A combination of legislation, governmental pressure, consumer behaviour, technical capability and a drive to reduce costs has created a set of conditions that has resulted in a wider and more holistic adoption of the Immediate Payments approach over the last five years.
In many countries the core Immediate Payment environment exists and is live: RTGS systems have been implemented, new rails deployed and banking systems upgraded to support instant or near instant electronic payments to be made. To date, the principle focus of many of these systems has been peer to peer type payments. This is hardly surprising. Many markets deploying the technology were looking to offer a convenient mechanism for rapid payment of low value transactions and reduce dependency on cash. In others, consumer pressure and a resultant political will challenged the concept of the traditional multi-day clearing period. In the EU, the ECB sees SEPA Immediate Payments as vehicle to support its drive to challenge the duopoly and “anti-competitive” charges of the leading US owned card schemes.
Whatever the motivator, the result is a major proportion of the world’s population now resides in countries where Immediate Payments is, or is becoming, a standard mechanism. The question many are asking is where do we go from here. In ten years’ time we’ll be able to say with authority (ok, hindsight) where it goes from here, but just now it seems the technology and its potential will be exploited on the following areas:
The peer to peer deployment of Immediate Payments has created growing consumer familiarity with, and trust of, the technology. The progression of the use of Immediate Payments at the point of sale is now happening and will evolve rapidly. In some countries the use of contactless has already driven a change in behaviour, though in the coming years QR codes are likely to bring real change as retailers adopt the technology, delivering a more fluid and seamless experience for the consumer. In addition, legislation in some quarters will force change; In September 2020, the European Union announced its strategy for an EU Retail Payments Strategy with Immediate Payments at its core. Whilst there are many elements of the strategy that will take time and negotiation to deliver, it serves as clear intent of a desire to change the way retail payments are made within one of the world’s largest economies.
Open banking provides the greatest opportunity for fundamental changes in the way transactions are processed at the point of sale. In the absence of this, it is possible that the contactless use of debit cards continues to prevail, with the real time capability relying solely on RTGS systems. Open banking, probably linked to the use of QR codes, will challenge the status quo. Retailers will be able to form alliances that reduce the cost of processing electronic transactions and banks who have not traditionally been acquiring institutions will be able to deliver new, innovative products.
With a few exceptions (including SCT Inst, Singapore/Malaysia linking PayNow and Duit-Now) Immediate Payment systems are contained within national boundaries. The obvious evolution is for neighbouring countries with strong trade links (e.g. Singapore and Malaysia) to link their systems to support cross-border trade. SWIFT, as one would expect, is heavily engaged in this space. Its GPI programme (whether in response to Ripple or not) saw rapid adoption by member banks. ISO20022 has facilitated SWIFT’s strategy – in the absence of the standard trying to pull a ubiquitous service together would have been frighteningly difficult. In 2021 SWIFT Go was launched in the low value payments space. Whether this becomes the de facto standard in the industry longer term is yet to be seen, but it points toward a change in attitude around payments and remittances. If the will exists, and the networks and technology support the end to end process, there is every chance that this service could reach the point of sale and challenge the international card schemes at the most fundamental level.
At its launch, The Clearing House (in the US) focussed on the business to business sector for its Real Time Payments initiative. The service has now grown to include P2P (Paypal’s Venmo supports the use of TCH and Zelle can now be routed and settled through RTP) as well as a number of other use cases. Relative to many other national deployments though, RTP has been a slow burner. Cost, complexity of on-boarding to the service and the level of influence/control afforded to TCH’s owners (all major FI’s) have been floated as reasons, and indeed are believed to have driven the Federal Reserve to announce the launch of its own service Fed Now for 2023. What can’t be doubted though is that Immediate Payments will have a major impact on the business to business space. Though Request to Pay has been dismissed by some as irrelevant in a transaction where payment terms often extend out to 30 days, the capacity exists for the use of the extended data capability of ISO20022 to deliver innovative solutions to corporates using the payment process to drive far greater business intelligence and improved customer service; additionally, the pure process of Immediate Payment allows treasury departments the potential to more efficiently manage cash flow.
Immediate Payments (along with ISO 20022 and Open Banking) is creating a significant amount of rich real-time data. Organisations will have to equip themselves not only to manage the new information flows, but do it in a way that is strategic and highly structured. Treating data as a strategic asset, and organising around a single holistic vision and approach is going to be crucial. Not only to ensure that the new interfaces and flows don’t simply add to the existing spaghetti inside many banks, but also to position organisations to leverage data in such a way that it supports improved customer service, new product development, analytics, reporting and marketing. It should also be noted that the increased number of services and products along with the overall growth of sophistication and complexity of the environment is already leading to a demand for an equivalent level of regulatory reporting, which is likely to become increasingly real time. This growth in scale, sophistication and use of data will force a deep re-think on the data strategies of many institutions.
There is no doubt that nature of Immediate Payments increases the risk for individual account holders. The amounts involved in some systems could be considered material to some companies, and though the mechanisms often exist to unpick fraudulent activity, the time taken to resolve a problem could create existential issues for SME’s. Equally, the immediacy of data should allow banks to be in a position to spot malevolent behaviour more quickly and address it in short order. Open Banking, with services such as Proof of Payee, will offer some protection; however It is likely that most FI’s will need to improve their Fraud solutions, many of which are as legacy as the core payment engines they interface to. The role of AI is likely to be critical here. Near real time may no longer be effective enough and rules cannot be changed in anything like the available time window. Machine learning is a step towards the answer, but AI is how the necessary change will be delivered.
The reality for the payments industry is that Immediate Payments will increase in use, importance and application. In tandem with Open Banking, it has the potential to change the way payments are made across all sectors from the simplest P2P transaction through to the most sophisticated international corporate payment. One other element that should not be dismissed when assessing the likelihood of change is the way the pandemic has altered attitudes to payment and business operation. Technologies that were peripheral (e.g. QR codes) are now in every day use, and the use of cash is seen by some to be unpalatable. The threat to the card schemes is obvious (and to an extent remittance solution providers) and indeed they are reacting accordingly. The real issue though is who the winners will be. The potential winners are consumers, retailers and those financial institutions with the wherewithal and the technology to adapt and deliver innovation to their users. The losers are obvious by exception.