Are instant payments just another payment option for businesses, or are they an opportunity for transformation? In many cases, instant payments can drive efficiencies, minimizing or even eliminating the costly, manual payment processes that many businesses experience today.

Major corporations and large businesses have already made significant investments in systems that enable them to automate some of their payments processing by using existing payment rails and electronic data interchange (EDI) messaging tools. In fact, an estimated 25 percent of the 25 billion invoices exchanged annually in the United States use these tools. Lacking the resources to make these same investments, however, some smaller and midsize businesses may be less able to automate their payment processes.

Instant payments can provide the much-needed opportunity for smaller businesses to expand their payment processing capabilities and possibly see a real, beneficial change in this landscape by eliminating some of its current complexities. However, it will take the entire ecosystem, including financial institutions, accounting software providers and business partners, to enable instant payments and streamline the process from end to end. In addition, it’s particularly important for businesses to understand and plan for what’s involved in making this happen.

Read on to learn more about how instant payments can help transform small and midsize business payment processes and key considerations in planning for adoption.

A look at what happens today: A basic business transaction

Invoice received: A local lumber yard receives its standing order of 30 pallets of wood from its distributor. The wood distributor’s accounting department issues an invoice either via email or mail for the materials delivered. Their payment terms allow the lumber yard to initiate payment either within 30 days to receive a discount, or within 45-60 days with no discount.

Making the payment: The lumber yard’s accounting department receives the invoice and decides to pay within 30 days to receive the discount. They can do this by mailing a check or initiating an ACH payment online via the distributor’s payment portal. They may also manually enter the information into their accounts payable system and set up a reminder to process the payment on the right date to ensure that the wood distributor receives that payment within 30 days.

However, timely payment initiation may not be the end of the story. Delayed posting of the payment may open the door for errors and costly disputes. What if the lumber yard initiated their payment on day 29, but the wood distributor’s bank didn’t post the payment until day 31? The wood distributor may consider this payment past the 30-day term and not grant the discount, and then deem the payment the lumber yard made insufficient.

Reconciling account information: When its financial institution posts the payment, the wood distributor’s accounting department needs to reconcile it in their accounts receivable records. Unfortunately, this process tends to be manual as the needed remittance information is typically not included in the payment record posted by the financial institution. Who is the payment from? The bank statement may include some information about the payer, but it might not correspond with the known name of the lumber yard. Which account and which delivery of goods is the payment for? Information such as the account number and payee contact information needs to be gathered and manually entered into the accounts receivable software system they are using.

Instant payments: Automation is key

Instant payments have the power to transform the way small and midsize business payments are made and processed. For one, they make it possible to send invoice and remittance details with the payment, facilitating two-way communication between payer and payee regarding the payment and ensuring all the necessary information is there to support automated handling and reconciliation. The “request for payment” (RfP) feature of instant payments has the capacity to carry individual invoice details, including, for example, highly specific payment terms. This same feature also facilitates the transmission of the corresponding remittance details along with the payment.

As software vendors include instant payments in their suite of services, RfP will allow businesses to integrate their Accounts Payable and Accounts Receivable systems and automate reconciliation of these payments. Doing so reduces errors and exception item handling. Suppliers benefit because they can automatically update their customer’s account balance when they receive the payment. And their customers benefit because they receive invoice details that can be automatically uploaded into their payables system for processing.

In addition, instant payments offer immediate and certain payment. Payments are reflected in the supplier’s account within seconds, and the funds are immediately available – a significant cash flow advantage. And because instant payments are settled immediately between the financial institutions, there is no risk of the payment being dishonored after the fact due to insufficient funds.

Another benefit includes immediate confirmation to the payee that their payment was accepted. This is particularly important for businesses that are trying to take advantage of timing discounts while simultaneously maximizing cash on hand.

All of these features help to eliminate some of the manual, messy parts of making and receiving payments. For businesses that have any kind of payments volume, being able to automate can be a game changer.

A look at what the future of instant payments may bring

Now let’s take a look at the example above, except this time, the local lumber yard and its vendor, the wood distributor, utilize financial institutions and accounting software providers that enable instant payments.

Invoice received: The lumber yard receives the wood from their distributor. The distributor’s accounting software generates and sends an e-invoice (formatted as an RfP) through a connection with their financial institution. The RfP includes all of the applicable billing details, including the payment terms. The lumber yard receives the RfP via a connection with their financial institution, and is able to upload the details to their accounts payable software.

Making the payment: With the assistance of its accounts payable software, the lumber yard’s accounting department schedules the payment to be sent on day 30 in order to receive the discount from the wood distributor. On day 30, the software initiates an instant payment instruction through the lumber yard’s financial institution, with remittance detail included, that responds to the RfP from the wood distributor. The transfer is made instantly, posting to the distributor’s financial institution account with all the correct remittance data attached.

Reconciling account information: Through a connection with its financial institution, the wood distributor’s accounts receivable software takes in the remittance data and is able to automatically post the transaction as the correctly discounted payment from the lumber yard for the lumber shipment.

In with the new, but not without planning and effort

The above example is simple enough, but it helps to illustrate how instant payments could transform the way Americans do business. There is a lot of work currently being done by financial institutions, business software providers and businesses themselves to make this kind of automation possible.

Those considering instant payments adoption need to look at all of the pieces of the puzzle to decide whether instant payments are right for their business, and if so, what they need to do to get ready. In particular, businesses need to ask the right questions and talk to the right people when planning for adoption. For example:

• Will instant payments integrate with our current accounts receivable/accounts payable or treasury management solution (TMS) software? If not, what are our vendor’s plans for adding instant payments? Will investing in new or updated software provide long-term benefits from a labor-saving and process efficiency standpoint?
• What are our business trading partners’ plans for adopting instant payments? Are they willing to offer discounts for the benefits of receiving payments instantly?
• Is our bank set up for instant payments? How will they support the invoice and remittance data flows, as well as automated uploading of the data into our accounting software?
• How will instant payments affect our cash flow? When should we implement instant payments versus traditional payment methods? Having funds available immediately is always beneficial for payees, while having the ability to control the exact timing of a payment is beneficial in optimizing cash flow in paying suppliers.
• How will instant payments affect other process flows? How will instant payments affect personnel needs? What kind of training will our staff need?

There are many important questions to be answered in considering adopting instant payments, and having key conversations sooner, rather than later, will facilitate planning for an instant payments transformation.

Learn more about instant payments and the FedNow Service, a safe and efficient instant payments infrastructure being developed by the Federal Reserve.

Read on to learn more about how instant payments can help transform small and midsize business payment processes and key considerations in planning for adoption.

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