Long reads

How banks can leverage real-time payments to stand out against competitors

Madhvi Mavadiya

Madhvi Mavadiya

Head of Content, Finextra

During a Finextra webinar, hosted in association with Bottomline, panellists explored the renewed vigour in addressing issues with legacy payments architecture and how transitioning to SaaS can support financial institutions looking to ‘stake their claim’.

Frédéric Viard, product strategist, instant payments, Bottomline; Judy Bei, managing director, global head of domestic payments and receivables product, Citi; Vijay Anand, head – products, digital payments and payments processing, AP-EEMEA, Mastercard; and Mark B Hartley, head of cards and payments international, Infosys, also discussed how real-time payment processes must be streamlined so that focus can be given to cashflow and revenue services, as well as retaining resilience and fraud prevention.

How pivotal is infrastructure to a bank’s evolution to real-time payments?

Market infrastructure is in a cycle of constant evolution, and real-time payment technology is no different. Financial institutions are now recognising that they must keep up with the pace of change and follow through with major upgrades to manage the ISO20022 standard from inception and ensure they have fully automated and machine-readable end-to-end processes, without any manual processing of payments.

As Viard highlighted, using legacy infrastructure is no longer feasible. Banks must “build new components, use microservices and SaaS technology to cope with instant payments requirements such as 24x7 availability, flexibility, time to market, and speed of processing. There are many operational and infrastructure considerations that need to be considered with instant payments, and it often depends on the marketplace. If the marketplace is mature and fast enough to cover mainstream needs, there is less of an appetite to move to instant payments because the immediate benefit is less obvious.

“However, even mature economies need to anticipate the future, where instantaneity will become the norm. So, moving to instant payments now means preparing the full marketplace to a new paradigm. It is about paving the road to keep the marketplace highly competitive and innovative.”

As an example, for organisations such as private banks, with payments not being their core business or from where they are not deriving the majority of their revenue, they might struggle to justify investments around instant payments; they need to build their business case to understand what could be the value for their customers, but also to consider the risk of not offering propositions in instant payments. The benefits of instant payments are clear, but it still requires to be accepted by all types of banks.

Despite the European Payments Council developing an instant payments scheme based on the Single Euro Payments Area (SEPA) credit transfer in 2017, Euro instant payments made up less than 11% of all Euro credit transfers by volume as of Q421, according to the European Commission. A redefinition of the business case for real-time payments is required; this should consider the pace of change, cost, and differences in regulations country by country.

Viard added that “it’s not only about making payments faster, but also about thinking about the future, how payments will be made, how people will manage and exchange money in a much more instantaneous way.” While the private or corporate banking sector remains hesitant, the retail payments industry recognises that if they do not position themselves as leaders across real-time payments, they will lose market share.

He continued to say that by leveraging instant payments, banks will be equipped “with all the building blocks to build new propositions to build innovation on top of that. It’s a trigger to provide more innovation.” Depending on the profile and the appetite of a financial institution, they will migrate towards new methods to position themselves as leaders, that embrace instant payments as an opportunity and position their business at a different level.

What are the barriers to adoption of real-time payments?

A poll to the audience revealed that 41% see a lack of IT resource and prioritisation with an already busy roadmap as the most significant obstacle to the adoption of instant payments. 14% believe that the cost or hassle of implementing new payment rails can be problematic, with only 6% considering legacy infrastructure as an issue.

Bei agreed that it is “not easy to launch a new payment scheme across multiple countries, and banks’ legacy infrastructure doesn’t help either. Imagine you wanted to update or launch something new. You would have to update 50 systems. That’s a humungous undertaking. And regarding the lack of IT resources and prioritisation, that is a mindset people have, not just in the bank, but in the market too.”

She went on to make a point similar to Viard’s and said that if “clients are asking for ACH, why should banks invest in instant payments where the business case is not strong? It’s fast-growing, but overall, in terms of percentage of the whole economy, as a payment system, it is still small.

“Adoption will take time: for a digital company, a platform that accepts instant payments can offer a competitive advantage over its competitors. However, for traditional companies paying out to vendors, why bother paying out in real-time? For real change, instant payments will have to reach critical mass,” Bei added.

Adoption varies from market to market, and by client segment. Hong Kong has a single system that supports ACH credit payments from Hong Kong SAR-domiciled accounts that can be value dated and processed on the same day. An innovative regulator that is willing to cooperate and provide real-time monitoring has also helped spearhead instant payments in this area.

It can be argued that SEPA has also worked in a similar way, due to this one scheme covering over 30 markets, at a low cost. However, in this case, although it has been increased over time, the transaction limit is now $1 million, much of the volume must go through ACH, and regulators are quite cautious.

On the other hand, these market conditions can also result in countries where the government is pushing for digitalisation across the economy. This is occurring in both Brazil and India and has led to high adoption rates of real-time payments. In Hartley’s view, different banks moving at different speeds depends on the country or the region, and there are “all sorts of shades of grey in between.

“If you’re small, it’s more important to invest in a new and flexible architecture from the get-go. If you’re large, you probably have a legacy system and sufficiently big pockets to address some of the problems. I think the vast majority of banks recognise that there is a need to move forward into the electronic payment space. Otherwise, it is dangerous.”

Picking up on the role of the regulator, Anand explained that “the speed at which instant payments are adopted in different countries varies on how exactly it is being implemented. Success stories like India and Brazil comprise 60% of the entire volume of the industry’s real payments. To reach this point requires industry collaboration, widespread adoption by merchants, and garnering trust to build, which can only be mandated by the government, which is what happened in India and Brazil.”

How can the ROI of real-time payments be measured?

In addition to the widespread adoption of real-time payments, cohesion still needs to be achieved across initiatives such as ISO20022 at a collective pace. Hartley explored how it is now time to “move to an environment where we have true interoperability across the world, and that is going to turn it over to the harmonisation of streams of regulations, approaches to data, privacy, security and so forth.”

He continued: "The return on investment is going to be maintaining your position as a payments provider. We’re seeing some downward pressure on these funds more and more as a utility function, but there is some value in improved insights and actions that can be taken based on the data that is provided.”

Bei agreed and mentioned that “data is a game changer. Banks are sitting on a huge amount of data, and what we lack is the good capability to monetise data and throwing structured data into a user pool in an intelligent way. […] Now if you come down to the level of real-time payments and transactional flows, we would want to leverage data to validate the accounts beforehand and leverage the ISO20022 format to serve many purposes.”

This is a substantial shift in the way that business is done. Shifting the payment channels in this way could mean a different experience is offered to customers. However, the ultimate benefit for banks is that this change will allow them to acquire more customers or reach out to a broader customer base. While the benefits of data being made available are clear, increased innovation and a large number of market peers involved can lead to higher risk. Therefore, compliance with regulation is imperative.

Anand added that “most of the payments are irreversible, so that also adds that element of risk. It is important that payments are compliant with AML/CFT as both have a very important role to play.”

Offering a concluding comment, Viard summarised by saying that “it is very important to focus on the benefits of instant payments because they are a concentrate of everything that is new in the economy: speed, transparency, reachability, security, and availability. Being ready for that combined with being ready for ISO20022 means you are ready for the future, and you are paving the way for innovation that can reposition banking.” 

To find out more, watch the webinar here.

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