Key factors: real-time delivery of low-value payments and a data-messaging standard.
Technology is disrupting just about everything, including the way payments are made. Companies that experience a high volume of payments between suppliers, customers and partners stand to benefit the most from their modernization.
A Payments Canada study, in partnership with Ernst & Young LLP (EY Canada), quantified the current cost of payments processing for Canadian business to be between $3 billion and $6.5 billion annually. The research looked at current payment processes and identified inefficiencies, such as the manual handling of accounts receivables and payables among all sizes of businesses. A faster, safer and more data-rich payments system will reduce many of these operational inefficiencies, and help lower costs while boosting bottom-line returns over time.
Manufacturers can prepare for payments modernization by focusing more on processing and taking note of two opportunities. The first is the real-time rail, and it’s all about speed. This new, 24/7/365 system will facilitate the real-time delivery of low-value payments in a matter of seconds.
The second is called ISO 20022, which is all about data. This messaging standard will underpin all of Canada’s new payments systems.
Real-time payments will be made almost instantly, providing significantly faster alternatives to current methods. With speed at its core, Canada’s rail also opens the door to a world of possibilities for businesses. A secure, regulated system will enable a variety of players to connect and innovate by developing new ways to pay for goods and services, as well as transfer funds and related business information.
Real-time payments are already a reality. Australia makes fast payments supported by payID, an addressing service that allows consumers and businesses to create an identifier for receiving payments across multiple platforms, such as social media or by text. In the UK, Pingit and Paym link mobile numbers with bank accounts, allowing users to send money back and forth as easily as they text. These innovations are just the beginning.
For businesses, the appeal of real-time payments boils down to operational efficiency. The EY research finds moving from legacy technology to automation will save $2.1 billion to $3.4 billion annually. But adding more data to payments is key to maximizing the benefits.
Why does data matter? On a practical level for manufacturers, it significantly reduces headaches for accounts receivable and payable, as well as treasury departments.
Many large companies have moved to electronic payments and invoicing in an effort to streamline and expedite their processes. However a payment may arrive separately from an invoice, or with no invoice data.
This leads to manual payment-invoice matching that requires time-consuming and error prone re-keying. Not only does this mean resources must be allocated to process and match payments to data, it also creates enough friction in the system to delay payment processing and collection, which has an negative impact on cash flow.
Let’s say, for example, eight invoices are sent over two months to a customer who sends a lump sum payment of $10,000 with no accompanying information. While you’re pleased to have the $10,000, the accounts receivable team will scramble to balance books by tracking down invoices, calculating sums, calling the customer to verify the match, correcting any inaccuracies or discounts, then keying in the information manually.
Providing more information with the payment has two benefits: you’re providing better service to partners and customers by streamlining operations for them; and it reduces the load on your customer service or accounting teams.
ISO 20022 will allow information to flow easily and quickly to whoever needs it, whenever it’s needed. Immediate access to specific data will smooth processes, from purchasing and shipping to managing customer relations, and every step in between. Coupled with new payments systems, such as the real-time rail, Canada’s economy is set to reap the benefits. Ultimately it’s still up to suppliers, customers and partners to make payments on time, but the looming modernization of payments systems will help everyone.
To prepare for the coming changes, stay informed by following updates from Payments Canada, and connect with other key partners such as suppliers and vendors to find out who is already ISO 20022-enabled. Also connect with your financial institution about modernizing your transactions. The more early adopters, the faster everyone benefits.
Jan Pilbauer is executive director, modernization and CIO for Payments Canada. Janet Lalonde is director, modernization. Payments Canada, a public purpose, non-profit organization based in Ottawa, is responsible for the clearing and settlement infrastructure, processes and rules essential to daily financial transactions. Visit www.payments.ca.
This article originally appeared in the October 2018 print issue of PLANT Magazine.