What are instant payments?
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Introduction
What are instant payments?
Instant Payments
An instant transfer involves three primary phases:
- Initiation: The payer in the transaction authorises a ‘credit push’ payment via their banking portal/application.
- Validation and processing: This triggers a rigorous messaging protocol between the financial institution sending the money and the one receiving – in regulated systems like the SEPA Instant Credit Transfer scheme in Europe there is a strict requirement for the recipient’s bank to confirm receipt and provide status within a given time frame (10 seconds under SEPA).
- Settlement and notification: With the transaction validated, funds are settled in real time between the two banks, and a confirmation is sent to both parties, providing immediate, irrevocable finality and eliminating the ‘pending’ state associated with traditional card or check transactions.
The strategic value of instant payments
Being able to carry out transactions in real time offers significant advantages to treasurers, beyond simply the speed of being able to settle payments:
Liquidity optimisation
In traditional payment processes, there is often a period where funds have left the payer’s account but not yet reached the payee’s. Instant payments eliminate these ‘float’ delays, offering real-time visibility of your cash position. With such visibility, you can forecast more precisely and deploy your cash more efficiently to, for example, meet urgent payroll demands, settle supplier invoices in time to capture early payment discounts, or provide immediate funds to subsidiaries.
Easier reconciliation
Instant payments are individual transactions, not batched. This means they are accompanied by rich, standardised remittance information. This makes the sometimes tedious process of account reconciliation far simpler – with payment data received in real time, enterprise resource planning (ERP) and treasury management system (TMS) platforms can automatically match incoming funds against open invoices. This automatic one-to-one reconciliation massively reduces the administrative burden historically required to track incoming receivables.
Risk mitigation and operational efficiency
By their very nature, instant payments are digital and standardised. This reduces the manual processing element and human error potential associated with paper checks or legacy electronic files. As these payments are irrevocable, businesses are also protected from the long-tail chargeback cycles associated with card schemes or traditional direct debits, where funds could be reversed weeks or potentially even months later.
The challenges of instant payments
For all the benefits instant payments provide, integrating this real-time transfer of funds into corporate operations is not without its complexities and operational hurdles:
Irrevocability risk
Irrevocability presents risks as well as advantages. As instant payments are final, there is no window to cancel or dispute any outgoing payments once the funds have moved. This makes organisations particularly vulnerable to risks like Authorized Push Payment (APP) fraud, where employees are manipulated into initiating payments to fraudulent accounts. Corporations need robust, automated fraud prevention and validation processes – e.g., verification of payee (VoP) services – to mitigate such risk and make certain funds reach their intended destination.
Systemic readiness
With a move to real-time payments, internal treasury infrastructure needs to keep pace. Instant payments are not batched, but many legacy ERP systems often process data in batches, typically nightly. This creates a functional bottleneck. If an organisation receives payments on a Sunday or on a holiday, for example, their backend systems would not process them until Monday. The benefits of instantaneous payment are therefore effectively nullified by legacy practices at the operational level.
Fragmentation
Domestic systems are maturing, but cross-border instant payments are still in something of an evolutionary state. Treasurers often have to navigate a fragmented landscape made up of a patchwork of bilateral linkages, different regional infrastructures, and bank-orchestrated overlay models if they want to achieve the same speed when moving funds across international borders.
