Meeting the need for speed

Real-time payments systems and infrastructures are being rolled out globally. What impact will they have on financial institutions? How fast is too fast? Daily News at Sibos asked delegates where the trend is heading …

Emmanuel de Bouard, head of cash clearing, Societe Generale global transaction banking

While definitions of real-time payments differ, there is no doubt that 24×7, 365 day a year payments will become the norm around the world. But there are risks in real-time payments for banks in Europe that should be considered.

Europe does not have a real-time clearing system and therefore payments aren’t real time. The information about a payment may be sent in real-time, but the actual funds are not transferred in real time. Therefore the beneficiary of a payment can reuse the funds from a real-time transaction immediately, but the bank will not yet have received those funds. If the initiator’s bank fails before the funds are moved, the beneficiary’s bank faces a loss.

This is not necessarily an issue between large banks but there are thousands of smaller banks, particularly in Europe, to which a guarantee of payment is not always attached. The initiator’s bank could insist that the beneficiary’s bank pre-funds the payment, but this raises issues about the cost and availability of liquidity. If there is a shortage of liquidity in the market, this becomes a major issue.

There are also issues for consumers. In the real-time world, accounts are immediately debited when purchases are made. This may come as a surprise to consumers who are used to being debited at the end of the month when using their credit cards.

Fraud is another potential problem in the real-time payments world. At present, cross-border transfers can be blocked between 24-48 hours and funds recalled if fraud is suspected. In the real-time world, there is no recourse to recall, again opening banks to potential losses due to fraud. One way to mitigate the impact of fraud would be to impose limits on the amount of a real-time transaction. This would reduce the exposure to fraud and also the liquidity requirements for banks.

Given the risks associated with real-time payments, it would be useful to ask exactly what people really want in the payments environment. Merchants are most concerned with obtaining a guarantee of payment and also an indication of the timing of that payment. For them, the credit card system is adequate because it guarantees payment if the transaction is legitimate. In a real-time payment world the beneficiary account has to be immediately credited with the funds, but this is a significant burden for banks, which would need to invest significantly in real-time accounting systems. An alternative solution could be devised whereby the beneficiary receives the information about the transaction but is credited at the end of the day, rather than immediately.

Many of the existing immediate payments services are offered free of charge, but this doesn’t reflect the risk or cost of liquidity associated with such payments. An option would be to impose differential pricing, with non-instant payments attracting a lower fee than immediate payments.

Paula Roels, director, head of institutional cash market management, Emea, Deutsche Bank

Much has been written about how banks can compete on real-time payments during the past 12 months, but much of it needs to be put into proper context. Banks won’t be competing around the ‘real-time payment itself’: that is something that in today’s technologically advanced environment has to be a ‘given’. We’re simply talking about money that is sent from one party to the other being instantly accessible to the recipient as opposed to the standard three day processing delay of, for example, an automated clearing house. The competition will be connected with services associated with accounts and the level of information. In terms of new entrants in the real-time payments space competition will intensify in the areas of user experience, comfort and accessibility.

In terms of value-added services banks can add to their platforms, based on real-time capabilities, a number of services are possible. We’re still very much in the early evolutionary phase here, but one could envisage offering tools such as apps for personal financial planning, reporting and overdraft services, alert functions or messages around certain transactions, or providing specific information related to purchasing motor vehicles (a cumbersome process in most countries) or even notary services when purchasing property. One of the frontrunners in this area is the New Payments Platform in Australia (planned for the beginning of 2017). Its basic infrastructure will support various overlay services, specially tailored services which individual financial institutions may choose to offer their customers.

The main challenge for banks in developing real-time based payments services is the emergence of multiple national real-time payment schemes. Many national initiatives are already under way, including in Spain, the Netherlands, Germany and Belgium. That is maybe not surprising given that about 95 per cent of payments in such countries are purely domestic. At the same time, this development on a national level has come in response to the threat from providers outside the traditional banking sphere. In many cases these aforementioned schemes simply do not have enough in common and especially global and/or regional banks that are active in multiple markets are less able to leverage the investment they have made to support individual schemes. In short, there is an absence of a globally standardised real-time payment scheme.

An additional commercial challenge is perhaps the lack of willingness of consumers to pay for these services. We now live in an age where services related to basic everyday activities are expected to be offered for free. The WhatsApp service is probably the best example.

Dean Henry, director, head of global low-value payments, global transaction services, Bank of America Merrill Lynch

Real-time payments are an inescapable trend in both the consumer and corporate spaces. We welcome the opportunity real-time payments bring, including the opportunity to work with other commercial entities in developing solutions for end-users.

While everyone is of course interested in getting paid faster, in developing real-time payments solutions, it has to be recognised that corporate payment requirements differ from those of consumers. The number one concern for corporate treasurers is reconciling invoices with payments. Appending the correct data to a payment will make the process of reconciliation much easier.

In the retail space, financial institutions are focused on enabling mobile, real-time payments. Consumers increasingly make payments in a digital environment and merchant retailers are integrating payments with programs such as loyalty schemes in order to foster retail sales.

A maturing global trend is the use of mobile numbers as a proxy for bank account or credit card numbers. Every country has a mobile network and consumers are using their phones as a tool on which they expect to carry out a growing number of activities. We see the global growth of mobile payment networks as an opportunity to provide simple and cost effective solutions for high volume, low value payments into the future.

We are investigating whether we can leverage what is happening in the consumer space for the corporate payment space. Is there a possibility to use the real-time payment infrastructures and mobile networks to send payments to small businesses, rather than using ACH and cheque rails? These core products are not going away any time soon, but there is the possibility of opening up more payments options and inevitably large corporations will become more comfortable with such ‘alternative’ payments products as they mature.

Consumers have rapidly adopted real-time payments, without necessarily pondering what makes them possible; they just like the services that are out there. Central banks and financial institutions have to keep up with this real-time world. Clearing and settlement is still done by a series of settlement windows operated by central and local banks. As more and more countries roll out real-time infrastructures, there needs to be cooperation and collaboration between banks and central clearers, particularly as cross-border commerce is growing. There will be an increasing need to ensure interoperability between real-time payments networks in order to facilitate real-time cross-border payments.

Peter Gordon, senior vice-president, payment strategy, FIS

Today financial institutions vary enormously around the globe as to their ability to be competitive in real-time payments. However, many who have begun to modernise their ageing payments systems by implementing open payment frameworks have gained a competitive advantage. This is in contrast to the alternative payment providers that have an edge as they are not encumbered by the legacy environments with which banks must deal. However, over the long term the banks will ultimately lead in real-time payments because as the famous bank robber, Willie Sutton said: “That is where the money is.”

Real-time payments system developments seem to keep most of the financial industry busy these days, both on the bank side as well as on the financial technology company side. With 14 countries running a real-time payments network, 12 in various stages of modernising and an additional 17 countries strategising about building one, it’s hard to find a financial institution that hasn’t thought about the impact of real-time payments on its organisation.

The bottom line is that when the payment infrastructures are modernised in banks to handle the evolving global ISO standardisation, the convergence of retail and wholesale payments to support the global real-time money movement demands that the banks will lead again.

Chris Dunne, market development director, Vocalink

The future of payments belongs to whoever can meet the rapidly changing needs of the consumer. So what do consumers want? Across the globe, the recurring themes are that they want their banking services to be delivered on their mobile and they want things to happen instantly like everything else that happens on their device. They also want their services to be secure; trust is a vital component along with speed.

Additional themes from our research, Next generation of payments, published in September 2015 in the UK are the desire of consumers to have certainty and control. This has come through in the work of Payments UK when it set out its vision for a world-class payment system and it also featured strongly in Moving Money 2025, our recently published collection of essays from industry leading thinkers.

So what does certainty mean for consumers? It means knowing that when a payment is sent or received it is reflected instantly in their account balances. Control then comes from knowing your exact financial position; in our latest research 83 per cent of respondents said they check their balance before making a significant purchase.

There are many ways to deliver a payments service that appears to be instant to the consumer, but in fact delivers a slower service. The best way to deliver genuine immediacy is through real-time payments directly to and from current accounts, rather than through card networks or services that sit on top of the existing payment rails.  The more parties that sit between the payer and payee, the greater the scope for delay.

This is where banks have a significant head start on the fintechs. They have the current account; they also retain a great deal of consumer trust that their security will be safeguarded. This was emphasised in our updated research on consumer attitudes to mobile payments that showed 47 per cent of respondents would be more likely to use a mobile service if it was provided by their bank.

The fintechs have the advantages of agility and a blank sheet of paper; one of the biggest challenges many banks face is to keep their legacy systems maintained and to integrate new services on top of the existing technology stack. This is the opportunity for fintechs, to get out to market with low-cost services that offer a great user experience and that can evolve rapidly to meet changing customer needs.

However this isn’t a winner takes all market. There is a great deal of scope for banks and fintechs to complement each other. The banks are best placed to deliver the instant account to account payment system that will underpin much of the financial innovation coming in the next few years. The fintechs can bui ld services on top of this real-time technology, either in competition with the banks or in collaboration with them. Ultimately this will deliver a far better consumer experience: a vibrantly competitive market of solutions sitting on a solid and secure foundation of real-time account to account payments.