Let’s be real: The enthusiasm behind real-time (or instant) payments stems almost entirely from the seller’s side of B2B. After all, whether we’re talking about a mom-and-pop vendor or a multinational corporation, who doesn’t prefer getting paid sooner rather than later?
And in the business-to-consumer realm, the majority of consumers like real-time too. The selling points are the speed of transaction, and the convenience of being able to buy what they want whenever they want.
The B2B purchaser, on the other hand — if smart — aims to stretch payments when it’s advantageous to do so. CFOs and controllers know how crucial it is to keep cash on hand, and are under growing pressure to pay the bills that can’t wait at the expense of invoices that can.
Case in point: Days sales outstanding (DSO) has grown from a median of 31 days back in 2021 to 40 days now for the more-than 15,000 American software-as-a-service (SaaS) companies, according to a Capchase report. Automation and AI solutions for accounts payable and receivables should, in theory, eliminate or at least reduce invoice delays for the SaaS tech sector. Not the case.
Demand for Real-Time Payments Is Limited
Real-time payments (RTPs) as a business practice is growing at a glacial pace, across all sectors of the economy. “[RTPs] are still in their infancy in the U.S., accounting for only a 1.5% share of the total payments volume in 2023,” finds a report by ACI Worldwide.
RTPs did at least grow, year over year, from 2.8 billion transactions to 3.5 billion in 2023 domestically. Global instant payments increased by 42% from 2022 to 2023. Real-time is popular in countries like Brazil, Thailand and Bahrain. The U.S. ranks 35th per capita among countries for RTP usage.
The Federal Reserve launched FedNow last July as an alternative to The Clearing House’s RTP Network, launched by a consortium of major banks in 2017. FedNow allows for payments to be cleared in about 20 seconds, at any hour and day of the year.
So far those benefits aren’t attracting a significant number of banks crucial to making FedNow a success. About 700 financial institutions signed onto FedNow over the past nine months, according to Atlanta Fed Senior VP Daniel Baum, who participated in a recent Payments Dive webinar. “Seven hundred sounds great when you compare it to the 35 that we started with, [but it] sounds small when you compare it to [the] 10,000” banks and credit unions in the U.S., Baum admitted.
Real-Time Isn’t Right Fit for Many
As we reported last year, businesses need to evaluate whether instant payments are right for them. Whether it’s FedNow, Zelle, The Clearing House, Venmo or some other RTP platform, here are some important questions that decision-makers need to ask and get answers to:
- What’s the game plan for cash flow timing situations where it makes more sense to use a traditional payment method instead of an instant payment to pay suppliers?
- How will our bank support the invoice and remittance data flows, as well as the automated uploading of the data into our accounting software?
- Can our current accounts payable and receivable software support instant payments? And if yes, will RTP boost efficiency?
- Will enough of our suppliers offer discounts if they receive their payments from us instantly?
- What are the fraud protection features and how do they work?
Cash Flow Trumps Streamlining Payables
For many small- and mid-sized businesses, the smart move may be to hold off on RTPs. Reason: Companies are struggling under the weight of needing to pay vendors and collect from customers.
Consider that a stunning 43% of small businesses are struggling to pay their rent in full. Bankruptcy rates show no signs of slowing down for both businesses and individuals. Some folks are filing for Chapter 11 for the second time and putting credit & collections teams in a bind.
And the Fed isn’t lowering interest rates to give employers a more affordable shot at working capital. When money’s this tight, better to stick with the tried-and-true when it comes to payments?
