address
specific deadlines.
“Business customers need to
contemplate API [application programming
interface] connectivity with their banks
to release transactions in real time, as
opposed to batch,” Casas advises.
Treasurers may also need to change the
way they manage liquidity and working
capital, creating models in their accounts
that move money from point A to point
B, he adds. Furthermore, with an RTP
system, security needs to be embedded in
the company’s operational processes at the
item level as opposed to the batch level.
Citi is working closely with its
commercial accounts to prepare them
for these changes. Ledford says the
other five TCH member banks are also
assisting their business customers with the
transformations required.
Response to RTP has been highly
positive thus far. “We’re already hearing
from the treasurers now using RTP that the
big difference for them has been immediate
confirmation of a payment,” Ledford
says. “They’re telling us they cannot
overstate how important that has been—
the certainty it gives them in simplifying
processes like reconciliations.”
Treasurers are also touting the speed
of the new payments system in assisting
their just-in-time supply and demand
obligations. An example is a midsize or
smaller company buying from a supplier
with which they don’t have a credit
relationship. “The company needs the
product to ship soon but is concerned over
payment,” says Ledford. “What might have
taken weeks to resolve in the past takes
a couple hours and less, due to the new
system’s certainty [of payment] and speed.”
Down the line, more and more financial
institutions and their customers will be
engaging in real-time payments. “We’ll see
material adoption [of RTP] in 2019, when
more banks are online with more features
and functionalities, such as requests for
payments and extended messaging,” says
Casas. “By 2020, we’ll see a high number
of banks on the system and payment
volume ramping up in a significant way.
Beyond that, it will eventually become the
material payments method and the primary
alternative to existing systems.”
These developments will be felt
worldwide. In anticipation, Citi has
developed a comprehensive toolkit that
addresses its connectivity to all payment
methods and channels globally. Casas
explains, “We’re focused on building
globally interoperable capabilities to
provide a common experience through a
central real-time payment gateway. We
see this as a significant differentiator.”
Russ Banham is a Pulitzer-nominated business journalist and author who writes frequently about finance and accounting.
REAL-TIME PAYMENTS (cont’d from page 3)
Real-Time Payments Have ArrivedBY RUSS BANHAM
Every day, in cities aroundthe world, people are doingamazing things. They’re creating,innovating, adapting, building,imagining. What about a bank?Shouldn’t we be equally ingenious? Strive to match our clients’ vision, passion, innovation? At Citi, we believe that banking must solve problems, grow companies, build communities, change lives. With an intense focus onbeing the best for our clients,Citi is leading the way in paymentsinnovation globally.
© 2018 Citigroup Inc. Citi, Citi and Arc Design and other marks used herein are service marks of Citigroup Inc. or its affiliates, used and registered throughout the world.
citi.com/tts
®
THEWORLD’SCITI. IT’SWHEREVERYOU ARE.
The picture painted by Fintechs would have you believe they are the only ones who are innovating when it comes
to payments. Turns out, there is more to the story. In fact, banks are leading the charge when it comes to payment innovations. A perfect example of this is the advent of instant payments.
Instant payments —which are inter-bank electronic transactions where the transmission of the payment message and the availability of funds to the payee occurs within seconds on a 24/7365 basis—are not entirely new. Many parts of the world already have different variations of instant payments; however, the U.S. market is just now joining the party.
There’s no doubt that Fintechs have demonstrated a propensity for bringing technology innovations to market quickly, but in the case of instant payments, banks have been at the forefront. Citi has long been committed to instant payment systems in countries across the globe, and has been playing a prominent role in helping to develop the standards that are making instant payments a reality in the U.S.
Banks helping set the standards for Instant Payments in U.S.
While many countries have introduced instant payment standards by government mandate, the U.S. has taken a different approach. In
the U.S., the Federal Reserve recommended, but did not mandate instant payments. As a result, several financial industry consortia and a Federal Reserve-assembled group were formed to develop standards and guidelines for the industry. Banks in general have played an instrumental role with these initiatives.
Case in point: The Clearing House (TCH) Real-Time Payments initiative created consistent industry standards and is responsible for the first foray into instant payments in the U.S. As an influential member of the TCH initiative, Citi is one of the first banks in the country to offer instant payment capabilities to its clients utilizing TCH’s Real-Time Payments system.
Smarter transactions improve the customer experience
Today’s consumers have come to expect a better customer experience—one that offers a seamless, immediate and frictionless payment process. Fintechs were quick to address this market demand, but they are not alone in the pursuit of innovative payment solutions. Banks have also made tremendous strides in developing technology solutions that help ensure a fast, seamless experience for commercial transactions like bill pay or receiving payments from employers or other commercial payers.
Instant payments are expected to have a real impact on a number of different types
of business transactions. As new business
models emerge, instant payments have
the potential to become instrumental in a
multitude of scenarios. One such example
is claims adjustment for the automotive
insurance industry. Instant payments could
be used to issue a payment immediately after
an adjuster determines the extent of damages
following a collision. Putting a claim payment
in the hands of a customer, moments after the
damage appraisal, would dramatically improve
the customer experience. Instant payments
will likely have many applications, such as
royalty and residual payments, paying bills and
medical payments, etc.
Payment data improves treasury efficiency
One of the most significant benefits of
instant payments is the ability to transmit
more transaction data. Access to this rich
data makes it possible to improve treasury
efficiency, enabling more effective use of cash
flows and potentially minimizing exposure to
fraud.
With ready access to data, treasury can improve
efficiencies in exception management, along
with enhanced posting and reconciliation
of invoice–related information associated
with the payment, thereby reducing back-
office costs. This can also empower treasury
to integrate payment data with Enterprise
Resource Planning (ERP) systems to attain
further treasury efficiencies.
Ultimately, by shortening the time frame for
recognizing receivables, instant payments
can help speed up the flow of commerce and
straight-through reconciliation, making it
easier to access much needed liquidity and
better manage vital working capital.
A matter of trust
While banks and Fintechs are similarly focused
on instant payments, one thing that banks can
provide corporate customers that Fintechs
cannot is an established, trusted banking
relationship. Banks have proven, secure
systems that corporates have come to rely on
for all of their cash management needs. The
greater regulatory scrutiny that banks face
contributes to making them highly reliable and
stable partners. As trusted advisors, banks
already have a deep understanding of client
needs and are best positioned to support their
unique business requirements with solutions
that include instant payments.
It only makes sense that when it comes to
sharing valuable data collected from ERP
systems, many corporates may feel more
comfortable with their banking partner, who
they can expect to utilize insights gained in an
effort to provide more effective services and
solutions.
Joining the global community
As the U.S. joins a growing global community
of countries that have introduced, or will be
introducing instant payments, more and more
businesses are likely to begin exploring the
potential advantages of these payments. This
means organizations will need to gain a clear
understanding of how instant payments work,
what situations warrant their use, and how
they can be leveraged to deliver the greatest
benefit for treasury and overall business
objectives.
Today there are 25 countries offering instant
payments, in addition to the recent TCH Real-
Time Payments system in the U.S. Fintechs are
working to make inroads in these markets, but
it’s important to remember that some banks
have already established a long track record of
success with instant payments in international
markets. For instance, Citi is a direct clearing
member in 12 of those international markets,
and has been facilitating instant payments
for many years now. As a leader in digital
transformation of the payments space, Citi is
continuing to expand its footprint as additional
countries invest in real-time payment systems.
While cross-border instant payments are not
currently allowed, Citi is committed to a goal
of building a truly global payment platform of
the future where instant payments are both
ubiquitous and borderless.
Getting beyond the hype – choosing the right banking partner
It is true that Fintechs have brought a greater focus to technology innovations, but in the case of instant payments, banks arguably have an advantage due to the significant investments being made to integrate these new payment methods into existing treasury management portals.
As treasurers begin to explore instant payments and examine how these types of payments might benefit their business, it’s important to look for a banking partner that can help drive treasury success. This means choosing a bank that can offer the most comprehensive, user-intuitive, connected and globally compatible suite of services—in short, a bank that has been at the forefront of efforts to move instant payments forward in the U.S. and is already supporting instant payment systems around the world. A clear choice would be Citi and that’s no hype.
Taking the Wheel: Banks are Driving Innovation with Instant Payments
Sponsored Statement
w w w. c i t i g ro u p . co m w w w. c i t i g ro u p . co m
Alberto Casas NA Payments & Receivables Head TTS Receivables, North America