Paying for goods and services we receive is a fundamental economic requirement. We need to pay the right amount, at the agreed time, so the supplier can then pay their own suppliers and employees. It is not only what amount and when we pay that matters, however, it is also how we pay.
Paying efficiently for goods and services procured and receiving money for sales are critical to business survival.
Banks execute payments for their customers through a variety of payment instruments.
|Domestic||High volume / Low value|| |
|Low volume / High value||RTGS|
Other payment types include:
- Book transfers
- International cheques or drafts (foreign currency),
- Banker’s cheques or demand drafts (drawn on bank on behalf of customer – to reduce credit risk).
Payments criteria: How do I choose?
With the exception of cash and cryptocurrencies, most payments will ultimately reach a bank account (or mobile wallet balance) at which point the funds are available to the recipient. The faster, more secure and less expensive the payment process is, the better. Consequently, when evaluating existing payment methods, or deciding what new payment methods to use, these factors are important considerations:
- How long will it take for the payment to reach the beneficiary?
- Is the payment safe?
- How much will it cost?
- How easy and convenient is it to make the payment, and how convenient is it for the beneficiary?
- How easily and reliably can the payment be accounted for?
The relative importance of these factors will vary depending on the value, urgency and volume of payments. There will also be differences in terms of the type of payment e.g. between businesses and consumers (B2C), peer-to-peer (P2P) or between businesses (B2B).
Using cash and cheques as examples, it quickly becomes apparent that these are expensive and risky choice of payment methods, even though they persist in many markets:
|Cash||Time to reach beneficiary||Quick if handed over in person||Quick if handed over in person||Days, as typically mailed or handed over in person|
|Security||High risk of loss or theft||High risk of loss or theft||High risk of loss, fraud, theft|
|Cost||Low cost for consumer. High cost for business, due to processing and resource costs||Low cost for consumer||High cost for both parties, due to processing and resource costs|
|Convenience/ acceptance||Relatively high for consumers as cash is widely accepted (except for accessing cash) but very low for business due to processing and resourcing issues||Relatively high (except for accessing cash)||Very low for both buyer and seller, particularly for cross-currency payments|
|Accounting||Very low, as it is difficult to prove payment/ receipt without a separate receipt process||N/A||Very low, with high risk of misappropriation of funds|
|Cheques||Time to reach beneficiary||Can take days to reach recipient by mail, and must then be paid into a bank account, with a float period of at least two days in most cases||Can take days to reach recipient by mail, and must then be paid into a bank account, with a float period of at least two days in most cases||Can take days to reach recipient by mail, and must then be paid into a bank account, with a float period of at least two days in most cases|
|Security||High risk of loss and fraud||High risk of loss and fraud||High risk of loss and fraud|
|Cost||Typically low cost.||Typically low cost.||Relatively high due to processing and resourcing costs. Processing costs vary between markets. Some benefit from the ‘float’ period, but this is offset by the unpredictability of the cheque being banked by the recipient.|
The above is a simplified view of the pros and cons of using cash and cheques. There are also challenges such as how to manage cross-currency payments. However, this can be a useful way of evaluating the choice of payment methods.
Cash, Cheques and Cards
Many governments have set targets to reduce cash and cheque usage through nation-wide initiatives to promote use of modern payment methods, pricing guidance and even pricing subsidies. are nudging their economies away from paper to electronic instruments with little success. Read about the benefits of transiting from cash to electronic and instant payments here.
Cash (notes and coins) remains prevalent in retail businesses globally despite the risks and inconveniences it presents. Cash handling has more operational and control issues, e.g. erroneous accounting, fraud and compliance risks.
Cash handling comes with high costs to both the business and the financial system. With advancement in technology and increasing smartphone penetration, there are more options for cashless payment modes.
Cheque usage has dropped dramatically in some advanced economies with the advent of instant and QR payments, but cheques remain firmly entrenched in many economies.
Cheque usage has applicable processing charges by banks. Cheque payment is a typically a lengthy process. On the issuance leg, we have cheque writing, signing and delivery to the payee. On the recipient leg, there is cheque depositing and clearing process. The process can take days. Cross-border cheque clearing is especially challenging. In some countries, cheques have a recourse period and this adds uncertainty to the finality of the funds.
The issuer has no absolute certainty when the cheque would be presented, thus there is a need to maintain sufficient liquidity to avoid overdraft on the account. As a paper instrument, cheque offers limited protection against operational fraud and malpractice.
Credit cards, but also debit cards (with debit from a bank account as opposed to a credit element) and prepaid cards (cards with a preloaded balance) are widely accepted in developed markets. Businesses also make regular use of cards, both for employee expenses and purchasing. Cards can be physical or virtual, with their use restricted to particular users, amounts, vendors and goods/ services. Single-use cards are variations of virtual cards for one-off purchases.
Corporate card solutions offer convenience and control for both users and the company, as well as a high degree of acceptance (in developed markets), whilst also maintaining auditability over expenditure. Card payments typically come with Merchant Discount Rate (MDR) and is a cost borne by the business.
While payment systems differ across markets, including the payment methods they support, operating hours, settlement timing, legal conditions and costs vary between markets, there are some common building blocks that support payments in most markets.
For domestic payments, your choice of payment method will depend largely on who you’re paying, for how much, and when/ how often. The likelihood is that you will use a variety of methods. For example, a company may choose to adopt the following:
|Purchasing/ employee expenses||Cards (physical/ virtual)||For smaller purchases (that may have been covered using petty cash in the past) and employees’ travel and entertainment expenses, cards may offer an appropriate balance of control and convenience.|
|Consumers||Real-time payments||For payments to retail customers, such as refunds, insurance claims etc. instant payments may improve the customers’ experience, whilst avoiding the cost and administration requirements to cut cheques or sourcing bank account instructions.|
|Payroll|| ||Payroll amounts are typically low value but high volume, and can be scheduled in advance. Low cost batch settlement schemes are often companies’ preferred route. For contractors, and in markets where fewer people have bank accounts, electronic payments to mobile wallets provide convenience for beneficiaries without bank accounts.|
|Supplier payments||Electronic payments (ACH or batch)||As the invoice date is known, these can be scheduled or batched depending on the value and urgency.|
|Urgent/ treasury payments||RTGS||RTGS is often used for high value urgent payments, such as treasury payments, M&A etc. as the amount is debited from the payer account and credit to the payee account in real- or close-to real-time.|
- Real-time gross settlement (RTGS)
Most markets have an RTGS system for interbank settlement across central bank accounts. These systems are used for bank-to-bank payments, urgent high-value payments (such as treasury payments) and net settlement between banks for ACH (see below) and other payment systems. RTGS is also used for clearing of cross-border payments typically in the currency of the domicile country.
How does RTGS work:
- Payer instructs bank to pay beneficiary
- Bank posts payment on RTGS
- TGS debits payer bank and credits beneficiary bank accounts with central bank
- Beneficiary bank credits beneficiary
Examples of RTGS are the following:
Number of bank members >60 >150 >300 direct participants,
Transaction types High-value and urgent domestic SGD credit transfers. Net obligations from Singapore’s other payment systems. High-value and urgent domestic HKD credit transfers. Bulk clearing of stock market transactions. High-value and urgent RMB credit transfers. Clearing/ settlement cycle Real-time. Closed on Singapore bank holidays Real-time. Closed on Hong Kong bank holidays. Real-time if payer and payee banks are direct clearing members. Other payments – 2 days. Closed on Chinese bank holidays.
* Hong Kong also has RTGS for RMB, EUR and USD
** China also has a low value RTGS, CNAPS BEPS
- ACH Transfers
ACH (automated clearing house) is used to describe the high-volume payment systems that exist in most markets.
While there are considerable differences, ACH is typically designed to support:
- Batch processing, with one or multiple processing cycles per day
- Final settlement between banks at the end of day via the country’s RTGS system
How it works?
ACH payments may be ACH credits (when the payer ‘pushes’ the payment to the seller bank) or ACH debits (where the seller bank ‘pulls’ the payment from the payer’s bank). Many markets, including Singapore (IBG) and Hong Kong (ECG, processing autopay, JETCO ATM, EPSCO POS), have low value net settlement schemes as well as high value ACH. These are typically used for batched, scheduled, high-volume payments, such as payroll.
ACH debits, usually known as direct debits, are used by governments, utilities, telecommunication(telcom) companies and banks to collect utility or telecom payments, and increasingly too for subscription-based models by other corporations. Direct debits vary across markets, but typically, where the buyer has signed the relevant mandate:
- Seller instructs its bank to request or “pull” the invoice amount from the buyer’s bank ahead of the invoice date
- The seller’s bank routes the request to the buyer’s bank via the relevant clearing house
- The buyer’s bank debits the buyer’s account, and updates the clearing house
- Clearing house calculates net settlement amount for each bank
- Each bank settles the net position via the RTGS
- Clearing house confirms payments, and the seller’s bank credits the seller’s account
Direct debit schemes offer the benefit of convenience and predictability for payer and payee.
Benefits of ACH Transfers:
For ACH Credit:
- Allows the payer to decide how much, whom and when to pay.
- Gives the payer advantage in liquidity planning and better payable management.
For ACH Debit:
- Collection is triggered by payee, their client is not required to initiate payment, this greatly reduces the risk of late or inaction at the payer.
- Ease of reconciliation is greatly enhanced as the payee is in control of whom and how much they collect from. Most cash management bank can provide reconciliation file for the payee. In contrast, ACH Credits received are often harder to reconcile as the matching reference is at discretion of the payer.
- Instant Transfers
As mobile-based commerce and digital, ‘instant’ business models become increasingly prevalent, companies and consumers increasingly demand more dynamic payments and collections that can be integrated directly and seamlessly into the customer experience, including social media tools and apps. For example, when paying for ride sharing, food delivery or access to a media service, the payment needs to be processed instantaneously, not only between the original customer and supplier, but throughout the ecosystem of participants that deliver the service, such as drivers or restaurants.
Governments too are driving a shift towards real-time or instant payments. Their motivation will differ according to their economic priorities. In some cases, the aim is to increase convenience for consumers and reduce cost and risk in the financial system by promoting a cashless society, thereby fuelling their economies. In other cases, increasing financial inclusion is a priority.
Domestic instant payment schemes are now live in 15 Asian markets, including Singapore (FAST and PayNow) and Hong Kong (FPS), India (UPI), Indonesia (Bersama RTOL) and Taiwan (eACH).
How it works?
Instant Transfers are near real-time and available 24x7 – the transfer is completed within seconds. This is a big difference, when compared to minutes for RTGS, a few hours or even days for an ACH.
Immediate payments are transmitted across the clearing system individually. Real-time turnaround creates capacity controls at clearing system. Banks are expected to meet the transaction per second (tps) prescribed by the clearing system. It is each bank’s discretion if the initiating customer’s a/c is posted at transactional level or at batch basis.
Instant Transfer payment systems enables payments made to the account holder’s proxy identifier (e.g. mobile phone number, national identity number, business registration number or email address) that is linked to their bank account. In other words, payment can be made to the proxy identifier without the actual bank account details of the payee, providing convenience and standardisation across different banking platforms.
Instant or real-time payments have been used most commonly in the B2C and P2P space to date. This is partly due to the limits on payment value (although this is rising as these schemes mature) and also as many companies have already established efficient ACH or batch payment processes. However, the number of use cases for corporate real-time payments is also growing, including:
- Insurance policy claims
- Customer refunds
- Urgent supplier or employee expense payments
- Contractor or freelancer payments
- Emergency aid payments
For collections, however, the benefits of real-time payments are substantial, particularly in markets where the use of cards and direct debits is less prevalent e.g.
- Rentals, services and subscription payments where real-time access is required
- Deposits and payments for higher value items (e.g. cars) where the value exceeds a typical card limit
- Utilities and other contract payments
- E-commerce/ m-commerce
In countries such as Singapore, there are related developments to use mobile numbers or National Registration Identity Number/ Foreign Identification Number (NRIC/ FIN) numbers to be used as proxy addresses for making real-time payments without the need to record or store beneficiary payment instructions. This is a valuable development in enabling real-time payments to be integrated into mobile apps or other convenient payment mechanisms, such as QR code scanning. The use of QR codes, including both static and dynamic codes, are becoming ubiquitous in China, Hong Kong and Singapore. Buyers can scan a code to purchase and pay instantly, whilst the seller can use the data linked to the QR code to process and reconcile the transaction automatically.
For example, in countries such as India and Thailand, request to pay (RTP) is supported as part of the new national payment infrastructures: Unified Payment Interface (UPI) in India and PromptPay in Thailand. The supplier makes a payment request to the buyer (either for single or regular payments), and the payment is then initiated once the buyer has approved it. This provides a convenient and secure payment alternative, particularly in markets where direct debits are less prevalent, and greater buyer control. In some countries, such as China, real-time payments are already the industry standard, accounting for more than half of all non-cash payments. In Malaysia too, Instant Transfers grew by over 80 percent in 2018, exceeding the value of Interbank Giro (IBG), the country’s low value net settlement system for the first time. This is a trend that is likely to continue across both Asia Pacific and ultimately in other regions.
While a range of payment methods exist for domestic payments, making and receiving payments in different currencies or across countries creates an entirely new set of challenges.
Like domestic payments, cross-border payments are ultimately settled at the central bank of the currency (or central bank that operates a foreign currency RTGS). This leads to the concept of correspondent banking.
For example, in the case of a USD payment from Singapore to Hong Kong:
- A Singapore payer instructs its bank to pay USD to a Hong Kong beneficiary
- Payer bank instructs its USD correspondent in New York
- Payer correspondent pays beneficiary correspondent via FedWire (RTGS)
- Beneficiary correspondent advises beneficiary bank of incoming funds
- Beneficiary bank credits Hong Kong beneficiary’s account
One payment can typically pass through one or more correspondent banks.
The messaging for cross-border payments is mainly via MT103 or ISO20022 messages over the SWIFT messaging network (which includes approximately over 10,000 banks worldwide).
The delivery of the payment message takes seconds or minutes, however the delivery of the funds to the beneficiary has dependency on the operating hours of clearing system and banks involved. Most countries clearing system only operates at their domestic business hours. In contrast USD clearing operates almost 24x5.A Singapore bank sending AUD to Europe at 4.00pm SGT has dependency on Australia’s RTGS clearing hours than the business operating hours of the European bank. In this example the European bank needs to wait for AUD clearing to take place next day as 4pm SGT is past Australia clearing hours. If it was USD or EUR, the European bank can credit the beneficiary on the same day.
Nevertheless, it is highly possible for the beneficiary to get good value (i.e. payer’s account is debited the same value date as beneficiary’s account is credited). Banks and the wider industry have responded to these challenges in a variety of ways:
- Telegraphic Transfers using SWIFT
SWIFT was first founded in 1974 as a co-operative across a group of banks to make cross-border payments based on a common service level agreement across a single, secure network. Today, more than 11,000 banks, securities and corporations over 200+ markets are members of SWIFT and can exchange messages with other participating banks across the SWIFT network. Since 1999, non-financial corporations have also been able to access SWIFT to exchange payments and other financial messages through their banks.
In 2015, SWIFT introduced Global Payments Initiative (gpi) to improve turnaround, introduce trackability and increase transparency for cross-border payments. With gpi, banks are required to provide processing status and fee deduction information back to remitter bank. Progressively, gpi reporting will become a requirement for all SWIFT member banks.
SWIFT announced 40% of gpi payments are credited to beneficiary account within 5 minutes, 50% under 30 minutes.
A gpi member bank can deliver more value to their customers by performing real-time tracking of their customers’ transactions. Customer experience can be enhanced by making tracking available at customer convenience.
SWIFT has announced roadmap detailing new services to further improve cross border payments.
Bank Identifier Codes (BIC)
SWIFT Code, SWIFT BIC. BIC Code:
They are all referring to the same thing - 8 or 11 characters to identify a bank in a specific location under the SWIFT addressing scheme. Often used in cross border payments, a SWIFT BIC would be the most unambiguous way of addressing a bank identity.
Local Clearing Code, routing code, bank branch code (e.g. Fedwire Code in US, Sort Code in UK):
These referring to the set of codes used to identify banks in a country’s clearing system. These codes facilitate transfers of the payment instructions efficiently within that specific clearing systems. It has very limited use to support transfers in a currency not handled by that country’s clearing system.
International Bank Account Number (IBAN):
European banks were the pioneers to standardise their customer account numbers in the IBAN format under ISO13616 to facilitate straight through processing. IBANs include the ISO country code, bank code, branch code, and customer account number, as well as a checksum to help with validation. While it started with Europe, IBAN is gradually being adopted by many non-Euro countries around the world.
IBAN carries enough information on both the beneficiary bank and a/c number. To take full advantage of IBAN, a bank must be able to decipher SWIFT from IBAN and validate IBAN structure effectively.
While cross-border payments via SWIFT served the industry well for many years, the demand for faster (same-day or less), traceable payments have been growing as corporations sought to achieve a comparable experience of making and receiving cross-border payments as they enjoyed domestically. This led to the formation of SWIFT global payment innovation (gpi). This comprises a new service level between banks and is supported by a payments tracker to provide end-to-end visibility over payments.
65% of payments on the SWIFT network are now gpi payments. Half of these are credited to beneficiaries within 30 minutes, and 40 percent in less than five minutes (source: SWIFT, Mar 2020). Over 3,900 banks have signed up to the SWIFT gpi service level agreement, and all banks will need to confirm payments to beneficiary accounts via the gpi tracker by end 20201.
Features of SWIFT gpi:
- Unique end-to-end transaction reference (UETR) for each payment
- Same-day (or faster) cross-border payments across all SWIFT members
- Traceability of payment
- Full remittance information, without deletion or truncation, to allow easier reconciliation
- Covers all banks that are members of SWIFT (and signed up to gpi), therefore supporting most trade/ currency corridors
- Cross-Border ACH
An alternate service that is slowing gaining popularity is using making cross border payment delivered via the recipient country’s local ACH clearing system.
Cross-border ACH has its limitations. The payment must be in the beneficiary country’s domicile currency since ACHs typically operate in domicile currency only. Some ACHs have maximum value limits, and this may make cross-border ACH unsuitable for large value commercial payments. A slower turnaround may be expected if the beneficiary country has a slower batch processing cycle.
Another option for cross-border payments is to leverage banks’ own networks, and in some cases third-party payment service providers (PSP) to replace cross-border payments with local ACH payments. The bank debits the payer’s account in one market, and makes a local payment in the relevant market on the payer’s behalf through the local ACH system. This relies on the partner bank being a member of the payee’s ACH system, either directly or through a PSP and that the payment is in the local currency of the payee.
If the payment is managed end-to-end through the bank’s own network i.e. both the payer and payee hold accounts with the same bank, even if in different markets, banks will often treat this as a book transfer.
- Book Transfer
Book transfers is an attractive solution to payer and beneficiary that have accounts with the same bank. Most banks offer this as a free service if instruction is initiated electronically. For payment to another bank within the same network, these are priced more attractively than normal transfers, or given faster processing priorities. This encourages inter-company payments within the same bank network.
- Distributed ledger technologies
Banks, finance technology companies (Fintech) and central banks across the world have been actively exploring new technologies to increase efficiency of payments. Among them are Distributed Ledger Technology (DLT) or blockchain. One possible value proposition is a cost-efficient multi-currency payment system with inter-operability of different DLTs.
The options for payment instruments available to both consumers and businesses are varied. Different payment methods cater to different unique business needs. Approach your bank to understand what they offer and how they can support your business needs.
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