Talking heads: real-time payments – instant gratification
With myriad domestic instant and real-time payments systems being deployed internationally, is the next logical step cross-border, real-time payments? We asked some Sibos delegates what they think.
Over the past few years we’ve seen a gradual global adoption and implementation of instant payment solutions. The UK, one of the first countries to implement an instant payment solution (Faster Payments) ten years ago, affords us a chance to review the existing and future opportunities for developments to instant payment schemes. The introduction of Faster Payments in the UK has driven both changes in consumer behaviour and the introduction of innovative solutions, such as the ability to split payments (for a meal), or to make payments while commuting.
To meet changing consumer needs and expectations, corporate innovation has included insurance companies paying claims quicker, instant refunds over the phone, and the ability for retailers to move to “just in time” stock management.
Looking to the future, the focus is to drive increased access to Faster Payments and new solutions, including a new “request to pay” service. The reviewed Payment Services Directive (PSD2) may increase this adoption, accelerating the use of instant payments both within the UK and Europe. It follows logically that with this extension, payment end users will increasingly expect this convenience to expand internationally in the future.
Achieving this convenience internationally will be complicated. In addition to managing multiple time zones and currency risks, international payments have increased information requirements, increasing the complexity of processing.
Further complicating matters, while domestic payments typically have only one regulator’s rules to adhere to, international payments can pass through several jurisdictions, leading to an obligation to meet multiple and different regulatory requirements.
While time is taken for payments to cross international borders, time is also required for settlement between banks and conversion to local clearing formats. Given the additional processing and regulatory requirements for international payments and the complexity this brings, in the medium term, it may be more likely that we see the continued use of international payments for transmitting payments between countries and correspondent banks and then the use of domestic real-time payments to transmit the payment in-country, much like Lloyds Bank’s Immediate Payments for UK, with the beneficiary bank notified that the payment originated overseas.
One final thought on how global reach is achievable with less complexity is to consider whether increased transparency of payment and FX charges (that PSD2 mandates), combined with the availability of payment status, through solutions such as Swift’s global payments innovation (gpi) will meet client needs for international payment processing. Coupling this increase in transparency and status with domestic immediate payments may provide the speed, transparency and certainty that clients require.
With increasing adoption of electronic and mobile payments, and the continuing globalisation of commerce, the financial industry is focused on making payments truly global, fast, price-appropriate and data rich. One potential way to achieve these objectives is interoperability of local real-time payment (RTP) systems. End-users will likely come to expect real-time processing of their cross-border payments in the future.
With banks responsible for the actual movement of money, we recognise three primary challenges to RTP interoperability: settlement risk, regulation and oversight/standards. A real-time user experience depends on immediate funds availability to receivers, yet current settlement activities supporting cross-border payments do not occur in real time. Local regulations and the lack of a single overseeing body add complexity. Finally, the industry would need to achieve agreement on general governance, data standards and establish appropriate disclosures to support transparency.
Real-time payments are still new, with large markets like the US, Europe and Canada yet to launch. While there is a proven market for global remittances, most payments are local. Before undertaking this effort, we should ask what use cases we are addressing. Adoption of real-time has been seen in P2P, emergency payroll, cash on delivery commerce and other situations where truly instant payments are required. Global use cases for instant settlement may include delivery of content, and interoperability carries the potential of fewer local accounts for multinational corporations. Should the use cases and customer demand prove substantial, the industry will undoubtedly resolve any issues.
Africa already had a culture of prepaid and cash on delivery, with goods and services only transferred upon payment confirmation. The rapid deployment of mobile meant that mobile and instant payments spread relatively quickly in Africa. This process was supported by African regulators who encouraged the roll-out of instant payments, not only to broaden access to transaction services, but to also improve aspects such as convenience and frequency.
Instant payments have been adopted in Africa in a variety of ways, through local clearing and mobile money, as well as by both formal banks and fintechs.
For example, several African markets have implemented faster account to account payment instruments via local clearing, such as GhIPSS Instant Pay in Ghana, Pesalink in Kenya, NIBSS Instant Payment (NIP) in Nigeria, and real-time clearing in South Africa. Namibia will introduce instant payments soon.
There are already alternative payment operators in Africa that offer a real-time, cross-border payment capability. Some of these are well-established such as MoneyGram, while others are relatively new entrants but growing quickly, such as Earthport or WorldRemit. As such, banks offering traditional cross-border payments are under increasing pressure to modernise. In response, for example, Swift has already launched a quicker cross-border payment product (Swift gpi). This reduces transaction time while allowing payment tracking.
In addition, several regions in Africa such as the Southern African Development Community, East African Community, and the West African Economic and Monetary Union have implemented regional real-time gross settlement systems.
Certain regional banks also offer real-time, cross-border payment solutions, native to their physical networks on the continent. The availability and real-time nature of these payments depend on the African market concerned, in line with local regulations, and are aimed either at existing customers, or at person to person payments.
In Africa, many banks already use their own networks to support internal instant payments. Banks also use existing instant payments infrastructures, like Swift.
Payments between mobile money wallet holders are also real time. Mobile money has been launched in many African markets. Many of these mobile money platforms are MNOs, the bank support playing different roles depending on local regulation. In certain markets however, mobile money does have to be offered via a bank utilising a mobile operator.
The Kenyan central bank reported 880 million mobile money payments during the first half of 2017, up 24% on the first half of 2016, and leading all other types of payments in the country.
African banks and fintechs have also launched their own instant payment offerings. Standard Bank in South Africa, for example, offers Instant Money, a real-time payment from a bank account to a mobile phone which can then be cashed out at an ATM.
Banks in Africa are also partnering with instant payment fintechs such as Earthport, Ripple or other distributed ledger payment technologies that provide both transparency, speed and cost advantages to customers. This instant payment capability will either be integrated into a bank’s offering, or provided as an easily used payments alternative, functioning seamlessly alongside existing bank payment services.
While the ball is certainly rolling in this area, we are still in the early days; instant payment schemes have been launched in around 20 countries and progress is primarily driven by mobile technology in the retail segment. We still must look to the future to see new innovative business models being adopted by corporates that will integrate the instant payment flow with an instant business flow, 24×7. But the ball is rolling fast, and it will speed up later this year and even more in 2018.
Payment services providers (PSPs) in Europe are working hard to adhere to the SEPA Instant Credit Transfer (SCT Inst) scheme which will be launched in November 2017. When this is a reality, an instant payment in euro will be available across countries, which will substantially increase the attention around instant payments.
In Denmark, we have had three years of experience with domestic real-time payments. Implemented in 2014, they are available through mobile solutions and online banking, both for retail and corporate customers. The maturity level is still low among corporates in Denmark, however; real-time payments via file (mass payments and treasury payments) are now being requested – but this is based on more traditional needs such as more efficient liquidity management and earlier shipments, rather than new business opportunities and business models.
A maximum value per instant payment exists, which is defined in the individual payment schemes, primarily to secure liquidity management in the financial institutions and sectors in an instant financial environment. This maximum value may limit the relevance of instant payments for corporates. For example, the value limit for a SCT Inst payment initially will be €15,000. In Denmark, the amount is DKK 500,000 (€67,000).
For corporates to take advantage of instant payments on a larger scale, they should step up in terms of innovation, and examine and identify new business models and opportunities. In short, the speed at which we will see an increase in cross-border, instant or real-time payments will depend on the corporates’ ability to see new valuable business models supported by instant payments.
Currently, no cross-border instant/real-time payment scheme exists, meaning there is no agreement on structures between financial institutions on the handling or exchanging of instant and real-time cross-border payments. Factors such as settlement, clearing, compliance, regulation and formats differ from country to country and region to region.
We are also talking about many different currencies at play, with each currency regulated separately and settlement and clearing taking place via local central bank or the European Central Bank (ECB) for the euro.
Payment infrastructure/network providers have presented possible technical connectivity solutions for instant cross-border payments but they have no value without a payment scheme.
The growth of instant payments schemes around the world has been driven by the growing need to deliver a superior payment experience to consumers and to address their needs of cost, speed, convenience and transparency. The growth of e-commerce has also been a catalyst and will further drive adoption as these schemes mature. Cards, and to an extent cash, have been the primary means to facilitate the immediate flows of funds in the past. With the advent of instant payments schemes, a shift away from cash and cards is expected.
While the rationale for domestic instant payments schemes has been very clear, the need for faster cross-border payments is also now becoming prominent and is driven by the same value-drivers seen for domestic instant payment systems. However instant payment systems that operate cross-border will need to have the best attributes of successful systems including request for debit, tokenised payments, and easy integration via APIs.
Setting up an industry-wide solution of cross-border instant payments schemes poses challenges that may need resolution across boundaries, legal jurisdictions and cultures. These include:
- FX settlement – executing FX transactions on a 24×7 basis.
- Liquidity – ensuring 24×7 liquidity specially to handle cross-border traffic.
- Legal framework – determining which regulations will apply, how a dispute would be resolved.
- Regulator – who will regulate the scheme?
- Scheme administrator – who would manage the scheme on a transnational basis?
- Agreement on standards – global agreement on set of standards to be followed.
- Scope of Network – the network should cover a critical mass of countries.
Even though some of these challenges are complex and require significant cross-border collaboration, they can be overcome with the involvement of the right network players.
Finally, the current cross-border payment infrastructure which relies heavily on Swift messaging can also be upgraded to address some of the underlying drivers for the need for instant, cross-border payments. A ubiquitous and mandatory adoption of Swift’s gpi, a move to a data rich ISO 20022 standard by Swift, the introduction of payment scheme standards and rules (modelled on the lines of instant payment schemes), supplemented by further investment by banks into straight through processing, capacity to handle micropayments, etc, would help address market requirements by leveraging existing network backbones. This may be an easier way to deploy a cross-border “faster” payment solution among willing participants.
We believe that implementing instant payments with cross-border reach is key to enable true customer value; instant payments will become the new normal and has the potential to substitute existing products like urgent payments and card payments. These propositions have global reach. So, to be able to substitute these products, instant payments will also need to grow into global reach. We see use cases for retail and businesses. The use cases for retail are more urgent and therefore most countries will first roll out to the retail segment.
We expect that other clients, such as corporates, will gradually also want to initiate instant payments (e.g. high value payments). With the development of more use cases on the instant payment infrastructure we believe that the reach inevitably needs to move from domestic to global. This does not mean that new systems need to be defined for that, but that connecting the existing solutions will be the way towards cross-border payments. In Europe, the commonly defined SCT Inst will help to secure pan-European reach.
Customers need to understand what this payment capability means to them. Being able to execute payments around the clock sounds wonderful, but this also calls for 24×7 cash management. The major challenge for all banks will be to provide real customer value instead of pushing a product. Therefore, it will be client expectations that will push the need for real-time and instant cross-border payments. The biggest challenge that all banks are facing is how to gain that reach. It is important that the ACH providers understand their importance in achieving that reach and that they play a vital role in connecting between themselves. The challenges there relate to using the same product functionality, agreeing on interoperability standards but also liquidity management.
Overcoming challenges will start with the client offering. We see that most countries have very specific local needs which only a local supplier can cater for. Collaboration on the front-end would stimulate pan-European solutions. For example, we see that the Hungarian National Bank has captured a ‘request for payment’ in its rulebook for domestic real-time payments. This request for payment is a great way to leverage instant payments for point of sale or e-commerce transactions. Instead of local communities proposing a local solution, we should try jointly to create such an initiative across Europe. It does not mean that all banks in Europe must support it; we could think of optional solutions as well.
We expect that the biggest volume will be created by domestic instant payments. However, there are very specific use cases for cross-border instant payments. There is a greater need here from corporate clients as they generally operate in an international environment, although we must consider that with the growing importance of e-commerce in the retail area, cross-border payments also gain momentum there.
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