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You raise some key questions Ralf Ohlhausen. I feel the decision must be left to the countries for this to take off as fast as required. The Nordics for example may prefer a multi-country approach, while UK Faster Payments type solution may be implemented
Credit cards anyway already provide exactly the functionality you're referring to in the context of retailers: Instant confirmation, deferred payment. Why invest all the money to do the same via A2A transfers? In any case, even if Instant A2A were available,
a majority of customers might not opt for it since they get additional benefits by paying with credit card, so I fear that this might end up becoming a solution seeking a problem.
On a another note, well-funded startups like TransferWise (which is already a unicorn) and Jet.com have been founded on the basis of questioning whether customers really want everything instantly. The former is offering very low fees for processing cross
border payments in a - let's say - "more leisurely" pace. The latter is offering 10-15% discount over Amazon's prices for everyday items to customers who don't opt for next day delivery.
The answer to the "why" question is not only driven by political and strategic motives: "instant is the new normal" as the ECB says. Just because we can, we must. As for Europe: of course there is a dilemma here because banks are faced with the choice between
not innovating and waiting for Europe on the one hand, and innovating with a risk of fragmentation on the other .....
Thanks Ralph for this good analysis. Often we (as payment professionals) tend to forget that payers & payees look for pan European RT 'Commerce' instead of RT 'Payment' ...
You are right to conclude that real-time payments are a big undertaking for Europe to implement, it will take time and a lot of change. However, I have different perspectives on some of the points raised:
1. The UK Faster Payments system is real-time (<<5s) for customers of the 10 banks (and one sponsored PSP) that connect directly to the Central Infastructure, for the single immediate payment (SIPs) type. These PSPs cover most of SIP volume. FPS is architected
for real-time, and operates real-time 24x7, including synchronous processing for real-time confirmations.
2. The UK experience has shown the importance of real-time availability of funds for consumers and SMEs - a payment guarantee is a much inferior proposition compared to a real-time payment for both payer and payee.
3. Real-time settlement is an unusual concept for mass domestic real-time payments - transaction volumes are multi-directional, making netting and deferred settlement an efficient way to manage liquidity. I assume real-time settlement for real-time payments
requires pre-funding, but DNS systems can be pre-funded as well (the UK is moving to this in October), so risk management would be similar for both.
The Faster Payments System in the Uk is opening up to FinTechs as aggregators meaning PSP's will have more options rather than submitting transactions through a direct member bank. This type of model will become the norm in all markets in the future
Great post Ralf !!! One of the crucial deficiencies of instant payments is the ability to push remittance data along with the payment. While the consumer payment use case is well served with instant payments, when we hit B2B payments, remittance information
flow tends to pose a hindrance. In the B2B world, straight through reconciliation is as important as immediacy of the payment. If the payee gets the payment but is unable to apply it to outstanding invoice the pitch gets diluted. Similarly user stories such
as child support payments, tax payments which hinge on justification data get impacted. Government to business payments and reverse are other manifestations that get affected.
Another dimension is interdiction check which along with fraud protection measures such as 'out of pattern' checks get minimalized.
All the juicy validations that the originating bank is typically expected to perform (as early as it can in the payment flow), do not get the required execution time, causing them to be compromised, in order to further the real time payment cause.
These are some points that would need to be considered when objectively analyzing the wider outcome of embracing ‘cashless cash’ mode of value transfer
I agree with @GaneshG and would go even further and submit that remittance data problems are applicable for all types of A2A payments including BACS (UK) and NEFT (India) as well as for C2B payments. Strangely enough, the situation is not uniform across
banks, with some banks in my personal experience providing long enough field lengths to handle narrations for most types of transactions (e.g. Citi UK, ICICI Bank India) whereas others restricting them so much that it became impractical to use electronic fund
transfers (e.g. HSBC UK, HDFC Bank India). I remember a time when I had to pay my house rent to a building management company in UK. The company wanted me to specify "MCS MERIDIAN CLIENT ACCOUNT" as reference in my payment instruction. This was in the pre-FPS
days and my bank at the time didn't support such a long narration in its BACS payment screen and wanted me to abbreviate it to "MCS CLT AC". To avoid the risk of my payment lying unapplied upon receipt by the company, I had to use paper cheques instead, where
I could easily write the required narration in full on the reverse of the cheque!
02 May 2013
17 Aug 2019