Faster payments initiatives are a key breakthrough for treasurers and financial markets. Tony Carfang asks what comes next and how we measure success

Over the past several decades, payments have become faster, cheaper, more secure and more reliable. Cheques used to take days in the mail and then days to clear once deposited. International funds transfers would pass through several banks, each taking a ‘lifting’ fee as the funds slowly passed from originator to recipient. Fortunately, those days are over.

Transaction settlement times have declined from weeks (the cheque is in the mail) to days to minutes. Only a couple of years ago, same-day settlement was hailed as a breakthrough. Now, the target is 10 seconds or less and many closed networks are achieving that fairly consistently, something that is now being called ‘immediate payments’.

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Central banks, commercial banks and payment networks are racing to make payments even speedier. This is all very good, since timing delays in payments and their accompanying information create risk and uncertainty as well as wreaking havoc with cash forecasts and liquidity cushions.

In the US, the Federal Reserve launched its Faster Payments Task Force with this statement: “The task force calls upon all stakeholders to seize this historic opportunity to realise the vision for a payment system in the United States that is faster, ubiquitous, broadly inclusive, safe, highly secure and efficient by 2020.”

Around the globe, the UK announced its Faster Payments Service in 2008. In 2017, the European Central Bank (ECB) kicked off its TIPS program (TARGET Instant Payment Settlement) with the goal of instant payments 24/7 within the euro area. The Hong Kong Monetary Authority launched the Faster Payments System initiative in 2018.

Curiously and embarrassingly, however, securities settlement times around the globe remain prehistoric in this faster-immediate payments context. Stocks, bonds and most mutual funds settle in a T+2 framework, two days. That’s business days – so add in two more days for the weekend.

Benefits

The success of faster payments is one of the most important financial market breakthroughs of our time.

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No doubt, payments are becoming faster, cheaper, more secure and more universal. The benefits of these initiatives are immense.

• More efficient use of capital. Float falls from days to seconds, lowering receivables. As settlement speeds up, less working capital is required to support the float. Ultimately, cash is freed up for other corporate purposes or returned to shareholders.
• Reduced credit risk. The risk of a vendor failing to pay for goods or services increases with elapsed time. By settling a transaction ‘faster’, that risk decreases. Payment problems can be identified and addressed earlier. Collateral can be seized. Shipments can be withheld. Collection treatment can begin. The end benefit is that a higher percentage of top-line sales reaches the bottom line.
• Fraud reduction. Fraud is better policed and more quickly identified. When transactions are settled in seconds rather than days, fraud is identified in seconds rather than days. This earlier identification will lead to higher recoveries and lower fraud losses.
• Reduced markets risk. They are rare but when they occur, they hurt. Bank failures, devaluations, currency blocks and other external events happen without warning and often on weekends or at least after the close of business. The faster the payment, the less likelihood of a crippling event happening while the payment is still in process.
• Robust information. Most of the faster payments networks are keenly aware of the importance of the payment information and building rich payment flows into the process.

A word about crypto payments

No review of the payments landscape would be complete without acknowledging the role of cryptocurrencies, especially Bitcoin, in payments. Indeed, there have been a couple of notable corporations announcing their acceptance of Bitcoin for payments. It’s very early in the game, but with central banks now exploring Central Bank Digital Currencies (CBDCs), expect to see these payments evolve in a material way.

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There are two major obstacles at present and we are watching developments closely:

• Since the transactions are anonymous, we expect to see tight regulations to protect the legitimate payments while thwarting underground payments.
• From an accounting and taxation standpoint, there are questions around whether cryptocurrencies receive ‘cash and cash equivalent’ treatment and how gains and losses will be treated.

How these two challenges are resolved will determine the ultimate utility of cryptocurrencies as payment vehicles.