Long reads

Expectation, standardisation and automation: Seizing the initiative in real-time payments

Jamie Crawley

Jamie Crawley

Reporter, Finextra

Real-time payments are likely to not only expedite the movement of money, but also heighten the expectations of consumers and corporates. Financial institutions need to address other aspects of the payments system to ensure that instant payments are supported by improved user experience throughout the cycle.

The Covid-19 pandemic is likely to have increased attention on real-time payments with more transacting taking place digitally and fewer retailers accepting cash.

It has been argued, however, that Coronavirus has in fact slowed down the rollout of real-time payment platforms as businesses redeployed resources elsewhere to ensure they could remain functional at the height of the lockdown.

Now, as life is beginning to return to normal, big projects in the real-time payments’ ecosystem look set to recommence with renewed purpose as businesses attempt to make up for lost time.

Real-time cross border

One such area is in cross-border payments, as consumers and corporates will increasingly expect the instant payment experience to be replicated at international level.

“Our customers expect these payments to be done reliably, quickly and for a very reasonable cost with transparency around the rates that are provided,” says Simon Jones, chief customer officer of ClearBank.

Fintechs are providing this type of service using cloud-based technology, allowing them to interrogate the markets quickly and obtain efficient pricing, while also accessing the payment rails required to support real-time settlement.

While traditional banks have the capacity to link different currencies and provide pricing, the two do not link together as well as they may need to, given the siloed nature of such large institutions.

“A lot of fintechs are having to put together correspondent bank networks themselves where you have one providing the market-making prices and other entities providing the payment rails,” Jones says.

These newer players in the market are building real-time correspondent networks to enable these pieces to come together in an efficient way, which is far from straightforward, as they still have to rely on a lot of large banks for the market-making capabilities and individual payment providers in different markets to provide real-time access to the payment schemes in each country.

This will highlight the importance of initiatives like P27, which are enhanced by standardisation frameworks like IS020022. Not only can these facilitate cross-border payments, they also provide the rails for instant mobile payments.

“On the back of that, mobile payment schemes make use of P27, allowing them to make cross-border instant payments as well as domestic,” says Tino Kam, head of transaction banking products at Nordea.

“In the Nordics, we see a lot of developments happening owing to our ability to make mobile instant payments.”

Among these will be in the developments of central banks digital currencies (CBDCs), which have gained prominence in last 12 months, thanks to concern about Facebook’s much-maligned Libra project.

In the years to come there may well be digital versions of all the world’s major currencies – a digital dollar, a digital euro, a digital pound, a digital yen and so on. Whether this will require international interoperability between payment networks or mobile networks remains to be seen.

Either way, this represents the value of initiatives such as P27 to creating a joined-up, standardised model for cross-border, instant payments.

Real-time value

Standardisation for all cross-border payments enables companies to harness the data from all payments made and received to ensure better end-to-end cash management.

This would make processes in accounts payable and accounts receivable more effective and is an example of adding additional value to companies and consumers.

The key to this value will be real-time data, opening up numerous doors for the art of the possible in real-time payments.

“We have recently introduced instant reporting through an API-enabled solution,” says Kam.

“We have obviously done this with corporates and big companies, but also with charities, making sure that they could see incoming funds from donations instantly.”

The charities would then be able to make use of this data to see how much they have collected. This is a simple example where instant reporting will be crucial for companies of all sizes.

The challenge then is to ensure that small businesses have the necessary infrastructure to allow them to make use of this real-time data.

“Primarily the responsibility for this will lie in the treasury management system domain,” Kam says.

“They need to make sure that their capabilities are enhanced or further developed to make use of real-time data.”

Therefore, businesses need to manage real-time risk with real-time data and real-time systems. Increased urgency may have been injected to this in 2020, with the Covid-19 pandemic heightening the need to manage cash positions, understanding cashflow, FX and so on to make sure that understanding of the business’ financial position is as up-to-date as possible.

Real-time fraud monitoring

Added to this is the necessity for real-time monitoring against fraud and other financial crime.

Systems that are truly real-time are able to intercept payments and conduct checks and screenings in a matter of seconds. This will offer a much better user experience, both for those initiating the payment and the recipients.

This points to the need for investment in machine learning or artificial intelligence in screening techniques.

“I think this is well developed in the industry, but as you have transactions on the cloud available in real time, it really does give you a very different user experience, compared to having a batched database process,” says Jones.

While banking systems for monitoring financial crime are already using artificial learning and machine learning processes, it is likely that more and more “sanctioned screening checking and monitoring”, as described by Tino Kam, will use AI, cloud and other technologies to allow greater automation and further enhance straight through processing (STP).

“We are not only trying to improve STP rates but also trying to improve our financial crime processes to ensure that we can use the data in a way that allows us to better track and monitor payments that are suspicious or potentially fraudulent,” Kam says.

This goes hand in hand with the importance of standardisation, ensuring that systems and processes across different banks and companies are aligned so that data is correctly formatted and so on.

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