26 September 2017
Imran Ali

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Imran Ali - Answer Digital

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Real Time Payments is the Answer, but what's the problem?

15 August 2017  |  5620 views  |  6

Real Time Payments is 'in', it's cool, everyone's doing it, it's the awesome thing that will solve all our payments problems. Wait! What? Really? But which problems?

Cast your mind back. It's 2004. 4 years before Faster Payments launches in the UK. I go to buy a sandwich from a shop. I'm asked to pay. I take out my debit card and pay. In real time. From my account. Anytime. So why do we need Real Time Payments, if we had it already?

Move forward a year and the Payments Industry is concluding a consultation on a new payments infrastructure. At the time the UK had cheques, which took a long time to give you your money; CHAPS, which got you your money quicker but was very very expensive; and Bacs, which was somewhere in the middle but still took 3 days. The chancellor had lamented that the UK had the slowest clearing in the G10. And so the industry was charged with finding a quicker alternative.

The momentum was moving towards a batch overnight solution. Get your money the next day, like a quicker Bacs. But along came LINK with an innovative solution. Why not clear payments in real time. We had the technology working in ATMs, so it was all possible. So there was an official tender, responses sent, and VocaLink (Voca and Link partnered on a joint response and subsequently merged) won, with it's Real Time Payments solution.

Move to 2006, and we kicked off the project. I was assigned Business Lead at VocaLink, charged with managing a team of business analysts who wrote the Functional Specification and External Interface Specification (yes, you can blame me!). And we started a bunch of discussions across the industry about what Real Time Payments would look like and how it would be used. The most common use cases were: imagine you're in a restaurant, the bill comes and one person pays - guess what, you can send him/her a Real Time Payment straightaway for your share; and imagine you're buying a car - Pow! send a Real Time Payment and you're done in seconds.

Last time I went to a restaurant with friends we all split the bill and paid our share on our credit cards, and the last time I bought car I paid with my debit card because it was real time and Faster Payments could have taken up to 2 hours. So what happened? And why, 11 years later, am I still using my credit card in sandwich shops?

I think we were looking at it all wrong. We thought Real Time Payments was the solution to a whole bunch of problems. In some cases it is. The other day I needed to make an urgent money transfer. I logged on to my online banking, sent the money, and the receipient got it in a few minutes. But generally, we already had a solution, so Real Time Payments wasn't adding any value.

Instead of looking at Real Time Payments as the solution we should look at it as an enabler. There are clear advantages of using Real Time Payments over credit cards. Lower merchant fees, for one, which is significant. Also, many people like to make payments directly from their accounts so as to better manage their budget, rather than put it on credit and get a nasty surprise at the end of the month - with ballooning consumer debt warnings by the Bank of England this is no bad thing.

So the appetite is there from both merchants and consumers. We just need to overlay the service with some value-adds. Use the cheaper quicker set of rails to transfer the money from one party to another but incentivise users. I use my credit card because I get cashback. I'd use Real Time Payments if I got cashback on my account, or loyalty points. I use my debit card because I literally tap and go. I'd use Real Time Payments if I could do the same with my phone and not even need to carry my card. How about the merchant incentivising me? With all that money they save on credit card fees they could give me a discount for using Real Time Payments. I also get product protection on my card, so if I buy online and the goods don't arrive, or there's something wrong I get a refund from the credit card company. If my bank, or the merchant offered that on Real Time Payments, I'd pay that way.

Since it's launch in May 2008, Faster Payments in the UK has grown significantly. But it hasn't quite reached the potential we all thought it would back in 2006. However, with the advent of Open Banking in 2018, and a surge of new players joining Faster Payments, we are hopefully on the cusp of something exciting. New Fintech players, and some of the old guard, will develop overlay services on top of the Real Time Payments rails. AI, data analytics, loyalty programmes, discount vouchers, and more, coupled with easy to use interfaces will finally enable us to realise the Real Time Payments potential.

So, Real Time Payments is the Answer. But not to the problem we originally thought. In fact it was the key jigsaw piece that has opened up the possibilities for new services.

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Comments: (6)

Peter Bove
Peter Bove - Aviso - London | 15 August, 2017, 12:18

And therein lies the problem. Everyone wants the security and benefits of using a card but doesn't want to pay for it. Add all those extras into Faster Payments and they would become more expensive ....... and then someone would want to establish a cheaper alternative!

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Ketharaman Swaminathan
Ketharaman Swaminathan - GTM360 Marketing Solutions - Pune | 15 August, 2017, 18:56

As someone who was closely involved in the implementation of FPS for a Top 5 UK Bank, I'm somewhat saddened to read this post. But I think your post has missed out two important use cases of FPS, namely, (1) Business-to-Person and (2) Person-to-Business online payments. I remember getting my May 2008 salary credited to my bank account on the same day that my employer initiated the transfer (as against two days later in the past); and also getting an extra two days to make my bill payments to my MNOs, Council, etc. Not sure how well these two use cases taken off though - we were expecting FPS to kill BACS but that clearly hasn't happened.

On a side note, apropos your expectation of a merchant giving you "a discount for using Real Time Payments", I think card agreements forbid merchants from charging a lower price than the price posted on the shelf for a non-card payment (although they permit merchants to charge a higher price via surcharge for a card payment). 

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A Finextra member
A Finextra member | 17 August, 2017, 13:15

You don't mention the stranglehold the duopoly in the cards space have over the UK market and now one of them also own the central infrastructure for real time.  Competition is what was needed and the regulator was sleeping on the job to allow that to happen.

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A Finextra member
A Finextra member | 17 August, 2017, 16:20

Hopefully the New Payments Architecture proposed by the payment strategy forum in the UK will make innovative uses of realtime much easier as third parties can plug directly into the scheme

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Paul Love
Paul Love - Compass Plus - Nottingham | 18 August, 2017, 17:46

When asking for directions, one common reply is "I wouldn't have started from here".
Given we are where we are, the cards model seems fit for purpose for retail payments, and instant "push" payments have a major hill to climb.
Key for me is a simple confirmaion of payment that a retailer can easly see and believe - There is an obvious opprtunities for "overlay" services to help fill this gap.  

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Jonathan Williams
Jonathan Williams - Mk2 Consulting Ltd - Rugby | 01 September, 2017, 11:17

The surcharge issue starts to disappear with PSD2/Payment Services Regulations 2017 - legislation trumps scheme rules.

Re: FPS kills Bacs, I seem to remember a statement from a government body that simply said that once Direct Debits moved to FPS, Bacs would no longer have a life. I'm uncertain that any business would pay the per-transaction fees that are charged to businesses for FPS payments, even if they were made in under 15 seconds. 

We shall see whether the new payments architecture can embrace all the use cases. At the moment I don't see the "conditional payment" (where I give a school a cheque for a trip that they cash only if it goes ahead) being met.

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I co-head the Finance Sector at Answer Digital. We provide software development services, as well as end to end project management and solution design. We help clients deliver solutions to meet their...

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