Mike Philips
The ability to manage and juggle the timing, sources, and uses of cash flow is critical. It’s even more so for a small business, where we have to live and breathe cash flow every day. Imagine the benefits a small business can get from having more insight into payments being made and the potential cash excess or shortages so that the true cash balances are known faster. What if a business could resolve emergency payroll issues, correct payroll errors, or even wait to fund payroll on the effective date? What if the funds from an invoice could become available the same day the payment is made? What if we could move funds from one account to another and have it all posted and available on the same day without using costly services such as wire transfers?
Many of the inefficiencies of the current payment and billing cycles, cash forecasting inaccuracies, and service fees could be removed if we could move money faster and easier. There’s some progress being made thanks to advancements in technology and payment processing as well as financial regulations that guarantee when funds are available to businesses. But what is it going to take for same-day payment processing or the mystical dream of real-time transactions to become a reality? Well, strap on your seatbelts. Changes are coming. Three major financial and regulatory changes currently underway will provide tremendous opportunity for improved cash flow management on a local and global level.
Same-day clearing
Some groundbreaking improvements were launched in 2016 within the payments world of the Automated Clearing House (ACH) financial transaction system, which serves as a backbone for payment processing within the United States. These changes move the ACH world from a single, next-day settlement process to one with multiple, same-day settlement options.
Phase 1 involved electronic credits to support same-day payroll, bill payment, and person-to-person payments. Phase 2 included debits to further improve bill payment for uses such as faster settlement of invoice payments between business relationships. This enables billers to pull funds from customers’ accounts more efficiently and provides for certain same-day transactions, including movement of funds between multiple business accounts as well as loan payments and credit card payments. These types of transactions are now able to be made and settled on the same effective date. Phase 3 provided more stringent requirements on the timing of settlement and availability of funds during the same-day process while also reducing counter-party risk.
Overall, this improvement allows for the multiple settlements of funds moved on the same day rather than waiting until the next day. By leveraging the power of same-day ACH within its financial operations, a small business will have more control and flexibility in its cash flow, additional investment opportunities, and more efficiency within both its accounts payable and accounts receivable payment processes. Additionally, same-day ACH could serve as a cornerstone for a real-time payment system.
Instant payments
On November 21, 2017, the Single Euro Payments Area (SEPA) Instant Credit Transfer scheme, an instant payment system, became active within European operations. Created by the European Payments Council (EPC), the system includes banks and approximately 600 payment service providers from eight European countries and enables the instant transfer of electronic funds. This new payment structure permits the transfer, sending, or receipt of up to €15,000 in less than 10 seconds within and across borders, with the funds available immediately.
The eventual geographic goal is to include more than 34 European countries. Currently, an additional six countries are forecasted to join the initiative by third quarter 2018, and it’s believed that critical mass of participants could be reached as early as the end of 2020.
To make the structure even more attractive to businesses, the EPC also committed to regularly evaluating the transaction limit beginning in late 2018. This will give businesses and customers within these markets a common and convenient way to move money or make payments through one channel and to be able to provide instant credit availability. Real-time payment clearing exchanges are also being formed in the U.S., especially for the millions of consumer-based person-to-person payments.
Of particular importance to small businesses, the data, details, and information needed to process and support the payment are also to be supported and embedded within the payment. All of this is designed to place the control of the cash flow in the hands of the person or business making the payments—control that provides significant benefit to the day-to-day cash management of a business.
Shared access and data
Another innovative event for cash management strategies is the European Union’s Payment Services Directive (PSD2). Effective January 2018, PSD2 mandates that banking lenders within the EU share between each other access to customer accounts and related data, with permission from clients, and also create data links between each other and outside firms. One of the key goals of this directive is to speed up the flow of information and transaction interchange. There’s still much to be worked out to enable this within the industry, but speaking as a veteran banker, this is a monumental “Wow!” moment as an extremely progressive yet risky move. Through this directive, electronic payment systems within the EU are expected to converge while the competitive channels could be opened to a level we have never seen within traditional banking channels. The level of collaboration and innovation sparked from this should accelerate the payments landscape to be even faster and more efficient.
In the U.S., the Federal Reserve established the Faster Payments Task Force in 2015 to provide recommendations on how to improve the electronic payments infrastructure, regulations, standards, and sustainability. The task force consists of more than 300 members across multiple disciplines, and its goal is to find ways to enable funds to be moved faster while being flexible, cost-effective, safe, and ubiquitous. Expect more advancements to come soon as it finalizes proposals to make payments in the U.S. faster, efficient, secure, and more accessible by 2020.
Action plan
Real-time and same-day payments and funds transfers have become a reality. Technology changes and systems to increase the efficiency of our day-to-day cash management processes are coming faster and faster. Those of us in small businesses need to have conversations with our financial management teams and strategic business partners so that we understand the changes and how the effective dates of transactions could be interpreted and used. We each need to evaluate how these changes could impact our business and overall cash management processes so that we can obtain the most benefit and efficiency. Exciting times are ahead for our cash management processes and strategies.
(Published in association with the US-based Institute of Management Accountants)
