Long reads

On the cusp of the instant payments era

Scott Hamilton

Scott Hamilton

Contributing Editor, Finextra Research

Faster payments are not new. Instant payments, however, are truly the ‘newest kids on the block’ when it comes to payments, though they look different depending on where you find them. Standardisation, innovation, and regulation are all playing a part in elevating the ‘young upstarts’ of the payment world to leadership status for our new global economy.

This is an excerpt from Future of Payments 2023.

Efforts to speed up payment transactions have been around for a while now, in nearly all major markets across the world. In fact, there has been a consistent drive, albeit one with fits and starts, led by large financial players and their customers and partners in the financial services ecosystem to accelerate and increase the value thresholds/limits for payments of nearly all kinds for decades.

Fintechs have played a pivotal part, in as much of an innovation and partnering role as in trying to disintermediate or supplant those traditional powers in the marketplace. Everybody wants everything faster, and for good reason in our growing, connected, 24x7 society. Why not payments too?

Such speed used to (and still does) come at a higher price for those involved on both sides of the transaction in Real Time Gross Settlement (RTGS) payments – or what most of the world has commonly called wire transfers. In the UK, these travel via the CHAPS system, in the US, via the Fedwire or CHIPS (private large bank gateway exchange) networks.

In both cases, like other RTGS payments in most places, payment and settlement occur in a network serving immediate, safe, secure, highly regulated and typically higher-value transactions with no top-side restrictions except those based on the originator’s and their financial institution’s credit standing and the capacity of the network.

These transactions are final within moments of execution, except when they happen on a weekend. To get your money from even a wire transfer, if sent after the day’s deadline on a Friday, for example, you’d have to wait until Monday (or later perhaps, in case of a holiday), no matter how much you paid to get it executed.

'Faster’ is not enough anymore

So, faster payments solved this problem, and at a lower cost than RTGS options, right? Unfortunately, no. Faster isn’t necessarily real time for many ‘improvements’ on legacy systems or other payment networks like them.

For instance, ‘faster’ might have meant a few years ago execution from end to end in one day instead of the typical two, three, or more days’ processing time for the US ACH network, or faster than one day for that Clearing House’s same day ACH alternative introduced in 2016 – subject to value thresholds at first, and with the ability to debit, and not just credit another participant’s account added a year later.

SEPA and ISO20022 play major roles as instant payments grow

Wherever they operate around the world, each of these separate payment types, not necessarily traveling on individual ‘rails’ but using their own rules, had or has its limitations. But standardisation, whether via now-ongoing transition to the common transaction language and structured data set of ISO20022 being promoted and introduced by banks (and Swift) across all areas of financial services, or through the rules of engagement for regional systems like Single Euro Payments Area (SEPA), as one prominent example is coming.

According to the US Federal Reserve, “ISO20022 messages are vital to instant payments and play an important role in the overall modernization of payment processes. They provide a structured and data-rich common language that is readily exchanged among corporates and banking systems. ISO20022 messages also provide the opportunity for enhanced analytics, which can help organizations offer valuable new levels of payment services to their customers.”

We are indeed now in an era of nearly constant innovation and change, in some cases on multiple levels at the same time. Some countries and regions have forged ahead of others, like the SEPA network offering both same or next day and, increasingly, instant payments (as of 2017) throughout the EU universe, and not necessarily via high-cost, traditional payment rails.

And don’t forget about other parts of Europe like Denmark, Sweden, and other markets, or Australia (2018). Or in parts of Asia, with faster payments platforms in India, China, and Singapore all showing rapid growth in usage and innovations to make that adoption and use easier for participants, according to the US Federal Reserve. These efforts have really gained ground as faster payment systems have addressed the needs of both consumer focused as well as business to business (B2B) transactions.

Speed yes, but 24x7 up-time even more important for many use cases

Now the star of instant payments is rising, and there is clearly a strong appetite for them in the consumer sector and increasingly business circles as well. As Annelinda Koldewe, global head of wholesale banking payments, ING notes, her company has grown its expertise in the field already.

She notes that “instant payments have been the norm in two (of ING’s) home markets, Netherlands and Belgium, for several years.” As for the source of ongoing and emerging demand? “Retail markets are moving more and more to a 24x7 economy. Also, for corporates use cases in insurance and logistics are emerging: with more focus on 24x7 availability than 5-10 seconds execution time.”

It’s an interesting point Koldewe makes regarding a lightning-fast time of execution not being as important as the up-time of the system itself, to support these business cases as well as ecommerce – all requiring “always-on” functionality to achieve their customer experience and efficiency aims. But it may not matter in the long run, as instant payments are for all practical purposes, instant anyway.

Faster means more fraud opportunity

ING, like many other institutions, Koldewe says, “is rolling out Instant payments across its Pan European network.” As they and other financial institutions do this, Matt Cox, director of digital payments and cards at
Nationwide Building Society addresses another reason why this is occurring and sounds a few notes of caution on the risks of the irrevocable nature of instant payments to be considered – along with their rewards – which providers and users of Zelle in the US, for example, likely know a bit about themselves, given skyrocketing fraud rates experienced on the network.

It starts with a bit of history, and a look at how the cards business has evolved is in order, Cox says. “There is a growing drive, from regulators and parts of industry for bank account to account payments to provide a true competitor to cards. Whilst there may be benefits of this to merchants and consumers, there are also risks. Before we go too far, the industry must ensure that equivalent consumer protections are in place, with a clear liability and dispute model. This requires funding to be effective so a commercial model must be established. Most importantly, we must ensure there are equivalent fraud controls and protections in place.”

Cox points out it has been a long road to the present state for the cards business, and those who press for rapid implementation of instant payment solutions would be wise to take a look back at lessons learned from this sector: “Card payments have developed (over) 50-60 years of investment to provide this very scalable solution for consumers. Developing a true competitor through bank account to account payments will take time and careful planning.”

Nationwide’s own card payment fraud cases have dropped substantially, says Cox, as a result of “the investments we have made in Strong Customer Authentication for online shopping […] c. 2000 fewer members each month are victims of fraud through this route. We need to now focus on uplifting the defences in other areas such as account to account payments if they are to be used in the same way by consumers.”

Reconciliation, speed and ease key benefits available

Outside of the concerns of increased fraud that come with operating a new instant payment rail, Yves Longchamp of SEBA Bank sees their main advantages, at least from a bank’s “business perspective,” as their ability to keep both “reconciliation costs and risks to their minimum.”

These benefits should have particular relevance to corporates and other businesses with large quantities of invoices and complex business details to accompany payments. That’s one area where the implementation of ISO20022 as a standard with richer data structure, a central dictionary of terms, and a common set of rules – not just for instant payments, but across payment channels, methods, platforms, and international borders, can bring huge value.

Spain’s Cecabank, a wholesale institution focused on the business market, would agree. They cite both consumer and corporate use cases in their analysis of the instant payments field as it stands now and going forward into the future.

“Undoubtedly, the expansion of instant payments against an account represents a real opportunity to promote the exchange of small payments among individuals who were previously outside the banking system, as they were conducted in cash. It also improves payments mechanisms in business,cparticularly in the electronic realm.”

The Madrid-based wholesale bank shares an example from their own local experience. “In Spain, a mobile payment system between accounts has been highly successful in this regard. Starting with P2P payments and now reaching 23 million users, it is expanding its use cases to include e-commerce.

Therefore, instant payment models against an account are already a reality that should be interoperable as soon as possible to gain scale at the European level. Schemes like R2P or the digital euro can also contribute to accelerating the implementation of this kind of payment.”

Instant payments growth

What would Request to Pay functionality add to the list of benefits for instant payments? It would mean, in simple terms, a simpler and faster way, even than proprietary (and costly) systems or exchanges that have been around for decades, to match payments to invoice details. And it would be vastly cheaper than those proprietary networks.

In such cases, as the Fed points out, “the biller (payee) is able to present invoice details through the…system to their customer (payer) and in turn, the customer is able to easily initiate the responding payment and automatically link it to the relevant invoice. With this feature, corporate payers may be able to automate their payables processing, and billers may be able to automate reconciliation of these faster payments against the related invoices.”

There are already examples of this functionality offered by The Clearing House in the US, and it’s soon to launch in the UK, which points out its flexibility to “settle bills between businesses and organizations as well as among friends.” The flexibility part is important here, says the UK’s Faster Payments group, as it “gives the payer more control by allowing them to either pay in full, in part, decline or even ask the payee for more time.

Additionally, says Deutsche Bank’s Marc Recker, global head of product, institutional cash management, there are other domestic/international interlinking examples in several regions of the globe. Immediate Cross-Border Payments (IXB) will interlink domestic instant payments in EUR and USD.

Other similar cross border payments projects include PayNow/PromptPay linkage for the Singapore dollar (SGD) and Thailand’s Baht (THB) as well as the Nexus project, spearheaded by the Bank for International Settlement (BIS) Innovation Hub. This effort in collaboration with authorities from Singapore, Malaysia, and Europe to connect their payment systems together.

Notwithstanding some well-placed concerns about fraud protection measures required and some not-so-happy lessons learned in this regard in the early days of the instant payments revolution, as well as a lack of standardisation of instant payments systems among various regions of the globe, it’s clear that the time for real-time payments is coming soon – to the degree they’re not already available in your country, or offered by your financial institution.

Multiple 'pluses' will fuel explosion in instant payments

With adoption of consistent regulatory standards, uniform transaction limits and employing common data exchange languages like ISO20022 brings to the table – plus emerging innovations like Request to Pay flexibility – instant payments will surely begin to take over the reins of faster, and more secure transaction functionality from traditional RTGS and Faster Payments rails. Consumers and businesses in numerous sectors, across multiple markets of trade and commerce and many international borders as well, will benefit from 24x7 availability and a richer set of data to enable quicker reconciliation from payee to payor.

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