Looking back on 2016, one of the hottest topics we explored with the Finextra community was real-time payments. This subject was – and is – guaranteed to hold the interest of the market participants we pull together on a regular basis to debate and discuss
issues of common interest.
I am reminded of a roundtable breakfast Finextra hosted along with IBM very shortly after the Brexit vote. Given we were in London and the room was full of bankers, the fact that Brexit not only didn’t dominate the discussion but was barely mentioned at
all was pretty remarkable. Real-time really is top of mind.
This is hardly surprising considering the number of real-time schemes coming to fruition in the next year or so, and the technology and business implications of real-time for banks.
It’s fair to say that within a decade, real-time 24x7 payments have emerged from the realm of leading edge technology to become the payments norm in many parts of the world. Momentum continues to build for real-time payments as more countries roll out systems
and more use cases are developed. There is an inevitability about real-time payments that means banks must develop real-time payments strategies. Understanding the implications of real-time for business models and technology infrastructures will be crucial.
To recap, around 35 countries have implemented or are developing real time or immediate payments schemes. These include the UK, whose Faster Payments scheme was one of the world’s first, to more recent entrants including the US and Australia, where schemes
are under development.
Drivers of these payment schemes vary; the UK’s scheme was a result of regulatory pressure, while a commercial imperative (including competition from telcos) drove developments in the Nordic countries. Elsewhere, a mix of regulation and commercial drivers
has played a role. Payments infrastructure upgrades now inevitably include a real-time payments element – both the US and Australian payments infrastructure upgrades, for example, will enable a move to real-time payments.
Australia’s New Payments Platform (NPP) will introduce instant payments in the low-value arena and will come into operation in the second half of 2017. In the US, The Clearing House is building the country’s first new payment system in 40 years – a clearing
and settlement system to support real-time payments. Like the Australian system, it will go live in 2017. Meanwhile, the European Payment Council's (EPCs) pan-European SEPA Instant Credit Transfer Scheme will go live in November 2017 and so will the EBA Clearing
instant payment infrastructure system that will be fully compliant with the EPC scheme.
As the attendees at the Finextra/IBM roundtable recognised, real-time schemes can act as platforms for further innovations in payments. In the Nordics region, for example, the initial focus was on retail payments, mainly P2P. Gradually C2B, B2B and ultimately
electronic commerce solutions were added to the mix. The latter hold the greatest promise for financial institutions, as there is more scope for value-added, revenue-generating services to be developed.
One issue the Finextra/IBM roundtable focused on quite heavily was the question of business case. In practice, and in common with most if not all infrastructure developments, the business case for real-time payments will be realised over the long rather
than short term. Connectivity to real-time schemes is costly. Depending on the level of integration required, projects can range in cost from €500,000 to €5 million. While initial costs are mainly related to integration and testing, the ongoing costs of maintaining
these links must be considered.
The roundtable attendees – especially those from banks operating in multiple jurisdictions - were also quite preoccupied by the differences between different schemes, and how to accommodate those in their technology and business processes. Clearly, the fragmentation
of real-time payments schemes is a challenge. Interoperability between schemes will become increasingly important as more are rolled out.
Steps are being taken to address this. The European Automated Clearing House Association (EACHA) recently published an instant payments interoperability framework that provides the technical basis for interoperability between the different euro instant payment
services. Fragmentation is also being tackled in the UK where the Payments Strategy Forum has proposed consolidating the country’s three payment system operators: Bacs, Cheque and Credit Clearing Company and Faster Payments into a single entity. It will be
responsible for developing a payments architecture that is simpler, more accessible and more responsive to innovation.
In addition to the technical changes that will be required to move to 24x7 real time payments, banks will also have to change business processes. Moving away from a 9-5 batch payments environment will be a challenge: each bank must work out how it will provide
a 24x7 service, and, crucially, how it will manage risk controls related to fraud, sanctions and anti-money laundering. This will require different skills, capabilities and management of data – to cope with a change that has many dimensions across a bank’s
business and technology set-ups.
If real-time was big for Finextra in 2016, given market developments this year it’s going to be even bigger in 2017. As the discussions during the Finextra/IBM roundtable breakfast reflected, banks see both opportunities and challenges from real-time, and
they are keenly aware that some of the technology choices they make now will have a strong bearing on their ability to thrive in the brave new real-time world.
I’m sure we’ll be hosting a number of events on this topic this coming year. I’ll look forward to seeing our growing community there, and watching how this area, which absorbed so much air-time during the past 12 months, will develop further during the coming