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The real-time payments challenge facing North America

The need for establishing a real-time payment infrastructure is firmly on the agenda in North America right now. The US Federal Reserve announced back in September that it was preparing to publish a road map detailing how the payments landscape should be developed and we expect that this will include looking at the possibility for a national faster payments network. More recently the Clearing House announced its intent to deliver such a service in the country. Across the border in Canada, work is also underway that could result in a real-time payments system being introduced there.  


While the ACH infrastructure currently operating in the US is regarded as efficient and secure, the payment rails were introduced in 1974 and can’t keep pace with the change that is now required. In the digital age such systems need to accommodate more than just the movement of money from one account to another. Quite simply, the relationship between standard payments, social media and e-commerce has become blurred and the payment infrastructures need to be sufficiently fast and flexible to fully leverage the opportunities offered by these largely consumer-driven changes.


This need for innovation helps explains why real-time payment infrastructures are increasingly in demand around the world. In the last decade at least 11 schemes, including six in the last three years, have been developed. The most recent was FAST, which was launched by the Association of Banks in Singapore in March this year and we are already seeing Facebook payments being offered as a consumer service by one bank.


At a macro level, the introduction of real-time payment systems offer tangible benefits to national economies through increasing liquidity and efficiency, which in turn supports GDP growth. These benefits will have a particularly positive impact on governments (in the form of increased taxes and lower costs to the treasury or finance ministry), but will also have applicable benefits to central banks and other payment industry stakeholders.


The most pronounced benefit to an economy is likely to be the impact of increasing the velocity of money. In simple terms, this means that by moving to real-time payments from batch systems, money can be used to make a greater number of purchases or other transactions within the same elapsed timeframe. This effectively increases the productivity of money.


From the perspective of the banks, by moving to real-time account transfers they can position themselves perfectly to leverage new technologies. These innovations range from those developed by individual financial institutions, such as Barclays’ Pingit, to collaborative initiatives including the Payments Council’s Paym service in the UK. The real value resides within the development of these overlay services to end-users and the ability to combine delighting retail consumers through efficient and easy to use services with corporate products and services. This  drives efficiency and generates revenue throughout the stakeholder value chain. It is these overlay services, which also include the likes of Zapp in the UK, that have the propensity to generate new revenues for banks, in particular the person-to-business propositions.


But while the case for introducing real-time payment infrastructures in the US may be developing at speed, exactly how they are introduced is still to be defined as the current ACH network is one of the largest in the world. With this scale comes complexity and the challenges may potentially need to be solved by multiple service providers. But it will also be important to keep an eye on achieving the level of ubiquity and across the board flexibility that is key to delivering a successful service. This will ensure it meets the diverse requirements of the regulator, the end consumer as well as the merchants and financial institutions.


Europe, where there is a growing realisation that SEPA needs to cater for increasing demand to “transact anytime, anywhere”, presents a model of how things could work in practice in the US. Here the most likely route to real-time will result from recognised players throughout Europe leveraging innovative technology solutions with sufficient flexibility to meet the varied needs of a very broad marketplace. The combination of real-time, mobile channels and the flexibility of the ISO20022 standard have the potential to deliver an excellent platform for innovation across Europe.


Given the size, scale and geography of the US, with its different time zones, it’s likely that there will be multiple switches, rather than a move to a single real-time payments infrastructure. As with the various systems planned for Europe (Finland is one of the most recent countries to put out a tender), it is important real-time systems in the US are properly coordinated. This will drive forward the innovation that North America needs to help ensure meaningful and innovative products and services can be launched.


Comments: (1)

Tom Hay
Tom Hay - Icon Solutions Ltd - London 01 December, 2014, 14:12Be the first to give this comment the thumbs up 0 likes

The technical challenges of a federated immediate payments network will be interesting. SEPA has shown us how there can be many different interpretations of a single standard, so ensuring interoperability between switches will be a priority. Reconciling different settlement cycles on different switches will need consideration, as will synchronisation of reference data. Ensuring low latency is difficult even with a single switch in a small country, and will be more difficult across transcontinental distances and multiple switches.

Despite the technical challenges it is undoubtedly achievable, as the card networks have shown. The bigger challenge is likely to be aligning the commercial and political stakeholders to drive the project forward. Regulatory pressure was sufficient to mobilise projects in the UK and Singapore, but American distrust of government and regulation makes such an approach less likely to succed there. The ability to capitalise on the new business opportunities of the digital age is what will really motivate organizations to get on board.