Faster Than Real-Time ACH: The Trillion-Dollar Opportunity in Accelerated Payments

by Sean Van Gundy 0

Adoption of real-time ACH is growing, and for a good reason: Transaction times are reduced by up to three days, allowing businesses same-day — and eventually real-time — payment processing.

As exciting as these benefits are, another, more profound possibility exists: Radically shortening the ever-lengthening payment cycles in supply chains. In addition to saving a few days with real-time ACH for payment processing, businesses can use alternative financing platforms to compress the period between invoice approval and payment dramatically.

Given that such cycles can extend beyond 100 days, the liquidity implications of shortened payment terms are enormous. Illiquidity generated by extended terms inhibits growth and is potentially financially-destabilizing, for both individual suppliers and the economy.

Real-time ACH creates greater liquidity — but the real liquidity boom comes from decreasing payment terms

We live in an on-demand world — both in business and as consumers. Technology has trained us to expect instant delivery.

Real-time payments offer this immediacy, one reason why real-time payments are experiencing global growth. Though the U.S. has not been at the forefront of the shift, significant changes are looming, as the Federal Reserve continues its ambitious push to improve the speed and security of U.S. domestic payments.

This push is occurring in parallel with NACHA’s three-stage rollout of same-day ACH payments, which began in September 2016. Soon, nearly all ACH payments will be eligible for same-day settlement.

There are challenges to address, of course: security, the global integration of various payment systems and the cost of new infrastructure, primarily. It will take some time to implement.

Three days of processing time is a significant gain given the fast pace of business. Consider, then, the impact of shortening a 30, 60 or 90-day-plus payment term to two days. This is possible with alternative financing.

Here’s how the timeline works: Without real-time ACH, businesses that agreed to 60-day terms would typically access their funds in 63 days. Real-time ACH reduces this to just 60 days by eliminating the three-day transaction processing window. By using an accelerated payment solution and the future state of real-time ACH, however, the time from invoice approval to processed payment can be reduced to a mere two days.

This combination is the key to ending the problem of trapped working capital.

Shorten the cycle, unleash the liquidity

Waiting two or three months to receive payment creates significant financial issues for individual businesses, and has costs in the trillions at a global economic scale. Working capital tied up in the payment cycle isn’t working. Lack of cash flow causes a whole host of thorny financial issues for a small to mid-sized enterprise.

Globally, payment terms continue to increase. The lengthy wait to get paid puts small and mid-size suppliers at the highest risk of failure. Many of these SMEs also lack access to financing, which places them at a greater disadvantage.

Given that SMEs employ roughly half of all U.S. citizens, instability from a lack of funding — coupled with working capital deficits — becomes a broader economic problem.

It is a solvable problem. One alternative finance option, C2FO, offers a working capital marketplace that allows businesses to pay suppliers within two days of an accepted early payment offer, radically shortening the cycle and eliminating capital issues created by prolonged payments. The platform allows customers to upload approved invoices with a target return, while suppliers request early payment of their approved invoices at a rate of their choosing. A proprietary algorithm then matches customers and sellers. Both parties benefit, which provides an incentive for customers to pay more quickly.

This dynamic approach creates a collaborative marketplace for both parties. Legacy platforms in this space have a more restrictive, static approach to variables such as bidding or rely on third-party financial intermediaries.

Should C2FO and other financing platforms make such compressed cycles the default, the liquidity implications are staggering. Estimated corporate cash stockpiles for non-financial corporations are $1.68 trillion in the United States1, $672 million in the UK1, $1.1 trillion for Eurozone countries1 and $2 trillion in Japan.3 Putting that cash to work funding their supply chain could hold economic potential equivalent to one of the world’s largest economies.

We don’t have to wait for real-time ACH to unleash liquidity

Same day and real-time ACH are in progress. But it will take time to update infrastructure and implement especially given the number of disparate systems globally and security concerns.

C2FO, as a leading example of alternative financing, does not require changing enterprise software programs or processes. It can be operational within 4-6 weeks with little IT involvement and no security risk. Older solutions that take a static approach to discounting require a significant IT investment along with extensive paperwork and documentation.

In other words, this type of alternative financing can be put to work now to solve liquidity issues. When real-time ACH is available in addition to accelerated payments, we’ll be able to realize a greater economic benefit from a liquidity boom.

The takeaway

Small to mid-size businesses are a vital economic engine limited by an extended payment cycle that ties up working capital and inhibits growth. While the shift to real-time ACH promises to speed things up incrementally, platforms such as C2FO have the potential to drastically reduce the length of payment cycles — and unleash a flood of liquidity in the process.

By implementing powerful, easily-integrated working capital solutions, businesses can keep their supply chains efficient and healthy, and ultimately carve out a competitive advantage.

About the Author
Sean consults with corporates regarding optimization strategies to manage their working capital. His areas of focus include holistic accounts payable, supply chain finance, payment terms standardization and process improvements.

Prior to leading the working capital advisory practice at C2FO, Sean held various leadership roles in Wells Fargo’s SCF offering, and led the implementation of Walmart’s SCF program that served over $4 billion in spend and generated cash flow more than $400 million. Sean also directed an A/P team in Walmart’s Financial Shared Services organization that supported approximately $40 billion in spend, and led various payment terms standardization, terms extension and A/R programs with Walmart suppliers. Prior to Walmart, Sean worked at ABB in Shared Services leading Cash Application and Collections outsourcing projects and A/R processes. He received his B.S. in Accounting at Eastern Illinois University and participated in Duke’s Executive Development program while at ABB.

1. “US non-financial corporates’ cash pile increases to $1.68 trillion, tech holding the lead,” Moody’s Investors Service Global Credit Research, May 20, 2016
2. Khalique, Farah, “The cash conundrum,” Association of Corporate Treasurers
3. “Japan joins less than zero club,” Treasury Today, February 2016
4. Davis, Michelle, “Cash-Stuffed Balance Sheets No Match for U.S. Company Debt,” Bloomberg, May 20, 2016

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