“I feel the need… the need for speed.” Those were the boastful words of Maverick, the fighter pilot character played by Tom Cruise in the 1986 hit film “Top Gun.” But they could just as easily describe the growing trend toward faster payments. In fact, the Federal Reserve reported that between 2000 and 2012, paper check volume fell by more than 50%. During the same period, non-cash payments such as Automated Clearing House (ACH), credit and debit cards have more than tripled. According to NACAHA – The Electronic Payments Association, the ACH network alone processes approximately 23 billion electronic financial transactions per year worth more than $40 trillion.
Faster payments hold real promise for small businesses. By reducing the length of time required to recognize a receivable, businesses will be able increase the flow of commerce, while at the same time making it easier to access much needed working capital.
The Shift to Same-Day Processing
In the U.S., growing adoption of digital transactions is viewed as the most effective means of speeding up processing time. To support this movement, financial institutions have begun migrating payments system to same-day processing as part of a global real-time processing trend. As of September this year, NACHA rules went into effect, phasing in Same Day ACH for credit payments. Subsequent phases will be aimed at ACH debit payments and bank credit funds availability requirements. The eventual goal is to have real-time transaction processing.
The Benefits of Faster Payments
Faster payments offer a number of advantages for small businesses. Instead of having to wait a relatively long period between the time a shipment is approved and payment is delivered and verified, same-day clearing will dramatically speed up access to funds, thus improving cash flow.
In addition to adding liquidity back into the business, these new systems will provide a greater depth of data on each payment transaction, which will enable organizations to gain efficiencies in straight-through processing. This invaluable payment data will help reduce overhead costs in the back-office through efficiencies in exception management. As ISO 20022 standards – a universal financial industry message scheme -- are widely adopted, small businesses will be better able to integrate payment data with their enterprise resource management (ERP) systems for further treasury efficiency. The automation involved in digital transactions will cut down on wasteful manual processes and free up critical resources for more strategic objectives. And armed with more information on customers and suppliers, and a better view into cash flow, companies will be able to improve their operational decision-making.
Banks are developing all-in-one payments systems that will support payments for small businesses that may lack the infrastructure to support faster payments.
Building Better Fraud Protection into Payment Systems
While the advent of faster payments systems will communicate more information, they are also being designed to do so in a more secure way with the objective of reducing fraud. In the current system, a payer authorizes another party to pull money from their account. For business-to-business payments today, buyers often need to know the account numbers of their suppliers in order to initiate a payment, which opens the door to the risk of fraud. New payment systems are looking address payment security by rethinking the payment authorization process.
The Clearing House and the Federal Reserve are both focusing on services that would use “push” transactions, allowing the payer to directly authorize the payment. Directly authorizing one’s own payments would be far safer, which is why this approach is the preferred choice. In these cases, the payer verifies the funds in their account and pushes a payment to whomever they are paying.
And to reduce the fraud risk associated with buyers using suppliers’ account numbers for transactions, tokenization can be utilized to shield those numbers. Tokenization creates a unique identifier for a user and hides sensitive information such as account numbers. Faster payments solutions under consideration may very well incorporate built-in technology to use tokenization so account numbers are never exposed.
The trend toward faster payments presents invaluable opportunities for small businesses. The changes that are underway today hold the promise of increasing efficiency throughout the payment value chain.