MARCH 2018 SPECIAL REPORT • treasuryandrisk.com

SPECIAL REPORT: ACCELERATED PAYMENTS

Sponsored by Citi

PAGE 2

Real-Time Payments Have Arrived

treasuryandrisk.com MARCH 2018 SPECIAL REPORT TREASURY & RISK 32 TREASURY & RISK MARCH 2018 SPECIAL REPORT treasuryandrisk.com

P repare for payments transformation. In November 2017, The Clearing House (TCH) and 25 partnering banks launched the first new core payments structure in the United States in more than 40 years. The new system permits real-time payment clearing, marking a major

change for treasury operations that have been using the one- to two-day Automated Clearing House (ACH).

Qualifying payments are domestic,

interbank electronic transactions. Their

payment messages are transferred, and

funds are available to the payee, in real time

—literally within seconds—on a 24x7 basis.

The new system, dubbed RTP for “real time

payments,” was designed and built through

the collaborative efforts of TCH and its

partnering financial institutions. RTP meets

the objectives of the Federal Reserve Faster

Payments Task Force, which has been tasked

by the Fed to identify and assess alternative

approaches for implementing safe,

ubiquitous, and faster payment capabilities

in the United States.

The new system follows late on the

heels of the Faster Payments Scheme

Limited (FPSL) launched by the United

Kingdom in 2008. FPSL moves mobile,

Internet, telephone, and standing-order

payments quickly and securely, in nearly

real time, 24 hours a day. Seventeen banks

and building societies are participants

in FPSL, with more than 400 financial

institutions now offering the service to over

52 million account holders.

Why has the U.S. lagged behind the U.K.

by a full decade in developing RTP? “The

clearing cycle prior to FPSL in the U.K. was

three days, giving them significant impetus

to improve the status quo,” says Steve

Ledford, senior vice president of product

and strategy at TCH. “In the U.S., we

already had ACH and next-day payments.

There was less of a gap to make up.”

Another factor slowing implementation

in the United States was the sheer volume of

financial institutions dotting the American

landscape—more than 100,000 entities in

all. TCH and its partnering banks needed

extra time to design a payments model that

could scale to address all these institutions’

different capabilities. As Ledford puts it,

“We needed to find a model that worked for

everyone.”

Worth the WaitSimilar to wire transfers and ACH,

RTP is another component of the core

industry payments infrastructure, with

the potential to support diverse use cases.

In a business-to-business context, RTP is a

credit “push” system. Payments are pushed

from the bank account of the business

making the payment to the bank account

of the company receiving it. In between,

RTP supports the financial institution’s

customer-facing systems for services like

bill payment, cash management, peer-

to-peer (P2P) payments, and emergency

disbursements. Messages such as requests

for payment, payment confirmations,

requests for additional information,

and remittance detail are used to create

frictionless customer-facing interactions.

TCH is working with a wide array

of industry stakeholders, including

community banks, credit unions, and

financial institution service providers,

to drive adoption of the long-sought real

-time payments system. “The reality is

that we’ve been talking about payments

transformation for the past 25 years,” says

Alberto Casas, managing director and

North American head of payments and

receivables at Citi, one of TCH’s partnering

institutions and one of six banks currently

processing payments through RTP. The

(continued on page 6)

Real-time payments—and receivables—are

a reality, already benefiting some treasurers’

supply chain and reconciliation processes.

Real-Time Payments Have ArrivedBY RUSS BANHAM

others are JPMorgan Chase, BNY Mellon,

SunTrust, U.S. Bancorp, and PNC Financial

Services Group.

“However, we wanted a model that

didn’t just promise immediacy and faster

payments,” Casas adds. “We also wanted to

create ‘smarter’ payments—a standardized

data set that allowed for clean interactions

between parties to send and accept

inbound or outbound payments. Today,

payments and payment information don’t

always travel together perfectly, with

the receiver often misunderstanding the

purpose of the payment, culminating in

costly and frustrating interactions.”

An example is a wire transfer that lacks

details indicating the purpose of the payment.

Without the right payment guidance, the

recipient company may not connect the

payment to the right receivable. RTP obviates

this possibility by supporting the transfer of

critical information about a payment along

with the transfer of funds, to efficiently deal

with back-office reconciliation issues.

“By providing transparency and

certainty, through immediate confirmation

notices that a payment has been sent,

received, and instantly settled, both sides

can see if a transaction went through,” says

Casas. “Having these confirmations gives

treasurers the ability to free up working

capital by more precisely managing their

cash flow.”

This unique capability was designed

and developed using technology from

Vocalink, the software vender that built

the U.K.’s faster payments system and

which is now owned by Mastercard. TCH

wrote the code for RTP and is the system

operator.

Heightened payment security was

another factor weighed carefully in the

development of RTP. The new payments

system is the first to be built and launched

in the United States since the advent of the

Internet. Over this period, incremental

changes have occurred in payments,

beginning with the gradual reduction in

the use of cash and checks, and continuing

forward with the digitization of payments

and standardized messaging.

“Previous fast payments systems were

based on older-generation technology and

payments standards,” Ledford says. “An

advantage for us being later to the game is

that we could learn from and piggyback off

of the previous systems’ upgrades. We’ve

developed a system using secure, digitally

capable Web-based protocols. So we’re not

just fast, we’re also safe.”

Treasury Opportunities Treasurers who leverage the RTP

system may help their companies achieve

competitive differentiation in their

markets.

“With RTP, the payments system can

actually become a customer engagement

tool,” says Casas. “An insurance company,

for example, can provide instant claims

payments to a company devastated by a

natural disaster.”

Now that the United States and

several other nations have introduced

independent systems for faster payments,

other countries around the world are

expected to follow suit, resulting in

significant changes in how businesses

and consumers send and receive

payments globally.

“Today’s payments systems are

the building blocks upon which future

payments innovation will be built,”

says Casas. “Nevertheless, we’re not

predicting that all payments will

move to a real-time payment channel

overnight. RTP is an additional option

for payers and receivers to support

unique use cases.”

He provided the example of a consumer

who has not paid his or her electricity bill

on time. “RTP will allow for a request

for payment to go from the utility to the

consumer’s bank,” Casas says. “When the

bank receives the request, it can instantly

forward a detailed message through

RTP to the consumer that the payment

is now overdue. There are multiple

benefits, including the avoidance of late

6 TREASURY & RISK MARCH 2018 SPECIAL REPORT treasuryandrisk.com

fees and/or service disruptions while

simultaneously helping to build trust and

customer loyalty.”

The business owner sees that if

the bill isn’t paid immediately, the

electricity will be turned off. “If the

person chooses the ‘click to pay’ option,

the money is moved from the bank to the

utility in real time to avert a shutdown

in power—and possibly even a late

payment fee,” he says.

Treasurers’ Next StepsTreasurers interested in adopting

RTP need to first determine its value in

the context of their current business

operations. Moving to RTP might require

new payment technology, particularly if

the company’s current system releases

batch payments periodically to address

specific deadlines.

“Business customers need to

contemplate API [application programming

interface] connectivity with their banks

to release transactions in real time, as

opposed to batch,” Casas advises.

Treasurers may also need to change the

way they manage liquidity and working

capital, creating models in their accounts

that move money from point A to point

B, he adds. Furthermore, with an RTP

system, security needs to be embedded in

the company’s operational processes at the

item level as opposed to the batch level.

Citi is working closely with its

commercial accounts to prepare them

for these changes. Ledford says the

other five TCH member banks are also

assisting their business customers with the

transformations required.

Response to RTP has been highly

positive thus far. “We’re already hearing

from the treasurers now using RTP that the

big difference for them has been immediate

confirmation of a payment,” Ledford

says. “They’re telling us they cannot

overstate how important that has been—

the certainty it gives them in simplifying

processes like reconciliations.”

Treasurers are also touting the speed

of the new payments system in assisting

their just-in-time supply and demand

obligations. An example is a midsize or

smaller company buying from a supplier

with which they don’t have a credit

relationship. “The company needs the

product to ship soon but is concerned over

payment,” says Ledford. “What might have

taken weeks to resolve in the past takes

a couple hours and less, due to the new

system’s certainty [of payment] and speed.”

Down the line, more and more financial

institutions and their customers will be

engaging in real-time payments. “We’ll see

material adoption [of RTP] in 2019, when

more banks are online with more features

and functionalities, such as requests for

payments and extended messaging,” says

Casas. “By 2020, we’ll see a high number

of banks on the system and payment

volume ramping up in a significant way.

Beyond that, it will eventually become the

material payments method and the primary

alternative to existing systems.”

These developments will be felt

worldwide. In anticipation, Citi has

developed a comprehensive toolkit that

addresses its connectivity to all payment

methods and channels globally. Casas

explains, “We’re focused on building

globally interoperable capabilities to

provide a common experience through a

central real-time payment gateway. We

see this as a significant differentiator.”

Russ Banham is a Pulitzer-nominated business journalist and author who writes frequently about finance and accounting.

REAL-TIME PAYMENTS (cont’d from page 3)

Real-Time Payments Have ArrivedBY RUSS BANHAM

Every day, in cities aroundthe world, people are doingamazing things. They’re creating,innovating, adapting, building,imagining. What about a bank?Shouldn’t we be equally ingenious? Strive to match our clients’ vision, passion, innovation? At Citi, we believe that banking must solve problems, grow companies, build communities, change lives. With an intense focus onbeing the best for our clients,Citi is leading the way in paymentsinnovation globally.

© 2018 Citigroup Inc. Citi, Citi and Arc Design and other marks used herein are service marks of Citigroup Inc. or its affiliates, used and registered throughout the world.

citi.com/tts

®

THEWORLD’SCITI. IT’SWHEREVERYOU ARE.

The picture painted by Fintechs would have you believe they are the only ones who are innovating when it comes

to payments. Turns out, there is more to the story. In fact, banks are leading the charge when it comes to payment innovations. A perfect example of this is the advent of instant payments.

Instant payments —which are inter-bank electronic transactions where the transmission of the payment message and the availability of funds to the payee occurs within seconds on a 24/7365 basis—are not entirely new. Many parts of the world already have different variations of instant payments; however, the U.S. market is just now joining the party.

There’s no doubt that Fintechs have demonstrated a propensity for bringing technology innovations to market quickly, but in the case of instant payments, banks have been at the forefront. Citi has long been committed to instant payment systems in countries across the globe, and has been playing a prominent role in helping to develop the standards that are making instant payments a reality in the U.S.

Banks helping set the standards for Instant Payments in U.S.

While many countries have introduced instant payment standards by government mandate, the U.S. has taken a different approach. In

the U.S., the Federal Reserve recommended, but did not mandate instant payments. As a result, several financial industry consortia and a Federal Reserve-assembled group were formed to develop standards and guidelines for the industry. Banks in general have played an instrumental role with these initiatives.

Case in point: The Clearing House (TCH) Real-Time Payments initiative created consistent industry standards and is responsible for the first foray into instant payments in the U.S. As an influential member of the TCH initiative, Citi is one of the first banks in the country to offer instant payment capabilities to its clients utilizing TCH’s Real-Time Payments system.

Smarter transactions improve the customer experience

Today’s consumers have come to expect a better customer experience—one that offers a seamless, immediate and frictionless payment process. Fintechs were quick to address this market demand, but they are not alone in the pursuit of innovative payment solutions. Banks have also made tremendous strides in developing technology solutions that help ensure a fast, seamless experience for commercial transactions like bill pay or receiving payments from employers or other commercial payers.

Instant payments are expected to have a real impact on a number of different types

of business transactions. As new business

models emerge, instant payments have

the potential to become instrumental in a

multitude of scenarios. One such example

is claims adjustment for the automotive

insurance industry. Instant payments could

be used to issue a payment immediately after

an adjuster determines the extent of damages

following a collision. Putting a claim payment

in the hands of a customer, moments after the

damage appraisal, would dramatically improve

the customer experience. Instant payments

will likely have many applications, such as

royalty and residual payments, paying bills and

medical payments, etc.

Payment data improves treasury efficiency

One of the most significant benefits of

instant payments is the ability to transmit

more transaction data. Access to this rich

data makes it possible to improve treasury

efficiency, enabling more effective use of cash

flows and potentially minimizing exposure to

fraud.

With ready access to data, treasury can improve

efficiencies in exception management, along

with enhanced posting and reconciliation

of invoice–related information associated

with the payment, thereby reducing back-

office costs. This can also empower treasury

to integrate payment data with Enterprise

Resource Planning (ERP) systems to attain

further treasury efficiencies.

Ultimately, by shortening the time frame for

recognizing receivables, instant payments

can help speed up the flow of commerce and

straight-through reconciliation, making it

easier to access much needed liquidity and

better manage vital working capital.

A matter of trust

While banks and Fintechs are similarly focused

on instant payments, one thing that banks can

provide corporate customers that Fintechs

cannot is an established, trusted banking

relationship. Banks have proven, secure

systems that corporates have come to rely on

for all of their cash management needs. The

greater regulatory scrutiny that banks face

contributes to making them highly reliable and

stable partners. As trusted advisors, banks

already have a deep understanding of client

needs and are best positioned to support their

unique business requirements with solutions

that include instant payments.

It only makes sense that when it comes to

sharing valuable data collected from ERP

systems, many corporates may feel more

comfortable with their banking partner, who

they can expect to utilize insights gained in an

effort to provide more effective services and

solutions.

Joining the global community

As the U.S. joins a growing global community

of countries that have introduced, or will be

introducing instant payments, more and more

businesses are likely to begin exploring the

potential advantages of these payments. This

means organizations will need to gain a clear

understanding of how instant payments work,

what situations warrant their use, and how

they can be leveraged to deliver the greatest

benefit for treasury and overall business

objectives.

Today there are 25 countries offering instant

payments, in addition to the recent TCH Real-

Time Payments system in the U.S. Fintechs are

working to make inroads in these markets, but

it’s important to remember that some banks

have already established a long track record of

success with instant payments in international

markets. For instance, Citi is a direct clearing

member in 12 of those international markets,

and has been facilitating instant payments

for many years now. As a leader in digital

transformation of the payments space, Citi is

continuing to expand its footprint as additional

countries invest in real-time payment systems.

While cross-border instant payments are not

currently allowed, Citi is committed to a goal

of building a truly global payment platform of

the future where instant payments are both

ubiquitous and borderless.

Getting beyond the hype – choosing the right banking partner

It is true that Fintechs have brought a greater focus to technology innovations, but in the case of instant payments, banks arguably have an advantage due to the significant investments being made to integrate these new payment methods into existing treasury management portals.

As treasurers begin to explore instant payments and examine how these types of payments might benefit their business, it’s important to look for a banking partner that can help drive treasury success. This means choosing a bank that can offer the most comprehensive, user-intuitive, connected and globally compatible suite of services—in short, a bank that has been at the forefront of efforts to move instant payments forward in the U.S. and is already supporting instant payment systems around the world. A clear choice would be Citi and that’s no hype.

Taking the Wheel: Banks are Driving Innovation with Instant Payments

Sponsored Statement

w w w. c i t i g ro u p . co m w w w. c i t i g ro u p . co m

Alberto Casas NA Payments & Receivables Head TTS Receivables, North America