Instant payments: A success story yet?

Following a welcome message from the Euro Banking Association (EBA)’s chairman of the board, and a series of introductory keynotes from host sponsors Intesa Sanpaolo and UniCredit, the first session of EBAday 2021 - ‘Instant Payments: A Success Story Yet?’ - was kicked off by moderator Teresa Connors, managing director, Payment Matters.

Joining the discussion was Gerhard Bystricky, head of product development payments, Germany, UniCredit; Erwin Kulk, head of service development and management, EBA Clearing; Craig Ramsey, head of real-time payments, banking, ACI Worldwide; and Michael Steinbach, CEO, equensWorldline. Each provided their perspective on the ways in which instant payments can become a factor in competitiveness, and what is still missing to increase its uptake.

Opening the discussion, Bystricky said: “Speed and transparency is increasingly key for corporate clients. However, for all stakeholders to access these benefits, the complete end-to-end chain must be running efficiently.”

Once this is achieved, argued Steinbach, value-added services can be built upon instant payments to provide a competitive edge: “Competition is related not so much to instant payments in isolation, but more to the services that can be built upon it, such as real-time cash management, or an innovative liquidity dashboard.”

Kulk agreed with Steinbach, and explored the services and solutions the industry is able to build around instant payments: “To gain a competitive advantage, I would start by adding properties that other solutions do not have. The most important ones are 24/7 finality, the real-time availability of funds, and a Request to Pay model to support payment solutions - especially the four-corner model setup.”

So, what should the roadmap to increased uptake of instant payments look like? In terms of the next steps, Ramsey stressed the importance of systematic and measured advancement across the industry: “The rails need to be the foundation onto which everything else is built - we can’t drive the value in the rails themselves. Yes, we need 24/7, clean settlement, and a ubiquitous reach across the industry, but that is where the instant payment rails themselves need to focus. The financial institutions and the fintechs are the ones that need to create the value on top of those rails. For example, when the rail tracks were built a couple of centuries ago, no one built those tracks for fun. They were built to connect communities, which enabled new ways of conducting trade. That is exactly how we need to look at instant payments. Today, we have the rails, but we need Request to Pay, QR code payments, more merchant engagement, more corporate engagement in instant payments, and so on. That’s not going to happen just because the rails are there.”

Digitalisation unlimited?

The session’s moderator senior advisory Kate Pohl launched the ‘Digitalisation Unlimited?’ session with a contextual question, asking panellists about the key changes brought about by the pandemic and how they have impacted the payments industry.

Andrew McFarlane, executive director, modernisation, Payments Canada, acknowledged that the pandemic was a real challenge for all organisations, and that it was essential to “find the balance” between getting their business-as-usual activities under control while attempting to drive major change initiatives through the ecosystem at the same time.

Agreeing with McFarlane, Emmelyn Wang, global lead AWS marketplace, Amazon, furthered that the tech giant’s digital catalogue meant despite salespeople being unable to travel to their customers, they were able to continue using this diverse marketplace for high touch sales, and to reach developers and end users.

“In addition to being able to facilitate the human elements, which was a very natural fit for sales folks, we really saw the catalogue activity increase a lot.” Wang continued that “I believe when you have an ecosystem that can shift very quickly to handle both the human and software elements, then you can do it in a way where it doesn’t disrupt business too much.”

For Accenture, Sulabh Agarwal, managing director, global payments, explained that while the shift to remote working shared similarities to the experience of Payments Canada and Amazon, he noted that there were a number of topics which emerged for Accenture clients. Namely, the decline in cash and ATM use as the use of e-commerce rose significantly, and, the spotlight placed on fraud and security.

Drawing further on the question of fraud, Wang added that the type of security that banks and organisation need to have - not only for risk and governance management, but also to protect the fact that you must move quickly must cover from infrastructure to the end user.

She continued by way of example, that Klarna which started off as a Swedish start up and is now a financial institution, makes it possible for customers to purchase in 4 equal instalments without fees or interest, is an example of a service which can give organisations more visibility into customers and their transactions, and therefore will assist to mitigate fraud.

Responding to Pohl’s next question around what payment service providers need to bear in mind so that digital can be accessed by everyone, Andrea Bacioccola, global service line payments director, SIA, noted that moving to digital is an opportunity but it can also be a risk.

“I believe that digitalisation is good and it must go forward for some customers, but not necessarily all of them. For some customers it is extremely important that there are still ways to interact with banks and make payments in ways other than digital.” Bacioccola added that while there will have to be a trade off somewhere, keeping good contact and connection with customers will remain essential.

Referring to recent research undertaken by Payments Canada which looked at the distribution of government benefits program, while 92% were very happy to receive benefits via direct debit deposit, 4% preferred the option of receiving this via cheque and a final 4% of these recipients were considered to be unbanked. McFarlane noted that the question here is around catering to the digital preferences of the 92% without further isolating the unbanked segment of society.

Strategies for intraday liquidity management

Toward the end of the day, Joost Bergen, owner, Cash Dynamics, moderated a session - ‘Strategies for intraday liquidity management’ - which examined the processing, monitoring, control and routing systems that are needed to better cope with liquidity requirements stemming from instant payments and regulation.

The speakers involved in this session - namely, Adnan Ahmed, head of global liquidity, HSBC; David Chance, vice president, product, Fiserv; Priyanka Rath, global head of liquidity, J.P. Morgan; and Ray Wilson, global head of virtual accounts, Montran - provided a long-term perspective on evolving financial services to satisfy the needs of corporate treasurers.

Rath said: “For payments personnel and treasurers, having a crystal-clear understanding of where their cash is, has become super important. To enable real-time visibility of liquidity, however, we need to technologically connect different regions, jurisdictions, and geographies; leverage up-to-date information feeds; and closely manage payments activity. Innovations such as blockchain can be deployed in this area, in order to provide a consolidated ledger view across different cash positions, and across jurisdictions.”

But what technologies promise to enable highly accurate methods or modes of cash flow forecasting? “AI, machine learning, and big data,” argued Rath. Yet, the question remains as to how effectively these technologies can become at predicting the future, based on their analysis of past trends, or typical usage patterns. Maximising their value will come down to “harnessing and using it in the most appropriate manner,” noted Rath.

Picking up on the distributed ledger thread, Chance urged caution: “We tend to talk about distributed ledger and crypto currencies as the ultimate goal, but I think that's wrong because they are looking at transactions that have already taken place; a ledger is only as good as that point in time. What we need to do is step back from that, to understand and predict when we're going to need liquidity and how we can change behaviour to actually make optimal use of that liquidity.”

The lack of available data that would otherwise enable close liquidity management, on the other hand, was the key sticking point for Wilson: “We will have to accept the simple fact that you can't manage what you can't see,” he said. “Most large corporates are multi-bank, so it becomes a really complex dynamic. While real-time is pushing things in a certain direction, if we haven't got connectivity between all the moving parts, then the job becomes impossible. If we're not getting the information we need, no amount of AI will work.”

To overcome this challenge, Wilson called for a change in behaviour within the corporate market - toward closer collaboration between banks and businesses, in order to enable more frequent sharing of information.

Attempting to pull together these various strands of the liquidity management puzzle, Ahmed identified three key pillars that the financial services industry must home in on going forward: technology, data and partnership. “The combination of partnerships, data and technology are really key here,” he said. “While there are some technological barriers, in terms of legacy systems - which banks and corporates must overhaul - we also face a mindset challenge. How far, as a bank, and as a corporate, do you really want to go in your partnership?”

Clearly, corporates and financial institutions need to start thinking in a very open, transparent, and collaborative manner, in order to meet their broader cash and liquidity management goals.

The next chapter for open banking

During the second stream two session for the day, ‘The next chapter for Open Banking’, moderator Vincent Brennan observed that we can examine open banking from either the regulatory perspective, or through the market and commercial lens.

Turning his attention to Giancarlo Esposito, head of payments, cash management and open banking, Intesa Sanpaolo, Brennan asked whether open banking is providing a return on investment through either or both of those lenses.

Esposito responded that profitability is perhaps the most important question when it comes to open banking. “If we talk about the regulatory space, it’s very hard to find a direct revenue model. Yet if we are talking about regulation, we must take the positive side of PSD2 because it helps the banks to prioritise and direct attention to open banking with senior management.”
Following on, Jim Wadsworth, senior vice president, open banking, Mastercard, argued that from Mastercard’s perspective, the credit use-case is the single most valuable thing to come out of open banking. This is the case regardless of whether “you're in a regulated market like we have in Europe or in a more market-forces-driven market like in the States.”

He continued that today, very significant amounts of consumer lending in the US, particularly in arenas like home loans, is powered by open banking data one way or another. “Banks today remain the most important lenders in most markets (whether that's consumer lending or small business lending) and we think open banking with those sorts of analytics is going to make a hugely positive difference to consumer and small business lending experience - in terms of helping thin credit file customers get access to finance speeding up the processes for example. That alone will drive significant value for financial institutions.”

Marcello Vittorio Ronco, head of GTB digital platforms and ecosystem, UniCredit, fully agrees with his co-panellists. Considering this is a long-term investment area for financial institutions, Vittorio noted that the real use cases will come later.

“At the current stage of the discussion, we all are approaching the open banking - specifically in the PSD2 area - with the very fundamental use cases like account aggregation or payment initiation. In reality, we will likely succeed more in developing new types of services on top of the fundamental APIs or integrating also cross industry services, like KYC.”

He said that it’s important to recognise the role that regulation played in order to get the open banking sector started, secondly, the fundamental position customer awareness plays to maintain this market, and finally, that we need for sure to invest more in finding new and innovative use cases.

Based on the poll question tackling the most critical design principles when transforming a bank into a digital ready bank, Michael Engel, managing director and vice president banking software, Diebold Nixdorf explained that one of the things we saw during the pandemic is the ability to be agile.

“None of us had something like that on the agenda. New situations came up literally every day and being able to respond to new circumstances, business opportunities and challenges, I think is key.”

Engel stated that the corporations and organisations we have seen thrive, are those able to adjust to such changes. Further, many elements around technology such as the utilisation of APIs, solutions and infrastructures as a service, will be vital. This goes alongside the fact that technology must be easy to consume, and it must also be perceived by the consumer as being very secure.

“We still figure out that a lot of the existing solutions are super secure, hence not easy to consume or the other way around. I think here as the industry, we can do more out of the legacy infrastructure that we have carried around for decades to give that level of innovation to the consumers.”

Brennan then turned to the role that scale and reach play inviable open banking use cases, asking Esposito whether industry wide infrastructure initiatives and open banking standard initiatives doing enough to enable the necessary level of scale and reach.

When talking about APIs, Esposito explained that we are talking about a standardised communication model which is in fact not yet standardised. “This is why the infrastructure or also standardising organisation can act as a catalyst in this in this field.”

On standardisation across European APIs, Ronco elaborated that we will ultimately be moving with APIs from human to machine, to machine to machine.

“We need to raise the bar in terms of the capability of infrastructure to be up and running in a resilient way. As a banking ecosystem we must grow from this point of view because the more banks are going to expose and integrate their APIs, they will become a sort of digital tissue for the corporates which means we are really part of their operating model.

“If we understand that we as banks will become part of the operating models for corporates, for instance, B2B2C. I think it's fundamental that there is cooperation with the banks to have a resilient infrastructure, like we have in many other areas (in payments in securities etc). It's a fundamental step of this transition, which is needed to make open banking strong.”