Real-time payments vs faster payments – what are they?
The term ‘faster payments’ is a generic industry term that has been used since mid-2008, introduced by clearing banks to describe the reduction in the transaction time from one bank to another – it is now only a matter of seconds. These terms have muddled recently and are often used interchangeably - but ‘real-time payments’ have evolved and offer a greater degree of flexibility and control of how money is moved between accounts. As the name suggests, the transaction initiates, clears and settles in a few seconds.
From a payroll perspective it gives employees their money quicker and with them having more control. Historically, a Payroll team worked to a standard industry approach of having a ‘cut off period’ by which payroll must be processed. Typically this is three days during which payroll is prepared for processing before the payment enters the employee's bank account.
What other benefits are there of real-time payments?
The most obvious is agility. If you run a weekly payroll, for example, you typically have a deadline for employees submitting their information (timesheets, expenses, etc.) and again there is a ‘cut off’ in order to process the payment. With real time payments this time for processing is reduced which means you can have more accurate payment of what the employee has earned so far, almost right up until the moment in which the money is moved into the employees bank account.
We have also seen some organisations consider this as a benefit that can be offered for their employees. If you can draw down your wages at the end of a day as opposed to once a month, is that a more attractive option than an organisation that does not offer that facility?
Is every business embracing real time payments?
Post pandemic what we are seeing is more ‘when are we going to use real time payments?’ rather than ‘is this an approach we should adopt?’. This is a relatively newly emerging technology, but one of the most frequent reasons as to why this is not viable for organisations is when looked through the lens of the potential cost-per-transaction basis. If an organisation is being charged by a bank for every time that a payment is withdrawn, giving the access to an employee to draw down from their salary on more than just a one-time basis through a traditional monthly payment, could be seen a prohibitive if you have thousands of employees all making monthly withdrawals of their earnings.
The global pandemic shifted the mindset of many employers we talk to as employers started to look at ways in which they can support their employees beyond just providing their wages once a month when people had so many different challenges happening in their personal lives. That shift from ‘what is this going to cost us?’ to ‘how can we support our people?’ during the pandemic was a key moment for the adoption of real time payments. Information from UK Payment authority – PayUK – in September real time payments was growing 16% year-on-year (£230billion for the month), whereas BACS (traditional payment for salaries) was in decline.
What questions should you be asking yourself if you are looking at implementing real time payments for your business?
The first question is to assess is your own cash flow cycles. We’ve already outlined the benefits to employees, as well as the benefit to employers in terms of demonstrating your flexibility to your people and potentially using as one of your talent attraction/retention tools, but with transactions happening on an ongoing basis throughout the month it has to work for your business and the way it is set up.
Secondly is ensuring accuracy of payments. It is an age-old adage that employees and organisations have few issues with payroll until there is a discrepancy. So your Payroll team needs to be set up to be able to ensure that the accuracy of when an employee receives pay, or a bonus for example, they get exactly what they should be receiving.
Real time payments provides the opportunity for the Payroll Team to be positioned as more strategically aligned to the business. If you can align your Payroll function to the cash flow cycles within a business, it enables smoother running of a business – regardless of size or industry sector.
What is the future for real time payments?
Real time payments has found a way to increase disposable net income. This has an impact for employees, of course, but also for people as consumers and that can have a knock on effect for businesses who those consumers purchase from, which is good for our wider economy as well. But in addition to that what I am hoping for is that real time payments is more widely adopted and used by businesses as a tool which also strengthens the trust between employee and employer.
If you are interested in talking to us about real time payments, or how you can ensure your Payroll function is more closely aligned to the strategic direction of your business, you can reach out to a member of our dedicated payroll consultancy team here. We’d be happy to chat.