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Payment systems need to move in line with digital world

As global commerce becomes a 24/7 real-time reality, there is a strong need for payment mechanisms to move in harmony with this new world. The fundamental requirement is to be able to move money from one account to another immediately, with certainty and convenience and at low cost to all stakeholders. Many existing payment infrastructures do not currently have this capability and most are not compatible with the online and mobile channels.


The main drivers will invariably depend on the structure and dynamics of the financial services industry, which varies from country to country. This will also determine when and how a real-time payments system is deployed. One of the main drivers is the appetite and motivation of key stakeholders. In most cases, the central bank plays a key role in driving forward a real-time systems project, largely through industry consultations and identifying a national payments roadmap. 


South Africa is an interesting exception in that the commercial banks identified the need for a payment service that would give the general public the ability to transfer funds easily and in a manner that made funds available to the payee immediately. Seven banks began collaborating in 2005 to develop a new clearing and settlement mechanism called Real-Time Clearing (RTC), in cooperation with the South African Reserve Bank and the service was implemented in March 2007. In the World Bank’s Outcomes of the Global Payment Systems Survey 2010, six key factors were identified as having triggered the reform of payment systems worldwide. The most important were the need to improve efficiency, responding to technological innovation and reducing systemic risk.


Findings from Lipis & Lipis research in 2013 on the ‘Market potential for real-time payments’ in 2013 found that a number of central banks, governments and payments associations are currently focused on the development of financial inclusion initiatives, modernisation of payment systems, decreasing the use of cash for payments and promoting competition within financial services. In the UK, the Faster Payments Service has had a profound impact on a number of these key themes, serving as the platform to underpin important nationwide initiatives. We are beginning to witness innovative services being developed on-top of the Faster Payments Service, which satisfies the drive to reduce cash and cheques.


Another key stakeholder is the Automated Clearing House (ACH), the operator of the computer based clearing and settlement facility for the interchange of electronic debits and credits among financial institutions. Most, if not all, ACHs are typically owned by financial institutions. For ACHs, important factors driving change include: the desire to increase relevance within the payments chain through the delivery of new technologies to grow their business; to circumvent the threat from card schemes and non-banks who are seeking to move their products into traditional and new payment domains and to avoid commoditisation occurring within traditional clearing and settlement services.


Given the size of the industry investment, it is crucial to define the benefits of real-time systems. Over the past few years there has been growing clarity over the advantage of introducing such a scheme. Real-time enables a higher level of service, creates new revenue streams, enables new payment channels, lowers risk, improves efficiencies and reduces the cost and reliance on cash and cheque processing.


The most crucial benefits for banks is that a real-time  system coupled with mobile and online initiated payments services, delivered by an ACH, put the bank account at the centre of the payments relationship. Ultimately it offers the ability to meet the expectations of retail and corporate customers in a rapidly changing digital world in which new and traditional non-banks are targeting. Real-time payments will provide the backbone for successful innovations for banks such as digital payments initiation services. The prize at stake is the lucrative mobile and online payments domain and the customer relationship.


Comments: (1)

Tom Hay
Tom Hay - Payment Systems Europe - London 14 July, 2014, 09:13Be the first to give this comment the thumbs up 0 likes

I wonder how the Access to Accounts (XS2A) requirement will affect the concept of "bank account at the centre of the payments relationship"? If banks fund the construction of a real-time infrastructure, and third parties then free-ride on it, that doesn't seem very equitable. Unless the XS2A legislation is drafted carefully, it could prove a disincentive for construction of real-time infrastructures, which ironically would hinder the innovation that XS2A is meant to promote.

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