As Australia prepares for New Payments Platform (NPP), its new fast retail payments system, Aussie bankers gathered to discuss the importance of innovation and what they can learn from similar overseas implementations.
“Why are we focusing on innovation?” asked Susan Feinberg, independent analyst and co-author of the Clear2Pay Flavours of Fast report that the presentation is based on. “You might as well be asking why we should be customer-focused. Banks and payment processing companies and others in the payments business all have to consider how they’ll get revenue in future and how to satisfy new and existing customers. There are plenty of alternative providers out there who would take your customers and revenue.”
And it’s not just competitors pushing ideas that banks can either embrace or get left behind. Customers too are finding innovative ways to use the new faster payments systems being implemented worldwide by banks and clearing houses in response to regulatory mandates.
Singapore’s G3 system, for example, went live in March. It enables notification and account posting in just seconds, with multiple intraday settlement cycles. When it launched, Malaysian bank CIMB, which has some branches in Singapore but operates mainly through its online channel, saw higher than expected transaction volumes and account opening. Looking closer it saw that customers were starting to take advantage of its better deposit rates by sweeping every day from accounts at other banks that they retain for greater branch/ATM presence and transaction account capabilities. So CIMB has begun to incorporate this concept into their consumer marketing.
Singapore is just one of the countries covered in the Flavours of Fast report (available for download here), which examines 15 countries around the world that have deployed or are building a fast payments system. This is defined as a domestic, inter-bank, purely electronic payment infrastructure into which irrevocable funds are transferred from one bank account to another and where confirmation back to the originator and receiver of the payment is available in one minute or less.
Rather than just explaining the technical details of each system, the Flavours of Fast report provides an examination and score for each system and its potential for fostering innovation. As a base standard, each system must have irrevocable interbank account-to-account transfer in less than a minute. Highly desired and optional features that can help facilitate innovation include universal access 24x7x365, use of ISO 20022 standards, fast settlement, support for batch and individual payments, extended B2B remittance and alternative account identifiers. Taking a food theme, the report gives each payment system a chilli score (for being ‘hot’ in terms of innovation) out of five based on these criteria.
Although Australia’s NPP wasn’t officially given a chilli score in the report, as it is not expected to go live until 2016, Feinberg said it should rank five chillies if delivered as currently planned.
The NPP approach is layered, beginning with the establishment of a basic infrastructure to connect all of the participating banks; to establish a link to the central bank for settlement; to create a new, flexible and fast payments messaging system (based on ISO20022) and to support innovation through the development of multiple overlay services that can be tailored to specific payment needs over time. Participation in payment overlay services will be optional by bank, leaving decisions about specific payment offerings to be driven by the market. The first overlay service will be the “Initial Convenience Service” to be focused on consumer payments, especially using the mobile channel.
Australia is unique in that the regulator has not mandated at what speed an account should be credited. Confirmation must be done in seconds, but beyond that is up to the banks. John Murphy, Executive General Manager, Everyday Banking & Payments at National Australia Bank explained that the feeling was that “market forces should decide, receiving banks should determine this. Message posting should be real-time but the account posting/crediting of money should be left to competitive forces. If there is sufficient demand for instantaneous payments for consumers we will look at this but we also need to protect our customers and moving to real-time payments in digital seconds will come at significant additional cost to enable the likes of fraud checking.”
While some have pointed out that this might result in a confusing message to consumers when the payment system first launches, Feinberg wonders if leaving it to market forces might have a positive result. “Until now, the least capable participant has stifled industry payment initiatives. However under NPP, is the industry more likely to be led by the most capable player?” she asked.
Shortlisted solutions for the NPP core and initial overlay service are being verified by NPP programme manager KPMG, with a decision expected at the end of August and work to begin in earnest shortly after that.
NPP steering committee representatives acknowledge that there will need to be big changes to process, operations and culture inside Australian banks to move away from batch processing.
Simon Cox worked on two rounds of payments transformation at the UK’s Co-Op Bank to meet UK Faster Payments requirements. As he shared implementation war stories with the audience, Aussie bankers pondered what lessons they could take on board for their own projects, which will come at no insignificant cost.
And after all that investment – some put the total industry cost in the UK for Faster Payments at north of £300m – does anyone actually make any money? Phillip Finnegan, Clear2Pay’s General Manager for Australia, New Zealand and Southeast Asia, posed this question to the audience to facilitate discussion of how value can be gained from this massive infrastructure investment.
Steve McGregor, Executive General Manager, Information Technology at Commonwealth Bank, said it should not all be about the banks. “On the question of who makes money, in the UK or elsewhere, it’s the customer. Having not had access to their funds for three days they now have it near instantly. And as we stare into the NPP, banks and other organisations need to keep this at the forefront of their thinking. That’s the reason these things come from regulatory mandates. We need to be far more in tune with the customer – particularly with small business and SMEs where cashflow is absolutely king. Putting customers, and not just ‘my’ customer, at the heart of thinking will really help drive that innovation.
So the money is now with the customer where it should be, and our challenge now is to extract value from that relationship with the customer.”
This value could come from two main avenues: attracting volume as an acquirer by embracing those third parties who are providing innovative services on top of the payments rails; and providing data-enriched services to business customers, from small business to large corporates.
Warren Gardiner, Chief Strategy Officer at Clear2Pay, pointed out that in the UK the number of third party innovators delivering services that benefit from UK Faster Payments vastly outnumber the two bank-launched initiatives that have gone live since 2008 (with a third, Zapp, imminent). Looking at Uber, as an example, Gardiner asked why a bank couldn’t partner with the rideshare service that’s shaking up the taxi industry and become its preferred payments partner.
This is the approach that two Indian banks have taken with the Xoom remittance service for foreign workers in the US. Xoom makes use of the IMPS fast payment service to enable Indian workers in the US to send money home. As preferred partners, HDFC Bank and Punjab National Bank can get instant account crediting for transfers to its customers from Xoom.
For all other Indian banks it takes four hours.
Data enriched services to business on the back of new fast payment systems are dependent on the ISO 20022 standard, which can incorporate corporate and transaction data in the messages. Although it’s not a fast payment service, the Single Euro Payments Area (SEPA) system provides a good example of the kind of value-added B2B services that are possible. For example, at least one large European bank is working on a virtual accounting and reconciliation service for corporate customers using SEPA.
“With fast payment systems that can provide much better data enrichment capability to corporate customers, banks can help them reduce manual efforts and exception processing in their environment,” said Feinberg. “If you can demonstrate value based on data and services in this way, you should be able to persuade corporates to pay for these new overlay services.”
Another example of a new service for businesses based on a fast payments system comes from Chile, where banks have created a last-minute batch payroll service for businesses that miss the window for traditional ACH processing.
Bruce Mansfield, Managing Director, eftpos Payments Australia, broached the subject of fraud after hearing Simon Cox relate his experience of UK Faster Payments with Co-Op Bank.
“My understanding is that fraud has been a material issue,” he said. “And if you look logically, funds are moving immediately and we have a trend of account takeover and fraud increasing across all digital channels that leads to a recipe for concern. The challenge we have in this market is not to fall in that same hole. Whether the answer is some kind of screening I just don’t know.”
In the UK, Cox said, there is not much publishing or sharing of fraud information and more open debate and discussion would be useful. “After doing some work recently with a credit reference agency I believe there is more that can be done with non-bank data to protect ID and account takeover – for example location and device data on interactions and transactions could flag something like an application from an unusual location as out of the ordinary.”
Feinberg again pointed to Chile as an example, where the clearing house has some sophisticated fraud technology in place but the bank community has also agreed to share data on all instances of fraud, so there’s a collaborative process. “But of course you can’t remove it completely,” she said.
With the introduction of any new payment system, the question arises – “What do we do with the existing ones?” David Ranasinghe, General Manager, Business Banking & Payments, from Commonwealth Bank, pointed out that Australia already had five clearing streams and NPP would make six. Looking again at the Chile fast payment implementation, where cheque usage has been reduced by 60 to 70 per cent, he wondered what opportunities might exist for consolidating clearing streams once the new modern system is up and running.
In NPP the addressing system is expected to be based upon the RBA’s innovation review conclusions, which sought an easier way to address payments to assist in providing an alternative to cheque usage. Addressing mechanisms like this are also seen as a good way to avoid the problem experienced in the UK of misdirecting payments and getting returns. In Sweden they have hardly any of that problem because its SWISH mobile payments system incorporates addressing, so when you pay you know it will get to the recipient.
Mansfield from eftpos Australia pointed out that some of the other existing payment infrastructures are modernising and moving towards real-time as well. Although it didn’t meet the criteria for inclusion in the Flavours of Fast report, the operator of Australia’s debit card point of sale network has been building a new real-time hub to replace the complex network of bilateral links that have existed since eftpos was formed almost 30 years ago. It will enable eftpos and its member financial institutions and retailers to bring innovative products to market faster and more efficiently in the rapidly changing global payments market. The first of Australia’s financial institutions will connect to the eftpos Hub in September, and the entire industry will be connected by late 2015.
Picking up on the global theme of the Flavours of Fast report, Andrew Davis, GIobal Head of e-Commerce Strategy and Innovation at HSBC, reflected on opportunities that might exist for “internationalising” these fast domestic payment systems into a global proposition.
Feinberg pointed to the example of Xoom remittances into India as a good single example of how fast domestic payment systems can be used in an international context, and also mentioned Finland, which has recently made the first announcement about its own yet-to-be-named fast payment initiative. “We know that they plan to open up their system to the rest of Europe particularly, which makes sense for them,” she said.
Clear2Pay’s Gardiner acknowledged that there are a few early-stage initiatives to look at international low value payments outside of SWIFT, such as Asian Payment Network, but it’s too early stage to tell how feasible they are. But the real international payments innovations are going to come from nimble third parties, and also banks.
“A bank in Singapore, for example, is using G3 to offer an immediate settlement service to their correspondent banks worldwide. They’re using it in a different way to what anyone expected,” he said.
And perhaps that could be the key to innovation in banks’ evolving payments businesses. If banks do things that wouldn’t normally be expected of them, such as embracing third party innovators or enabling them by opening up their payments to developers via an API approach, that could be the key to achieving the economic value and transformation that investment in fast payment systems aims to promote.