New Payments Ecosystem of Real-Time Payments

In the UK, faster payments are well established, and we have seen new innovations as well as new businesses being built since May 2008. In Singapore, which went live in 2014 with its Fast and Secure Transfers (FAST) scheme, we are starting to see similar innovations. And we can expect similar seismic shifts in payments innovation for years to come, as Instant Payment schemes in Europe and Real-Time Payments in the US go live, ubiquity increases and real-time payments become the new normal.

Whatever name you call them by, preparing your business to operate in this New Payments Ecosystem of real-time payments has considerations and costs implications beyond just connecting to the new schemes.

So why should banks be investing to ready themselves for real-time? There is plenty of evidence of customer benefits when we look at retail banking and its consumer audience; however the business case for real-time corporate payments is just as strong.

1. Grow your business

At the launch of UK Faster Payments, it was predicted that over 70% of CHAPS (RTGS) volumes would migrate to the service by 2018. There was some concern that the rise of real-time payments on new instant payment rails would cannibalize banks’ traditional Real-Time Gross Settlement (RTGS) business. Current data shows that only 5% of global payments experts now believe that faster payments will eat into traditional wire transfers.

The UK is a case in point; Faster Payments didn’t kill RTGS, it reduced the usage of cash and cheque instruments. Last year’s Annual Summary of Payment Statistics from Payments UK did show a reasonable increase in Faster Payments volumes from 2015 (up 14%), but also a 4% increase for CHAPS and a 2% increase for BACS. In fact, Payments UK predicts that there will be 48.7 million CHAPS payments made in 2025, up from the 37.5 million processed in 2015.

Cash is a slow and costly process, so the global rise in digital payments (forecast to hit $2.2tn in 2020) is no surprise. Visa actually offered $10,000 to winning US businesses to help them with their drive to cashlessness. The shift to digital payments is driven by numerous factors, but increased speed is a key part of the trend.

It’s not purely about how fast the payment arrives: The certainty of authorization, confirmation and clearing associated with real-time payments provides improved certainty for a bank’s own liquidity. Forward-thinking banks are considering how to turn that certainty into value-added services for their customers. On the other side of the certainty equation, the ability to send payments at the last possible second is also a value-add for corporate customers. Knowing the exact arrival dates for real-time payments means that corporate customers don’t have to schedule payments to arrive days in advance, and can keep their money in their own accounts for longer.

Alongside the new offerings, based on improved visibility of clearing and settlement trajectories, we are also witnessing the convergence of corporate and retail banking; increased transaction value limits on real-time payment rails mean that banks can leverage least-cost routing of transactions. The cost per transaction for real-time payments is lower than for RTGS. This benefit can be passed on to the customer, but also offers the customer the choice of transaction type to meet their preferred level of service.

Plus, real-time payments are based on a messaging standard that offers richer data: ISO 20022. This drives improved efficiency and innovation within a bank’s own operations, and the ability to analyze data to create tailored solutions for larger corporate customers.

Improved real-time services aren’t just for the largest corporate customers. Good banks talk about the small and medium enterprise (SME) market segment becoming a priority, while still focusing their energy on large corporates; not surprising given the revenues that come from this sector. As a result, most banks ‘slough off’ disjointed services designed for corporates or consumers onto SMEs. However, great banks realize that the SME market also represents a major revenue opportunity, which would benefit from better products. Market leaders are creating relevant solutions tailored to the real needs of SMEs. Look beyond the pure movement of money in real-time at a reduced cost, and consider the value-add that can be layered on for SMEs.

In the medium-term, real-time presents opportunities for payments that require increased flexibility, availability, and immediacy of funds. Same-day ACH already provides big improvements for business payments, but true real-time will accelerate business value recognition by SMEs that micro-manage their cash flow. Use cases include B2B wholesale cash on delivery, immediate insurance claim disbursements, instant supplier payments to enable faster delivery of consumer goods, capture of supplier discounts, and instant remuneration to temporary or freelance workers. Each of these provides the key to unlocking working capital from supply chains and support SMEs to achieve their growth plans. In the UK, 54% of SMEs say experiencing cash flow problems is their biggest obstacle to business growth. Banks that can alleviate some of the issues through improved real-time services can drive loyalty and satisfaction with their fast-growing customers.

One clear use case worth expanding upon is instant supplier payments. Technology retailers often wait for the consumer’s payment to clear, or to take expensive card payments, before placing their order and sending payment to the wholesaler for fulfilment. With real-time payments, they can request the customer’s order, receive payment and send their payment to the wholesaler on the same day. This flow ensures there is no impact on the merchant’s cash flow, plus it offers an improved customer experience to the consumer and positions the merchant to solicit discounts from their wholesaler for instant payment terms.

ACH will continue to dominate for recurring payments over the next couple of years, but the ability to offer enhanced cash management as a function of real-time payments will become a key differentiator. Furthermore, it is expected that Request for Payment (RfP) being used by utility companies will not only open new business opportunities for them, but also precipitate a shift away from Direct Debit.

Financial Institutions that are ready for real-time payments “on day one” will realize competitive advantage and win over the competition.

2. Minimize risk and costs

Real-time payments mean that everything in your bank needs to run faster. The biggest operational challenge for a corporate bank in the rapidly evolving New Payments Ecosystem is how to minimize risk and reduce costs, whilst taking advantage of the new opportunities for growth through transformation. Instant payments are about so much more than immediate clearing and settlement. From a bank’s own point of view, real-time payments enable better cash management, improved reconciliation and a reduction in the costs and risks associated with physical money. Real-time liquidity managementwithin the bank is an important piece of the real-time puzzle. Banks must take steps to ensure they are not exposed by the real-time flow of cash. This is increasingly important in countries with high transaction value limits such as the UK, which will increase its individual transaction value limit to £20 million for Faster Payments in January 2018.

However, in an era where there is increasing focus on compliance, managing your own operations in real-time and meeting your mandates presents a challenge.

Banks need to upgrade their automated processes to look at the business of the customer, and to determine whether the payment is fraudulent. This decision-making process cannot hinder the real-time service-level agreement (SLA). Alongside fraud prevention, there is a critical need for improved sanctions screening, with more fuzzy logic, to spot Special Designated Nationals. Banks need to perform due diligence on payment initiators and recipients in line with country-specific regulatory restrictions for anti-money laundering (AML) and counter-terrorism financing checks. The irrevocable nature of real-time payments means that certainty of the recipient is of utmost importance. To achieve this requires a central database, managed at the country level, to ensure the payment beneficiary is correct.

3. Kick start your digital transformation

RTGS rails operate in domestic ‘business hours.’ But in today’s global digital economy, even small business customers may operate across multiple time zones. The concept of business hours has become obsolete, so value-added services need to be real-time, and available all the time. 49% of payments using the UK Faster Payments system are made outside of ‘business hours.’ Real-time payments are accessible 24 x 7 x 365 across all channels and devices and creating a true real-time bank is about more than instant payments.

It’s not enough to focus purely on achieving real-time across your operations and services. Banks need to broaden their thinking to move beyond real-time payments as a siloed project. They must connect it with a wider digital transformation strategy. Real-time solutions need to be developed that take advantage of market developments beyond the immediate opportunity.

Access to account information, market information, alerts and alternative payments all come into play when considering the modernization of legacy systems to meet real-time demands. A solution that is prepared for Open APIs, and open banking more broadly, is a logical step when considering a digital transformation strategy. Banks choosing to pave the way with reliable real-time solutions will be the leaders--and the big winners in the New Payments Ecosystem.

Embrace real-time, and you stand to increase revenues through product offerings related to increased speed and remittance information. The rich additional data available through real-time payments can be combined with cutting-edge data analytics to identify opportunities for the cross-sell of financing products and reconciliation add-ons.

Differentiation and speed-to-market with new enhanced real-time offerings (not just instant payments) are critical to seize this opportunity to increase market share.

#SleepAtNightability Considerations

With real-time payments, the operational reliability of systems becomes a mission-critical utility of your proposition. Tolerance for any loss of availability is not acceptable, and the solution needs to be true 24x7x365. And in a true real-time environment there is zero planned downtime, and you start to see the need for a payments foundation that is highly available, scalable and reliable.

Good banks look for functionally sound IT solutions. Great banks go a step further by demanding excellence in their non-functional requirements (NFRs) as well. They understand that security, scalability, availability and reliability in this area underpins their real-time proposition.