The gap between paper checks and ACH credits is widening, according to the payments experts who recently met up for an AFP webinar. At least in North America. “Checks really aren’t used much on an international basis,” said Tom Hunt, AFP’s director of treasury services and payments.

Despite the increase in digital payments, checks haven’t disappeared. “In 2004, we thought checks were going to be gone by 2010, but that’s clearly not the case,” said Hunt.

When it comes to key supplier payments for businesses, what drives the decision between check or digital payment? Of the factors to be considered, one is coverage; not every financial institution is connected to the network. Vendor preference factors in too. In some cases, vendors use smaller banks that are not part of the network. And ACH isn’t free. “As a small business owner my bank gives me checks for free, but they charge me to do ACH. There has to be an incentivization to move away from paper,” said another treasury professional.

What about same-day ACH payments? Why is such a small percentage of businesses using that service? Payment terms and the extra fees associated with same-day ACH is the answer that came back. “Our payment terms are 30-40 days out, so why spend the extra money on same-day if I receive the invoice in time to use traditional ACH?” said one treasurer. “We have the ability, and we’ll use it if we need to, but because we have those longer payment terms, we really don’t need to use it.”

Another piece of the process under consideration is remittance information. How do you send remittance information for digital payments? The majority of organizations send it via email, both encrypted and unencrypted. One of the reasons email is still so prevalent is that it's ubiquitous and free, though the information people need when payments are sent varies greatly.

Made for speed

For certain kinds of payments, speed matters. That said, the word “speed” might be a proxy for visibility. “One of the great characteristics of the instant payment schemes is I know that when I send the payment, seconds later, the party will have received the payment,” said one treasury professional. The visibility of payments and the ability for treasury organizations to have a better eye on where all their money is at any given point in time will continue to drive the use of instant payments.

Where is speed the most important factor? Cross-border payments. Speed in a cross-border payment, where the time difference between when the money was taken out of the originating account and when the money arrived at the destination account was much greater, is again, really about visibility. One of the reasons speed has such a heightened level of importance in the international market is that more of their relationships are across borders.

New payment rails coming online

Will you be ready for FedNow next June? “We already have some instant payment capabilities for our customers, including debit and Zelle. We're probably just going to sit back and see what happens because we just don't need it right away,” said one executive.

When FedNow comes online, the limit will be $500,000. Whether your organization is working towards being ready, or you’re simply not going to be ready, what has to change for you to get there? 

“Systems have to change,” said another financial executive. “It's not the regular course of business where you’re being invoiced, making payments and there's a batch running every day at 6:00 p.m. The use cases will grow as people learn why and when these things provide value.” 

The other critical thing to watch is reach — to whom can I send a faster payment? Can the person on the other end accept a payment? As the schemes work to improve reach, we’ll see an increase in volume.

Every instant payment scheme around the world came to market as a domestic scheme. The Federal Reserve has not made any announcements about bridging FedNow to any other country, but the bridging of instant payment systems is coming. It’s all part of the maturation of instant payments more broadly.

“There is a little bit of an aspirational component here,” said one executive. “It would be great to be able to pay at the very last minute and know that my payment is good; it would be great to be able to get money faster. And so, if I had full visibility in all of my technology systems on my side and your side, were able to process these things 24/7/365, instant payments would be great.”

How are they likely to benefit through the various use cases? What you see in the market with FedNow and RTP, they're trying to seed the market with ideas. We have barely scratched the surface of the use cases that will benefit from instant payments. It's going to take time; it's going to take maturation; it's going to take the ability, particularly in business backend systems, to become instant aware.

There are quite a few things in play that will increase the usage of instant payments across different markets. “It’s an indication of, ‘boy, I'd love to have this,’ more than I see a lot of activity,” said an executive.

What’s the difference between these future payment rails and those already in existence, such as PayPal and Venmo? A PayPal or Venmo cash payment actually happens in a totally separate ecosystem. The money doesn't start in a bank account, and it doesn't end in a bank account. Zelle is a promise to pay network, so while it looks between you and me as if the payment moved instantly, the banks settle up at the end of the day. So, the value of instant payments is the value of clarity of money in a bank account; the people who will benefit from these various use cases are people who understand that. Do you want your money now, or do you want your money later? That's driving an expectation.

“Most financial institutions are trying to hide that requirement as much as possible from their customers because again, customers have systems that are wired up to send payments certain ways,” said a treasury executive.

The promise of ISO 20022

One of the benefits of ISO 20022 is it holds the promise that it can be this sort of universal language for carrying the business relationship of a payment along with the payment — “but it's going to take a long time to get there,” said one executive.

Companies that operate globally are much more aware of ISO 20022 than companies that operate domestically because other schemes around the world are much more mature in their use of ISO 20022. Backend software will get updated, become much more ISO 20022 aware, and financial institutions will begin enabling products that, to the extent you’re ISO 20022 aware, enable you to gather some benefits from that extended data.

The concept of ISO 20022 was for financial services to be the one standard that would rule them all. ISO 20022 is two things. It's a data dictionary, so that when we say address, we all know what an address looks like. It's also a set of messages in the payments realm; there are approximately 140 messages in the payments domain of ISO 20022. “To put that in perspective, RTP might use a dozen of those messages, so there's a lot of capability and opportunity we haven't really even begun to explore,” said a finance executive.

“You have to be able to receive those messages. You have the choice to not send it out, but you have to at least be able to receive it,” said another executive. There are tools out there for translations, there are tools out there for testing to progress on that initiative. But it's a multi-year roadmap. “Anybody thinking in that direction should not leave it to the last minute because it will take some time to get there.”

The newer schemes, FedNow and RTP, are built natively on ISO 20022. Wires are moving in that direction. SWIFT has the received requirement coming up in several months. The Federal Reserve has made an announcement that they're moving entirely to ISO 20022, though we're still a few years away from that. “But the data benefits of ISO 20022 will clearly accrue more to businesses than consumers; for businesses, there is all kinds of promise in the volume of data,” said a treasury executive.

“Anybody who has sent or received a wire has had the problem of looking at the incoming wire instructions and saying, ‘What the heck is this?’ One of the benefits of ISO 20022 is this much more highly structured data,” said an executive.

That will be the game changer: improvement in straight-through processing. However, it will take some time for everyone to start using those structured fields in the right way. What we're seeing now is the evolution of it from the inside out. The network adopted ISO 20022, they're pushing out the requirement in a stepped form to the financial institutions, and the financial institutions have an option as to if and how they make it available to their corporates.

“The payments technologies are building across payment types. They're standardizing their payment sub capability and ISO 20022,” said a treasury executive. “That stuff already exists within the corporation; the corporate might not know that they're using it, but the fact that the underlying technologies are beginning to be implemented in this standard is setting the groundwork for being able to take advantage of some of the more data-capable features.”

To learn more about changes in the payments landscape, the full findings from the 2022 AFP Digital Payments Survey, underwritten by J.P. Morgan.