Immediate Payment Innovation Supports Increased Client Satisfaction and More Business

Payment innovations such as real-time payments remove banking hours, cutoff times, windows, weekends and holidays to move funds any time. David Jackson, a payments industry expert for First Horizon National Corporation, lays out the value of immediate payments for the factoring industry.

BY DAVID JACKSON

Most companies operate during business hours closely tied to when clients conduct business. However, the factoring industry is more closely tied with banking hours, which creates constraints on how flexible they can be with clients. Factors must design their business processes based on the calendars, time zones, cutoff times, hours and settlement times of banks along with many other considerations. Many times, clients have an entirely different set of operating hours when they conduct business, but money only moves during banking hours. Generally, this means factors lose the opportunity to work during those days and hours in between. Payment systems require cutoff times to be within the window for processing. Nearly all payments are submitted in batches for payment one to three days in the future. To accelerate payments, factors and their clients are forced to use an expensive wire platform, but even those options have pesky cutoff times, weekends, holidays, time zone cutoffs and other issues that add time to funding clients.

RESHAPING THE PAYMENT SYSTEM FOR FACTORING

What if factors and their clients could work together on any day without worry that the bank is closed for a holiday? What if there was no cutoff to send money to clients? What if factors could work with clients at any time and still send funds? And what if there was no longer any issue with crossing to a different time zone because there still is no cutoff time to send money to clients? This would truly change the nature of the industry, and best yet, funds would move immediately when told to move.

This concept has existed in the United States for several years and is now emerging with more function. This was prompted by continued innovation of the financial services industry and amplified by a set of projects by the non-regulatory side of the U.S. Federal Reserve. The recently completed U.S. Faster Payments Task Force defined the issues and the success criteria. The financial industry is now deploying systems to move money faster, more securely and with more granularity to support finer liquidity management of business without regard to “banking hours.”

Today, the most viable method involves the use of existing networks that can push messages and money to nearly any depository account across the country. The techniques that are used have been around for years from Visa and Mastercard but are not a “card” product. They truly move from one account to another using these very pervasive networks. As this method (and ones from the Fed and The Clearinghouse) further mature, the U.S. could start to see the merging of ACH, check, same day ACH and wires into a more uniform immediate transfer economy.

For all businesses, timed payments are becoming more of a necessity. Consider the ability to pay another business or person at a specific date and time, or at completion of a specific criteria. For example, when a load hits the dock, payments could be made regardless of the date or time. This is beneficial for clients as well because when the funds move into a client’s account, they are immediately available for use. There is no delay between receiving the payment and using the funds to get to the next job. Because of how this system is designed, clients will never have a “wire receive fee” or anything like it. And remember, this process happens whenever its told, whether that’s Sunday at midnight or on Jan. 1.

Since payments can move any time and any day, issues can be addressed for a factor’s accounting cycle, systems and procedures. Normally banks will send a report for the day’s transaction activities. What happens when that report cycle isn’t the same as your business day or is produced in the wrong time zone? Factors must reconcile multiple reports to their accounting system business day or wait to reconcile on the next business day.

In a more immediate payment system, since transactions move when they’re told, their status is continuously available since the status of everything can be monitored as it happens. That means factors can set their accounting day so the status of processing periods already match the previously defined business day. Then widely available technology can auto-import status to reconcile to the accounting system. Now the accounting system can reconcile every day or at any time synchronization is needed — end of day, intraday, every hour or whenever account updates are required. This is immensely helpful in managing intraday liquidity and cash flow/ position because you don’t have to wait for a report, just consume the transaction data when you want.

THE BUSINESS PAYMENTS COALITION

In addition to more immediate payments, to support a different Federal Reserve of Minneapolis initiative, you can use an optional shared ID. You can read about this work by the Business Payments Coalition (BPC) in an article published by The Federal Reserve of Minneapolis: “Simple Remittance Requirements.”

This reference ID could be as simple as an account number, invoice number, contract number or anything that helps both sides know the purpose of the payment. Many small business owners can be confused when it comes to understanding which payment is for which invoice or account. The BPC was formed to help. Clients can collect transaction data on their side of the platform if they would like to automate the upload of payments data to their accounting systems. The reference ID can be used as an index to auto-post to the correct item in the payable system. •