RTP is changing payments fast
The ability to pay for goods and services tends to serve as the foundation of any self-respecting economy. But it’s the convenience of payments that really makes the economic wheels go around.
That’s partly why the invention of paper cash in Europe several hundred years ago was such a big deal, while Micronesia’s Yap island’s economy, with its reliance on multi-tonne stone coins, never quite got off the ground. The quest for convenience in payments never quite eased up, with promissory notes, cheques, bank-to-bank direct transfers, credit cards and newly-minted forms of digital payments all making giant strides towards ever faster and more convenient forms of financial value transfer.
Now, several years into the new millennium, a new form of payment has been garnering attention over the last few years: real-time payments. We’re promised payments of unparalleled convenience, speed and finality. Real-time payments (RTP) are supposed to address all the shortcomings of the payment methods of yesteryear. Not only do they gracefully sidestep the question of just how heavy your coins should be, RTP schemes promise to quite literally change the reality of payments. And these promises may be not that far off from reality.
The invention of credit cards and the advent of digital payment means put a real dent in the popularity of cash. That’s generally considered to be a good thing. Cash only ever had one real advantage over more modern means of payment: the transfer of value from one party to another is instantaneous. Every other form of payment incurs significant delays. Bank transfers need to be processed, cheques cashed, card payments have to be settled. For the modern merchant, bank or financial institutions, each of these means has its own set of costs, be they in time or money.
Bye-bye plastic, hello digital
Real-time payments aim to change the reality of payments by combining the benefits of all worlds with none of their traditional downsides. Instant payments, traceable purchasing, no physical objects to get stolen or lost, and no processing or settlement delays for the merchants. Besides serving as convenient cash replacement, real-time payments hold another less-talked about advantage for many in the industry: sidestepping the card schemes and the undue influence of credit card giants on the dealings of most small financial institutions. The greatest benefit, however, is for the merchants, who now have hope of receiving payment for goods and services without having to wait for whatever settlement cycle was decided for them.
Of course, no one hoping to avoid the card schemes can do so without addressing Point-of-Sale terminals. Poland’s PKO BP launched a relevant product last year, and it’s gaining significant traction in one of Europe’s leading economies. At this rate, the Polish giant might just oust the globe-spanning plastic payments juggernauts from its own back yard, but others will have to deal with similar questions soon enough. The sooner they strike, the better their chances.
Inter-bank payments need RTP
All these customer-facing advantages are clear, but real-time payments are bound to cause swift changes behind the scenes as well. Customers and businesses aren’t the only ones who need to make payments and transfers around the world. Inter-bank payments, and payments to and through correspondent banks in particular, make up a significant part of the funds transfers around the world.
Like it or not (and for the most part, the decidedly do not), most banks are subject to processing delays that would feel familiar to the modern banking customer. Pre-gpi Swift transactions can still take up to three days for full clearing. In today’s economy, such delays are unacceptable. Money I will have tomorrow is money I cannot make use of today.
Real-time payments can and likely will have significant positive effects on the liquidity of banks and financial institutions. Having their funds actually usable is likely to improve their profitability and, in effect, strengthen the stability of a sector currently experiencing quite extreme pressures.
But perhaps even more important is the fact that RTP invites a swatch of new players to participate in a financial industry that has so far been somewhat closed-off. Electronic money institutions, for the most part, have in place all the necessary infrastructure to participate in real-time payment schemes, and in many cases can serve business clients better than traditional banking providers.
Despite the push-kick RTP schemes received from COVID-19 (as did all other non-cash payment options), there is still a way to go before all kinks are worked out and widespread adoption is here. One issue that remains is tax and VAT collection in Europe.
Presently, it is a mess. Some acquiring banks clear VAT during processing for certain clients, while others are left to deal with VAT on their own. Some industries get standard VAT clearance, while for other it’s unheard of. Real-time payment schemes are currently not integrating with tax authorities, but that is absolutely something that must be dealt with soon. Not only will it ease operations for countless merchants, but improve cash flow for the authorities themselves. Now, in the infancy of RTP, is the time to strike and design systems that can handle tax requirements efficiently.
Whatever answers these questions find, it’s clear that real-time payments will have far-reaching effects on the payments world and on our lives in general. It’s not a question of if, but when will the ubiquitous plastic pass from our lives, when transfer delays can no longer be deemed acceptable and payment settlement concerns get shortened from weeks to mere hours or less. If all goes well, predictions of half a decade or more may be far too long.