How Instant Busts The Myth Of Float

For the person on the receiving side of an instant payment, there isn’t a lot of selling that has to happen because the concept of getting one’s money faster more or less sells itself. That’s a story the numbers more or less tell over and over, Ingo Money CEO Drew Edwards told Karen Webster in the latest edition of the PYMNTS “How to Instant” podcast. Offer a customer a choice between a check and a digital payment, and they’ll pick the digital payment. And of the customers who choose digital, nine out of 10 will pick an instant payment if available.

But there is a semi-persistent idea that for payors to offer instant payments, they must be willing to give something up — namely “the float,” that gap of time between when a payment is paid out by the payor, but still technically in their possession until the funds are final in the payee’s account. Payors that are simply paying out instantly and on time, the argument goes, are missing out on the opportunities the float provides.

The problem with that argument, according to Edwards, is that it is based on something that, for almost every player, is a fallacy. They aren’t giving anything up because the float doesn’t exist anymore.

“I think it may have once, but it is really a thing of the past,” he said. “It’s not just because we’ve lived in the era of zero percent interest rates for a decade, or that they are at historical lows now. The truth is, interest rates are hopefully never going to back to a place where the value of having money on the float can overcome the costs and complexity of batch-based and paper-based payment mechanisms.”

Plus, Edwards noted, the float of the past wasn’t ever really all it was cracked up to be. The instances where players have been able to derive notable revenue have almost always been in specific circumstances like payroll processing, where regulation specifies when funds need to be put up in advance in relation to the date by which they must be paid out.

For almost any other player, he said, float costs far more than it nets if checks are in the mix — and offers a much less compelling revenue opportunity than the conversion to instant payments.

Investing in Certainty

There are two perspectives from which one might have a fondness for float on the payor side of transactions, Edwards said, though neither is particularly compelling. The first is a security perspective that says a three-day liminal period where a transaction is undertaken but not completed is a benefit — because if a security issue is unearthed, there is theoretically time to claw back the funds.

“I would say there are real alterations needed to your risk management system if you are depending on reversibility for a few days to secure your transactions. Our experience is that with most of the crooks who really get you, the money is long gone by the time you get there to try and take it back anyway,” Edwards told Webster.

The other perceived advantage is the one alluded to earlier — that there are cash flow and liquidity advantages to slow payments with float periods that merchants are somehow passing up. But the lived experience, Edwards said, is just much different. In many, if not most, business-to-consumer (B2C) payment contexts — insurance and payroll, for example — regulatory structures govern exactly when a payment has to arrive. In a paper-based system, that means putting a check in the email by a specific date on the assumption it will arrive on time.

Maybe the receiver will hold on to it for the longest amount of time possible and there will be a long float period, but more likely, the payee will look to cash their check as soon as possible. The slow payment, Edwards noted, isn’t giving the payor any revenue-generating amount of extra time — they’re just getting a lot of uncertainty about when their payments are going to hit.

“Remember reconciling your checkbook and trying to figure out what’s cleared and what hasn’t? No one wants that. Instant just means ultimately have more control of your cash flow because when something is due on the 15th, you can push it there on the 15th. This is a much better way to manage the flow of funds than trying to guess when a check will get there and be cashed,” he said.

And beyond creating efficiencies for the payor, Edwards said, ultimately instant payments also present a previously unexplorable set of options around monetization and consumer retention.

Considering the Other Side of the Float

On the other side of every story about float as a possible liquidity advantage for a payor, there is a payee for whom it is a major cash flow liability. That payee might be a small business, a consumer waiting on an insurance check or a wage worker anxiously anticipating their next payday — but what they all have in common, Edwards said, is that they are all keenly interested in securing their funds as quickly as possible and are severely negatively affected by any uncertainty.

That, he said, is why the numbers in this area are so one-sided — there are almost no examples where a customer given a choice asks to be paid slower. The process change that is underway now, Edwards noted, is entirely on the payor side because the recipient side is already sold on why this is a better method.

And, to their credit, Edwards said, the payors of the world are catching on to it; it has been a long time since Ingo Money has heard a potential partner bring up liquidity concerns vis-a-vis the float. The question now, he told Webster, is what those payors and institutions supporting instant disbursements are going to do with the instant as a customer-retention tool — or as a revenue engine. What’s been demonstrated in use case after use case, Edwards said, is that consumers will pay for instant access to their funds, as will small- to medium-sized businesses (SMBs), provided the charge is reasonable.

That means scenarios where regular W-2 workers can look to their payroll companies for access to their pay as they earn it daily for a fee of a few dollars. Or where an SMB can choose on an invoice whether they want to be paid 100 percent in 30 days, or 98 percent right now. The ultimate potential, he said, is that instant payments offer something that a concept like float cannot — a situation where both sides of the transaction can come out ahead at the end, and with their financial management improved by the interaction instead of dented.

“We have a vision of the future coming really soon where our Disbursements Marketplace allows payment recipients to choose not only where they want to get paid in terms of what account — but also when exactly they want that payment to happen,” Edwards said. “In this environment, we will see issuers/banks/wallets developing incentives to influence these choices similar to what happens today with purchase rewards.”