The Need for Speed: SMBs & Instant Payment Solutions

By JP Galin - The need for speed has never been more apparent than it is in today’s fast-paced business climate. Traditional systems often aren’t able to keep up, leaving small businesses in a difficult position, without real-time insight into their own financial position. This can have far-reaching and detrimental consequences.

For example, let’s imagine a typical restaurant employing Automated Clearing House (ACH) mechanisms to manage loan repayments. To ensure a smooth financial operation, they would have to plan their financial needs well in advance, typically by a Thursday, to submit withdrawal requests in time for funds to be available on the following Friday. An error in judgment could leave them in a precarious position, unable to access much-needed additional capital over the weekend.

The advent of on-demand transfers, made feasible through the implementation of the Real-Time Payments (RTP) system, heralds a transformative change for small and medium-sized businesses (SMBs). This innovation ensures a continuous availability of funds, 24 hours a day, seven days a week, thereby vastly enhancing the daily cash flow management capabilities of these businesses. This gives SMBs more financial control and flexibility, empowering them to navigate financial uncertainties with greater confidence.

The acceleration of financial transactions via the RTP network represents a paradigm shift. SMBs no longer need to grapple with the prospect of overdrawing their accounts or delaying payments to vendors due to insufficient liquidity. Instead, they can access their funds promptly, enabling them to effectively manage unforeseen expenditures, meet their financial obligations to suppliers punctually, and sidestep the potential for catastrophic financial setbacks. In essence, the adoption of real-time payment systems promises to usher in a new era of financial stability and resilience for small businesses, bolstering their capacity to thrive in today's dynamic economic landscape.

Some ‘instant’ solutions

Earned Wage Access & Payroll

Since the advent of the RTP® network in 2017, transaction volumes each quarter have grown consistently by at least 10%. In Q4 of 2022 the network facilitated an impressive 49 million transactions, aggregating to a total value of $22.7 billion.

A pivotal catalyst for the surge in RTP volume is the adoption of earned wage access (EWA) solutions, embraced by a significant proportion of gig economy workers. EWA affords workers the ability to access their earned wages on demand, alleviating financial stress among employees. In this period of widespread financial uncertainty, corporate leaders nationwide are increasingly turning their attention to the implementation of financial wellness programs to attract fresh talent but also to retain existing personnel. This motivator has contributed to the impressive growth in RTP volume.

The allure of same-day pay has particularly grabbed the attention of Millennials and Generation Z, marking a discernible shift in workforce preferences. This trend extends beyond generational boundaries, with an escalating proportion of employees, increasing from 49% in 2018 to a substantial 79% in 2022, expressing a desire for immediate compensation.

As a result, it is likely that earned wage access will become an offering in businesses of all sizes, rather than remaining exclusive to larger corporations. SMBs are expected to catch up with their larger counterparts in embracing real-time payments and EWA solutions. In an era characterized by economic uncertainty, entrepreneurs are turning to real-time payments as a means to fortify their cash flow management, particularly concerning employee compensation.

Treasury & Accounting

Real-time payment solutions are increasingly commonplace in the B2B payments sector, and represent significant growth potential for both banks and payment providers. These innovative systems promise to enhance the payments experience for corporate treasurers and finance teams, signaling a transformative shift in the way financial transactions are executed.

Leveraging the ISO 20022 standards, RTP has the potential to equip banks with an array of value-added services, facilitating the comprehensive modernization of end-to-end B2B transactions. These enhancements encompass automated matching of purchase orders to invoices, provision of virtual account services, initiation of e-invoices for payment processing, and streamlined account reconciliation for B2B clientele. In an era characterized by a progressively interconnected economy, where businesses and the rapid exchange of information and capital are increasingly intertwined, these value-added services become more and more vital for future success.

Real-time payments hold the potential to deliver substantial benefits to small and mid-sized businesses, many of whom often grapple with challenges such as limited transaction visibility, elevated processing costs, manual invoicing, protracted accounts payable processing, and payment delays in their B2B transactions. The speed of real-time settlement frees trapped working capital, removing the need for high cash reserves, and accelerating the velocity of money within the economy. Additionally, it affords these businesses greater flexibility in settling payments closer to their due dates. Real-time payments, when combined with real-time balance and transaction reporting, also augments cash visibility. Overall, it’s safe to say that the multifaceted advantages inherent in real-time payments are set to revolutionize the B2B payment landscape.

The advent of instant payments presents the potential to divert a substantial sum, as much as US$37.0 trillion, B2B transactions away from conventional checks and routine Automated Clearing House (ACH) payments within the United States by the year 2028.

It’s just beginning

These changes to cash flow management are not exclusive to just RTP.

FedNow, the payment system established by the Federal Reserve, is set to facilitate real-time transactions for financial institutions of all sizes, offering continuous service 24 hours a day, 365 days a year. This system streamlines the exchange of vital information among banks through clearing functions, enabling instant debiting or crediting of customer accounts during payment settlements. Furthermore, the integration of FedNow empowers banks to furnish enhanced notifications to their clientele, providing timely updates on payment acceptance or any transaction-related issues.

In contrast to the Real-Time Payments (RTP) system, FedNow is designed to serve all federal reserve banks seamlessly through the FedLine network. This comprehensive service encompasses not only payment processing but also a range of information services, including secure electronic messaging systems and IP-based solutions, catering to the needs of over 10,000 financial institutions.

Conclusion

As the business world continues to evolve, so too do the systems that support it. Gone are the days when you could wait several days for funds to clear, or financial statements to be updated. The benefits of speedier, more agile systems are particularly strongly felt by SMBs, many of whom are early adopters and champions of these new systems. With the ever-present need, more systems are sure to follow.