So much in the modern, high-tech world happens instantaneously; it’s only a matter of time for payments to catch up.
We live in a real-time world where execution speeds for many tasks are measured in seconds, if not milliseconds. Except, that is, when it comes to payments, where it’s still not unusual for transactions to take days to settle.
Now, a wave of instant payments schemes is sweeping the globe, promising to revolutionize the way money is exchanged, and creating new opportunities and challenges for banks and corporate treasuries.
In just the past year, real-time payment (RTP) schemes went live in the US, the EU and Australia. Before 2018 is out, at least eight other markets—Hong Kong, Malaysia, DR Congo, Spain, Portugal, Belgium, Slovenia and the pan-European central bank’s Target Instant Payment System—are expected to follow suit.Throw in existing schemes in the UK, China, India and more than a dozen other countries, and over half the world’s population now has access to real-time payments solutions.
By 2020, Citi estimates, 50 countries with 85% of world GDP will have instant payments. Clearly, momentum is building.
“Banks haven’t come up with something this game-changing in payments for decades,” says Carl Slabicki, director and product line manager of immediate payments at BNY Mellon. “This is the first time we’ve been able to reset the playing field [and] build something new that can present opportunities for the next 10 or 20 years.”
RTP is mostly a nation-by-nation affair. Some schemes are further along than others and serve as models. In a 2017 report, FIS, a banking technology provider, gave India’s scheme its highest rating, while also giving high marks to Denmark, Kenya, Singapore and the UK, among others. But all schemes are less than perfect.
In markets where RTP has been recently introduced, banks have been slow to embrace it. In the US, fewer than a dozen large banks currently offer real-time payments. BNY Mellon, Citi and JPMorgan Chase are among the exceptions.
In Australia, many small and community banks have already linked the country’s hyped New Payments Platform into their mobile apps, but as of press time only two of the “Big Four” banks have done so. The other two, along with major foreign banks like HSBC, say they’re working on it. “It’s like the highway is there, but there are no vehicles for corporations to use on it,” says Arnie Cho, a senior analyst with GlobalData Financial Services in Sydney. The reasons include competition for investment dollars from other technology endeavors and a perceived relative lack of demand from clients.
Existing ACH (automated clearing house) and wire systems aren’t exactly broken, and they’re not going anywhere. Some potentially significant RTP catalysts—most notably enhanced cross-border messaging standards—have not been fully embraced.
“We get a lot of questions about the business case,” says Sandra Horn, senior principal product manager with ACI Worldwide, a Florida-based payments firm. “There’s an investment required, but what’s the return?” Many companies face significant costs converting to RTP.
Citi, which has made global instant payments a key part of its core strategy, is helping some clients “re-engineer their entire treasury process to make the best use” of RTP, says Manish Kohli, Citi’s global head of payments and receivables.
Even so, Erika Baumann, a senior research analyst with the Aite Group, says that banks are understating corporate demand for the service. She estimates that less than 1% of all business-to-business payments globally are currently made in real time, while some surveys show a majority of companies wanting it.
“It’s an industry joke when you talk about who’s winning the race [in instant payments], that the banks are coming in last,” Baumann says. “It’s ironic, because there’s corporate demand out there, but a lot of banks don’t have a strategy.”
Kohli acknowledges instant payments face “some challenges related to reachability.” Even so, he says it’s only a matter of time before “the benefits driven by the emergence of instant payments will drive rapid adoption by banks.”
For corporates, those benefits include enhanced liquidity and transparency, irrevocability of transactions and 24/7 availability. Everyone prefers to get the money they’re owed now, as opposed to waiting several days for a transaction to close. It could be a boon to risk-management efforts.
For banks, it’s a way to build stronger relationships, cut costs and create new sources of fee income. Today, the most common corporate use cases are in the business-to-consumer arena—tax refunds, brokerage and dividend transactions, legal settlements and insurance payouts—where the volumes can generate a return on investment for banks.
Nandan Sheth, US-based head of global debit solutions for First Data Corp., a payments processor, has experienced the benefits personally. After an adjuster reviewed storm damage to his house, “they asked for my debit card number and the funds were in my bank account two minutes later,” he explains. “It’s a powerful way to build loyalty.”
In time, the financial sector should be able to leverage real-time payments to innovate B2B product offerings and pricing.
Many of the potential use cases center on what’s attached to the payment. A key feature of ISO 20022, the global financial messaging standard, is the ability to include richer, more-detailed data with an instant payment. Invoices, confirmations and “request for information” messages can all be sent along the same pipeline, speeding processes and lowering costs.
“It’s about getting more certainty and speed, reducing the capital required for trade, and shipping goods faster,” says Harry Newman, London-based head of EMEA initiatives at SWIFT, the financial messaging and payments cooperative.
The enhanced messaging capabilities open the door to services like “request for payment” (RfP) which allows authorized billers to “pull” payments from a payer. Today, most schemes are limited to “push” payments initiated by the payer. Interest in RfP is growing in Europe and Asia.
The holy grail is cross-border instant payments. The RTP movement has been driven mostly by central banks and their national payment associations, employing different technologies and communications protocols.
ISO 20022 creates a common language for those disparate systems, which should eventually make RTP an efficient and attractive alternative for managing trade finance and global supply-chain payments.
“When you think about all the different payments that happen in a supply chain—a shipment has been received on the dock and payment is due, and one has the ability to move a message along at 11 p.m. on a Friday because it’s all automated—this is the perfect payment type,” ACI’s Horn says.
As things evolve, expect some banks to offer “overlay services”—value-added capabilities layered on top of their RTP systems to generate additional revenues.
Chris Allen, a managing director with Deloitte Consulting, offers the example of a US company needing parts immediately from overseas to repair a jet plane. “You need the parts quickly, and they are regulated. Serial numbers have to be tracked and reconciled,” he explains. “The new schemes that are emerging allow so much more data into the message that [companies] will save weeks in lost time and reduce their risk and regulatory challenges.”
It could take up to a decade for cross-border RTP to become a reality. Nobody cares to make a prediction. “There is not yet the ubiquity of a master plan” that can guide global direction, Baumann says. “Connecting these country schemes and predicting adoption globally is difficult, there are so many challenges.”
Either way, the broader RTP revolution is underway, with enough momentum that banks and corporates alike must decide how faster payments will fit into their strategies.