The future of payments: Meeting instant expectations

Digital transformation continues to alter traditional business models across several industries such as retail, transport, and travel, to name a few. While the financial services industry is yet to experience a sea change of equal measure, a number of payments processes and business banking touchpoints are indeed undergoing transformation.

This is an excerpt from Finextra Research report 'The Future of Payments 2021', which is exclusively available on the EBAday digital platform. Register here for EBAday to access the full report.

As clients demand speedier transaction processing, convenient access to information and accurate tracking at a low cost, these customer requirements have been a catalyst for banks yearning to explore new ways to create efficiency, manage margin and price compressions better.

Bridging the gap with proactivity and reactivity

As highlighted by Sindhu Vadakath, executive manager, global channels and Asia payments product management at BNY Mellon, “banks have scaled up in a large way to meet these demands, both proactively and reactively.

However, there is still a gap in bringing the cross-border payments experience on par with domestic payments experience as the industry and market networks strike towards unification and standardisation to enable interoperability across markets.” Migrating away from manual, siloed and post-facto legacy processes to real-time, instant, technology-first processes is key.

Further to this, to stay abreast of and remain competitive with the consumer experience that new, digital banks offer, traditional lenders will need to deliver significant improvements and incorporate digitalisation into their core systems, rather than offering this value through a potentially unsustainable offshoot.

Enabling payment execution

Using correspondent banking service providers as an example, Vadakath adds that while these organisations have “historically been focused on infrastructure, the pipes that enable global payment execution,” neobanks and challenger banks have “almost exclusively been focused on the client experience and being aggressive with pricing.

“It is interesting to observe that the newer technologies, created by fintech payment service providers and digibanks, have leveraged existing payment rails. Traditional banks have understood this and adapted the newer technologies enabling them to provide improved capabilities and competitive pricing to their clients, effectively leapfrogging ahead of the new entrants,” Vadakath continues.

Banks, in their current myopia, must deliver an efficient consumer experience for all parties across the entire value chain and determine the core technologies needed to digitally transform their infrastructure, enabling scalability, interoperability and ubiquity, as Vadakath explains.

However, in collaborating with regulators and clearing infrastructures, banks have upgraded the payment experience with the implementation of real-time payments and instant payment networks. Further, as these networks have been developed and given the space to mature domestically, settlement is speedier.

The instant payments narrative

While Christian Schäfer, head of payment products and solutions at Deutsche Bank also believes that the instant payments trend has picked up pace, he stated that the narrative around the benefits has evolved. “Much has been made of the benefits of instant payments for businesses through incremental liquidity gains – and these are certainly valuable.

“But today, as we continue to explore the use cases and in the context of an ultra-low-interest-rate environment, many businesses are concluding that the most compelling edge that instant payments offer comes from the ability to significantly improve customer service,” Schäfer says.

Citing e-commerce, where online retailers can offer instant refunds, and insurance, where a driver can cover payment of a rental car after an accident, as viable use cases, Schäfer added that Request to Pay decreases the time taken for the customer to “fish out credit cards or log into various banking portals in favour of giving a simple set of bank details and confirming the transaction.”

Susanne Prager, head of trade finance and transaction banking at Raiffeisen Bank International has a similar view and says that in years to come, “instant payments will be the new normal. The new generation of treasurers will not accept that in an instant world a payment takes one to two days or even longer to reach the beneficiary. This will have an impact on the processes of corporate treasuries when they are currently not prepared to receive payments on weekends, for example.”

As mentioned, dependent on developments made to underlying infrastructure and acceptance on both sides of the market, Schäfer surmises that instant payments could become “the all-in-one payments solution for the banking industry.”

“This is something banks would love to see. Currently, the industry runs several types of infrastructure, including automated clearing houses (ACHs), instant, cross-border payments, and card networks, leaving plenty of scope for rationalising the cost base should one infrastructure serve all the relevant markets. It remains to be seen, however, whether this vision will materialise,” Schäfer concludes.