Treasury and Working Capital Management in the Era of Real-Time Payments

Treasury and Working Capital Management in the Era of Real-Time Payments

The corporate treasury landscape is evolving rapidly in response to global shifts in payment technologies. With the advent of real-time payments (RTP), businesses in Australia can now enjoy the benefits of instant fund transfers, optimised cash flow, and enhanced liquidity management. As Treasury and Finance executives navigate this change, it’s definitely now the time to be proactive in understanding how legacy payment systems are transitioning into newer, more dynamic formats, and the financial advantages this shift brings to organisations of all sizes.

This article highlights key considerations and benefits in the shift now to real-time payments (for businesses) with a focus toward a CFO / Treasurer perspective on relevant changes in products, policies, processes and technologies.

How Corporates Have Traditionally Received and Made Payments in Australia

Australia’s corporate payment landscape has historically been dominated by batch payment systems. These systems have relied on specific file types and standardised processing times to facilitate the movement of funds. While functional, these legacy systems often limit operational flexibility and cash flow agility.

Single Time Payments

Single time payments are a common method for corporates to make and receive payments, whether for business-to-business (B2B), customer-to-business (C2B), or other types of transactions, typically initiated individually via internet banking platforms or via card payment schemes and networks. Payment instructions commonly being manually entered, and the funds then transferred to the recipient's bank account.

For both domestic and international payments, single time transactions have mostly relied on Electronic Funds Transfer (EFT) and/or Global Card Provider Networks.

These payments are usually settled typically in 2 to 4 business days, depending on the payment type and the banking institutions involved. While the payments themselves are straightforward, the settlement time can still create delays in cash flow, which can be a concern for businesses with tight working capital cycles or where urgency of payment is a priority.

Bulk Entry Payments

For bulk entry payments, file formats like the Australian Bankers' Association (ABA) file for bulk payments is commonly used. The ABA format allows businesses to send payments, such as payroll, multiple supplier payments, or other recurring transactions. Other bulk file upload formats like Comma Separated Value (CSV) files, which contain structured data in a simple, readable format are also used.

These files can be uploaded into corporate Treasury systems, allowing payment instructions to be (commonly submitted to banks) and batch processed. However, both formats have limitations, including delays in fund transfers, reduced visibility of payment statuses, and limited flexibility.

As Australia’s payment ecosystem undergoes a transformation, several emerging technologies are reshaping the way corporates can move money. These include ISO 20022, Real-Time Payments (NPP), Open Banking, and innovations like Blockchain and Smart Contracts backed by convertible digital currencies. Each of these technologies offers unique features and benefits

ISO 20022: Key Features and Benefits

ISO 20022 is a global standard for financial messaging that allows for rich data to be included with each transaction. Unlike the older formats (such as BAI2 or SWIFT MT messages), ISO 20022 is more flexible and capable of supporting a wide range of data types. This is particularly important in Australia, as it aligns with the New Payments Platform (NPP) and Real-Time Payments systems, enabling enhanced data sharing between parties in the payment ecosystem.

The key benefit of ISO 20022 is that it allows corporates to transmit detailed remittance information with each payment, reducing the need for manual reconciliation and enabling more accurate cash management. 

Furthermore, it allows for more granular tracking and management of payments, improving operational efficiency.

Real-Time Payments (Dynamic PayID, PayTo)

The New Payments Platform (NPP) in Australia is the backbone of real-time payments, offering instant funds transfer capabilities 24/7, 365 days a year. Real-time payments eliminate the delays inherent in traditional batch systems, providing corporates with an immediate understanding of their liquidity positions.

Two key components of NPP are Dynamic PayID and PayTo. Dynamic PayID is a user-friendly way of linking payments to a mobile phone number or email address (at the individual invoice and transaction level), allowing businesses to receive and instantly reconcile payments in real-time without needing to share their bank account details.

PayTo, allows businesses to set up real-time, recurring payments directly from customers’ bank accounts, with enhanced digital efficiency, engagement and security for merchants and payers.

Open Banking Initiated Payments (CDR)

Australia’s Open Banking initiative, driven by the Consumer Data Right (CDR) framework, allows businesses to initiate payments from customers’ accounts via third-party providers (TPPs). This initiative enhances real-time payment capabilities by reducing the friction in authorising payments and increasing payment transparency, enabling corporates to optimise cash flow and working capital management.

Blockchain, Stablecoin and Smart Contracts

While still in the early stages of adoption in the corporate treasury space, blockchain and Stablecoin technologies are beginning to be explored for their potential to revolutionise payments. Blockchain offers decentralised, transparent, and tamper-proof transaction records, which could reduce fraud and improve payment tracking. 

Stablecoins, which are cryptocurrencies pegged to a stable asset (like the Australian dollar), offer faster settlement times and lower transaction costs than traditional banking systems. Additionally, smart contracts, which execute automatically based on predefined conditions, can automate complex transactions, further improving efficiency.

The Shift from Legacy Batch Payments to Real-Time Processing

The transition from traditional batch payments to real-time processing has significant implications and benefits for corporate treasury functions, providing businesses with enhanced control over their cash flows, liquidity, and working capital.

Benefits for Intragroup Funds Movement

For multinationals or businesses with multiple divisions or subsidiaries, real-time payments simplify intragroup funds transfers. These transactions can now occur 24/7 365 without delays, ensuring that subsidiaries or divisions can access funds when required, eliminating bottlenecks, and optimising the utilisation of group liquidity.

Benefits for Customers and Suppliers

Real-time payments can enhance relationships with customers and suppliers by improving the efficiency and speed of payments. Suppliers can be paid instantly, which can strengthen relationships and potentially lead to better payment terms. On the customer side, real-time payments facilitate immediate delivery of goods or services once payment is received, increasing satisfaction and trust.

Regulatory and Industry Changes in Australia

The Australian Treasury is currently consulting on a Strategic Payments Plan, which outlines the future direction of payment systems in the country. As part of this plan, changes are being made to ensure greater transparency, increased security, and enhanced efficiency in payments across various sectors. 

One of the changes on the horizon is the Payday Superannuation requirements, which mandate that employers now be required to pay superannuation contributions with each payroll cycle in real time, starting from 2026.

These regulatory changes are just some of the key considerations for businesses as they adapt to real-time payments systems. The real-time payment infrastructure is crucial for meeting these new obligations and ensuring compliance. 

Corporates will now need to adjust processes to accommodate for example the upcoming Payday Superannuation requirements, which will result in a more frequent and transparent flow of funds into employees’ superannuation accounts. This shift will also have wider implications for cash flow and liquidity management across business operations.

Debulking Batch Payments for NPP Processing and Reporting

One of the most significant changes that corporates face when implementing real-time payments is the transition from batch payments to individual transaction processing. "Debulking" refers to the process of breaking down traditional bulk payment files into individual real-time payment instructions.

What This Means & How it Works

The de-bulking process essentially requires the conversion of a traditional batch payment file (e.g., ABA or CSV) into individual transactions that can be processed by the NPP. This is a key part of moving to real-time processing and requires careful planning to ensure that all the necessary data is captured and formatted correctly.

Once the bulk payment file is received, the system "debulks" it into individual payment instructions, each of which can be processed in real time.

This will require smart integration between the company’s Treasury Management Systems (TMS) and traditional transaction banking provider and increasingly now also supported by specialist fintech payments providers who may also offer additional flexible features and benefits.

Reconciliation and Reporting

Real-time payments require a different approach to reconciliation and reporting. With traditional batch payments, reconciliation occurs at set intervals, but with real-time payments, reconciliation is continuous. Corporates will need to establish systems that can handle the speed and volume of real-time transactions, ensuring that every payment is tracked and properly accounted for.

Real-Time Payments and Working Capital Optimisation

One of the key treasury advantages of real-time payments is the ability to optimise working capital by improving liquidity management and reducing cash conversion cycles.

Real-time payments provide businesses with 24/7 access to funds. This flexibility allows organisations to dynamically manage liquidity by making timely decisions about when to move money and how much to hold in reserve. 

The ability to access funds instantly can improve cash flow, reduce the need for short-term borrowing, and provide businesses with more flexibility in managing daily operations.

Practical Examples of Real Time Payments benefits and the Working Capital Cash Conversion Cycle.

To illustrate the impact of real-time payments on working capital optimisation, consider the following practical examples:

Real-time payments can help reduce the time it takes to both collect customer payments and send payments to suppliers. By receiving payments faster (e.g., reducing the customer payment cycle from 5 days to 1-2 days) and simultaneously eliminating the need to send payment remittances ahead of time (a practice that typically adds 2-3 days), the business can reduce its overall CCC.

SME Opportunities

A medium-sized enterprise with a 10-day CCC can benefit even more from real-time payments. The ability to collect payments faster from customers and make payments instantly to suppliers could potentially reduce the CCC by 4-5 days. For example, if the business typically experiences delays of 5 days to receive payments and 2-3 days for processing outgoing payments, real-time payments could streamline both inbound and outbound cash flows.

If the enterprise processes $500,000 in monthly receivables, reducing the CCC by 4-5 days could unlock an additional $20,000 to $25,000 in working capital each month (assuming monthly receivables of $500,000). The freed-up liquidity could be used to reduce debt, improve operational efficiency, or reinvest in the business, ultimately enhancing profitability and financial stability.

Large Corporates Opportunities

For a large enterprise with a 30-day CCC, the impact of real-time payments on both collections and outgoing payments can be substantial. By reducing delays in both receiving payments and sending funds to suppliers, the business could achieve a reduction in its CCC by 5-6 days. For instance, if the enterprise typically experiences a 7-10 day delay in receiving payments and an additional 2-3 days in sending payments, real-time payments could cut this total delay by up to 10 days.

With $10 million in monthly receivables, a 5-6 day reduction in the CCC could release an additional $500,000 to $600,000 in working capital each month. This liquidity improvement could help the enterprise lower its working capital requirements, reduce reliance on expensive short-term financing, and improve overall financial flexibility.

Other Key Platforms and Process Considerations

To fully leverage the benefits of real-time payments, corporates will need to update and integrate existing platforms, such as Enterprise Resource Planning (ERP) systems and Treasury Management Systems (TMS), with emerging payment technologies.

This integration is essential to enable seamless processing and real-time data exchange. 

Smart APIs (Application Programming Interfaces) play a pivotal role in this transition by offering faster and more flexible connections to new payment technologies, streamlining access to real-time payment networks and enhancing system interoperability. 

Treasury teams will also need to update policies, procedures, and governance frameworks to manage this shift. With careful planning and adaptation, organisations can not only optimise cash flow and liquidity but also safeguard against potential disruptions, achieving stronger financial and operational outcomes in the process.

Closing Summary: Key Considerations for CFOs and Treasurers

In conclusion, the evolution of payment systems, particularly the shift from traditional batch processing to real-time payments, presents significant opportunities for corporate treasury and working capital management. 

With the advent of new standards and technologies like ISO 20022, the New Payments Platform (NPP), Open Banking and Blockchain solutions, businesses in Australia can now benefit from instant payments, enhanced liquidity management, and improved cash flow agility.

The ability to manage payments dynamically, as opposed to waiting for batch processing, empowers organisations to streamline their cash conversion cycles, reduce reliance on short-term financing, and strengthen supplier and customer relationships. 

However, transitioning to real-time payments requires careful integration of existing treasury systems with new technologies and processes, along with updates to governance frameworks. 

As Australia’s payments regulatory landscape continues to evolve, corporates will benefit from remaining proactive in adapting to these changes in managing both the risks and benefits of the real-time-payments evolution. 

By embracing this shift, CFOs and Treasurers can gain a competitive edge, improve liquidity management, and position their organisations for long-term financial success in an increasingly dynamic global market.

As always, let’s talk. artipi.com.au