Cash is king, but visibility is key
Immediate payments are already available in a number of countries but it’s only since the European Payments Council (EPC) proposed the Single Euro Payments Area (SEPA) instant payments initiative, in November 2015, that a lot of buzz has been created in the world of payments regarding the concept of instant payments.
Officially known as the SEPA Instant Credit Transfer Scheme (SEPA Inst), the EPC proposes a new payment method in response to the growing appetite for real-time payments. The scheme will be based on the SEPA credit transfer (SCT), and will be available for all payment service providers in Europe. Our expectation is that this new scheme will win a large market share from the urgent payment scheme transactions and also from the SCT market, due to better service.
What’s there to add?
Corporate Europe is already familiar with the concept of fast payments. Even though SCTs can be cleared and settled at T+0, the vast majority of banks clear and settle SCTs at T+1 due to legal requirements. If close to real-time settlement is required, corporates have the possibility of using ‘SEPA urgent’ or RTGS services that allow for fast payments. These types of payments are usually cleared and settled within minutes with a lead time of T+0 but carry a significantly higher cost compared to normal SCTs.
Currently, a corporate’s visibility of bank transactions and current cash balances is provided via electronic bank statements, e.g. MT940, MT941, MT942 or the XML-equivalents CAMT.052 and CAMT.053. MT940 provides end-of-day cash balances, and is therefore the initiator of the daily cash management process.
Additionally, corporates have the possibility of using MT942 for intraday transaction reporting. With the adoption of instant payments, these intraday reports will likely increase in importance for the corporate’s treasury function.
Instant payments ensure close-to-immediate processing based on the existing SCT scheme. The principle is a 24/7/365 service, irrespective of whether the transaction is made between two accounts in the same SEPA country or in two separate SEPA countries. Compared to the batch processing used for SCTs, instant payments will be cleared and settled on a transactional level. Additionally, an immediate credit confirmation is provided to the payer. Due to this unique combination of characteristics, instant payments can be seen as the closest substitute of cash.
Figure 1: Corporate funds available in two schemes
Corporates that very tightly control the credit allocated to their customers or those that are cash poor are expected to benefit the most from SEPA Instant. At the same time, SEPA Instant will boost the need for realtime visibility, and consequently put more focus on the intraday reporting feed used by both the treasury organization for cash visibility as well as the accounts receivable organization for the allocation of cash to the correct customers. This requires that a corporate system landscape get accustomed to operating on a real-time basis.
Once properly integrated, what is the reward?
The rise of fast and more convenient payments will reduce the reliance on cash, cards and cheques, especially for point of sale payments. Furthermore, instant payments increases the cash flow transparency during the day as well as improve liquidity, resulting in an instant and less volatile availability of funds.
If a corporate is able to combine instant availability with instant visibility, it becomes clear where the benefits lie. The corporate is able to use these funds to make better strategic plans for executing FX transactions, paying off debts, or investing in money market deposits.
Next to the additional availability and visibility of cash, SEPA Instant payments also ensure that funds are not ‘stuck overnight’ at banks or payment service providers due to lead times. These factors combined can lead to significant (operating) cost reductions.
The EPC has announced that instant payments will be its main focus in the next few years. The scheme is scheduled to be published in November 2016 and will come into effect in November 2017. The EPC has stated that the initial maximum amount will be EUR 15,000 but given the increase of the maximum amount in the UK’s Faster Payments Service to GBP 250,000, we expect this amount to increase in future. We feel that in time SEPA Instant will become a cornerstone of the European payments ecosystem.