By Thomas Egner, Secretary General of the Euro Banking Association
A key responsibility of all corporate treasurers is to ensure their organisations meet any financial obligations as they fall due. To achieve this, treasurers rely on their banks and other payment service providers to process payments – both disbursement and collection – accurately and in a timely manner. Banks generally need to have access to multiple payment systems in order to process payments, and they have to manage the level of liquidity they provide to these systems to ensure these payments are processed without delay.
Over the past few years, infrastructure supporting real-time payments processes has been developed. To date, SEPA real-time payments have primarily been used by consumers, with limited adoption in the realm of business-to-business (B2B) transactions. This restriction is largely due to the transaction amount limits in place.
However, from 1 July 2020 the maximum limit will increase from €15,000 to €100,000 and this is expected to lead to a rise in instant B2B SEPA transactions. Despite this, some key constraints to the widespread use of instant payments channels for B2B transactions remain for both corporates and banks.
Companies are likely to choose to use instant payments only if they already follow a ‘just-in-time’ business model, e.g. relying on subscription models or machine-to-machine payments in which all the processes are fully integrated. In a just-in-time business model, instant payments can offer the benefit of reducing counterparty risk by providing payment certainty, of process efficiency gains that enable the internet of things and add-on/in-app purchases, and of optimising credit lines by improving working capital and liquidity management. Ultimately, instant payments will only gain more traction with treasurers if additional services can be built on to them. For example, one offering that many corporates believe could make a difference is a pan-European request-to-pay solution. Furthermore, treasury and finance will need to work with the wider business to link just-in-time business processes with just-in-time financial processes to fully leverage a transition to instant payments.
Whether companies adopt instant payments in significant volume or not, their implementation has considerable implications for banks, resulting in a twin challenge. First, banks have to provide sufficient liquidity to instant payments services to ensure time-sensitive amounts due are processed instantly, especially outside normal banking hours. Second, this has to be done while managing their own intraday liquidity to the satisfaction of shareholders and regulators. The processing of payments through a batch-based system has so far enabled banks to have predictable liquidity flows, aiding liquidity management. With real-time payments, cash inflows and outflows become more unpredictable as they can occur at any time of day.
However, as increasing numbers of banks roll out instant payment products and customer adoption reaches significant and stable levels, banks stand to gain. Plateauing volumes mean they will experience sufficient reciprocity, so they will no longer need to fund the total value of transactions over a particular period. Instead, they will define their funding requirements by focusing on the spread during peak hours. Experience from existing real-time payment systems suggests that, by this point, liquidity efficiency will have increased to an extent that the same liquidity can be reused for multiple transactions during the day.
As further detailed in the latest report by the Euro Banking Association’s Liquidity Management Working Group, instant payments are changing the dynamic between banks and their corporate clients. The process will evolve to include increased two-way sharing of information, which will help to streamline efficiency, especially regarding payments processing.
The working group members believe this exchange of information about payments processing as well as both parties’ requirements, expectations and objectives in that field will help banks and clients develop a clearer understanding of the interdependencies in the corporate liquidity management ecosystem. Specifically, this improved understanding will support both sides in using intraday liquidity more efficiently.