The instant catalyst
Immediate payments are 24×7, account to account (A2A) payment transfer services that facilitate immediate availability of funds to the beneficiary and instant confirmation of such availability within seconds.
The system should be ubiquitous and support a range of payment channels and instruments. Such a system should also deliver digital processing, with transactions conducted electronically and without manual intervention (subject to legal and regulatory restrictions). Transactions processed by the system should be irrevocable. Our definition is oriented to the consumer perspective and is in line with that of the Euro Retail Payments Board (ERPB), which defines immediate payments as electronic retail payment solutions available 24×7 and resulting in the immediate or close to immediate interbank clearing of the transaction and crediting of the payee’s account. Such a transaction will be carried out irrespective of the underlying payments instrument used (credit transfer, direct debit or payment card) and also of the underlying clearing and settlement arrangements. The European Savings and Retail Banking Group (ESBG) has further narrowed the definition to solutions that complement existing systems using either real-time clearing and gross settlement infrastructures, automated clearing houses (ACHs), or card scheme systems.
Regulators’ definitions of immediate payments tend to be wider, covering clearing and settlement and operational functionality. In our survey of payments industry executives, we found our definition resonated. A senior executive at a leading European bank said: “The main characteristic of instant payments is that funds should be available in a few seconds, although the concept relates also to specific data standards, automation and integration requirements which have to be met in order for instant payments solutions to actually work”. Another senior executive at a leading European bank defined immediate payments as: “Real-time payments should be real real time: a few seconds to actually see debits and credits occurring on the account”.
Of 18 initiatives across the globe that claim to be pure immediate payments systems, only nine meet our criteria: Faster Payments in the UK, RealTime 24/7 in Denmark, Sweden’s BiR, Singapore’s Fast, Immediate Payment Service (IMPS) in India, Internet Banking Payment System in China, Poland’s Elixir, Instant Payments System in Norway and the Nigeria Inter-Bank Settlement System Instant Payment. These initiatives, in varying degrees, meet our criteria of system availability, time for fund transfer, time limit for notification of confirmation or rejection of the transaction, irrevocability, digital processing, and A2A transfer.
Immediate payments systems can act as an enabler for business growth across multiple industries by accelerating transaction speeds, reducing risk and fraud, creating new revenue sources, reducing transaction costs and reaching new markets. Customers, regulators, banks and non-banks all benefit from immediate payments initiatives. Banks can match, if not exceed the strength of non-banks in innovation. Non-banks can lower their costs by gaining direct access to the payments system.
The new payments infrastructures built to enable immediate payments are a catalyst for banks to develop new value-add propositions and to provide holistic payments solutions. There are a wide variety of use cases that banks can develop for retail and business customers across a range of payments channels, including peer to peer (P2P), business to business, e-government and mobile payments. For example, a problem for cross-border logistics companies is the requirement to pay customs duties in disparate locations and time zones. An immediate payments solution that solves this challenge would be of real value to such companies. Additionally, while individual digital wallet and mobile app solutions have been developed to meet various real-world customer issues, they have not changed the payments service fundamentally. Rather, they are based on the existing payment network and create a wrapper solution. For example, users of digital wallets have to top-up the instrument via the existing payment network. Banks can provide better immediate services by leveraging features such as A2A or credit transfer.
Systems should be available at all times ensuring 24x7x365 availability
System should clear the transaction instantly delivering the requisite funds to the payee in seconds
System should give instant confirmation message to both the payer and the payee
Account to account transfer
System should be ubiquitous and support a range of payment channels and instruments in order to achieve its objective of comprehensive reach
System should support payment transactions to be conducted electronically without the need for any manual intervention subject to legal and regulatory restrictions
Transactions processed through the system are irrevocable in nature and cannot be reversed; reversal of payments can be done through separate instructions and thus can address regulations such as AML
Banks are already building value-added innovative services on top of immediate payments infrastructures in order to drive transaction volumes. Across different countries to date immediate payments initiatives have been geared mainly towards P2P and mobile use cases. In the UK, services have been developed across P2P, retail, corporate and public sector environments. In P2P, banks visualised immediate payments as an opportunity for innovation in customer acquisition and retention and have launched services such as Paym. Overlay services, integrated within a mobile banking application, such as Zapp, are also being developed for mobile and consumer to business domains. Banks have an opportunity to differentiate for each market segment. Given the fast evolution of the payments industry, any differentiation would however ultimately become a standard and banks need to continuously innovate to have a competitive edge in an environment of rising customer expectations. Banks have to develop their own strategies and collaborate to drive change in consumer behaviour.
Another area that could benefit from immediate payments overlay services is cross-border remittances, the development of which requires concerted efforts from payment services providers. Growth rates of cross-border remittances are poised to rise in the coming few years and efforts are under way to improve services. For example, the West African Monetary Zone (WAMZ) has identified exchange control monitoring as a key area of improvement for cross-border payments. For an optimum outcome, the interoperability of immediate payments schemes is crucial. Value-added services could prove to be a key differentiating factor for banks, according to the results of an online survey conducted for WPR 2015. Corporate payments, mobile P2P and cross-border remittances were identified as the most effective differentiators for banks.
An executive of a regional payments processor says: “There is also demand for immediate payments from merchants; not only banks but other users in the payments ecosystem must also embrace immediate payments. For example, a transportation company often needs to be able to pay customs fees when a truck enters a border at, say, 2am.” The head of payments at a regional bank adds: “Initially, immediate payments developments will be domestic; the need for a regional solution is not there from the start. The impact of immediate payments goes beyond payments and into core banking areas such as client data and accounts. There is an opportunity in immediate payments to share components in the infrastructure that were originally separated (cards and payments), as they may converge.”
Banks should focus their investments on continuous innovation when building customer-centric offerings rather than a series of standalone solutions. To build a strong payments portfolio banks should focus on building a holistic solution through progressive transformation from tactical, through value add to holistic offerings. Tactical offerings are typically launched from immediate payments platforms and include use cases such as mobile P2P transfers. Value-add offerings are more advanced, leveraging the maturity of the immediate payments infrastructure and the standardisation it brings. The UK’s Paym is a good example of a value-add offering. Finally, holistic offerings are based on a mature infrastructure that has good governance and participatory models. Such offerings should meet all of the payments needs of a customer.
A senior executive from a leading European bank says: “Banks can establish themselves as key players in the digital space, where financial services are not offered in isolation, but rather connected to the business transaction. New service offerings can be linked in the space of liquidity risk management and supplier finance”.
As markets plot a course towards immediate payments, they would benefit by reviewing the steps taken by others such as FPS in the UK. Here, some participants were initially sceptical about FPS, but growth has been very strong.
As UK consumers have adopted FPS payments, PSPs have gained the confidence and business case, to devise new value propositions such as Paym and Zapp. Following the full implementation in May 2012 of Regulation 70 of the Payments Council, which moved the processing of standing orders from BACS to FPS, volumes and values have steadily increased. Between 2013 and 2014, FPS transaction volumes rose by 13.8 per cent to more than 1 billion.
Immediate payments also provide an opportunity to unify the fragmented payments value chain. There are two elements to the value chain: front-end activities such as transaction acceptance, authentication and authorisation and back-end activities including transaction capture, processing, clearing and settlement and reporting. Banks should aim to deliver truly competitive propositions in both elements of the value chain by developing offerings with seamless transaction processing. At the front end, equally compelling or better value propositions from banks will help in competing with non-traditional PSPs. At the back-end, increased system efficiencies and operational changes will help banks to improve digital processing of immediate transactions, agnostic to the channel and instrument.
Aided by infrastructure rationalisation and system upgrades the ‘to be’, or desired, state of the payments value chain will involve merged activities: authentication, transaction capture and processing, clearing and settlement and reporting. DNS
This is an edited extract of World Payments Report 2015, published by Royal Bank of Scotland (stand D37) and Capgemini Financial Services (stand E39).