Gareth Lodge, Senior Analyst – Banking, Celent
Real-time payments is more than just speeding up clearing cycles though, and has profound implications for a bank and its IT architecture. In this white paper, Gareth Lodge, Senior Analyst – Banking, Celent highlights key trends in real-time payments.
In our definition, real-time payments refer to retail payments that move between accounts at different organizations (and, therefore, precluding closed-loop systems) and where the recipient receives and can use the value instantly, and the sender has confirmation of the status of the transaction.
Such a simple sentence, but so many nuances, and so many challenges in actually delivering that For example, by retail payments, we mean those that are low in value rather than defined by the purpose or participants of the payment. In a number of markets, there is an assumption that the systems are purely for person-to-person transactions, such as the oft quoted (but, rarely and actually done) splitting of bills for a meal. Yet, in the UK for example, in the Faster Payments system, corporates can pay other suppliers, and have a daily aggregate limit of £100,000. Other systems, such as SPEI in Mexico, have no limits at all. Therefore, we define retail as much as “not wholesale” as anything else. RTGS (Real Time Gross Settlement Systems) systems continue to have an important role, but, we believe, for increasingly high values. Many RTGS systems today have surprisingly low average values. CHAPS, the UK RTGS system, for example, have average values around £10,000, whereas European legislation considers a high value to be typically above €50,000.
One important thing to note is the real-time notification. Both the sender and receiver need to know that the transaction is complete, and, in the majority of cases, the receiver has the value from that point. Note that this is not the same as settlement taking place. Whilst there are exceptions to every rule, in many cases, settlement in real-time systems takes place at a later time. There are some very practical reasons for this. For example, real-time systems are generally designed to operate “24/7”, every day of the year – but most RTGS systems are bank run. As a result, Monday to Friday 7 am – 3.30 pm are the typical operating hours. As a result, a multitude of solutions have been found, to suit market practice and requirements. Poland and Sweden have sophisticated shadow accounting systems, and delegated authority for the management of settlement accounts. The UK and Singapore have pre-set settlement windows, but with rules allowing the trigger to additional settlements to prevent imbalances. One interesting thing to note is that, at the time of writing, is in proposing a market first, with the RTGS system also working “24/7”. This makes sense on paper to an extent, but has numerous, technical challenges associated with it.
There are many myths surrounding real-time payments. Strangely, considering the volume of myths, one of the first to be addressed and corrected, is a belief that there are only a handful of systems globally, thus implying that this is something banks and banking communities need to consider only in the future. Certainly, there have been some very public examples, such as Faster Payments in the UK, and G3 in Singapore. Yet the reality is that there are far more countries that already have such systems, or that have committed to building such solutions.
Real-time payments is about far more than payments
For example, real-time systems typically operate on single messages, and operate 24/7, yet most banks in non-real-time countries operate batch systems and rely on off-peak hours for maintenance. Early systems typically utilized the 8583 card standard to re-use parts of the cards value chain, but there are challenges in using that format.
For example, in Europe the new IBAN numbers that are required often exceed the 16 characters allowed. This is certainly is the case in Poland, for example. Additionally, with payment cycles measured in seconds, the timestamp field is beginning to be considered as too small to include the increasingly levels of precision required. In some cases, 8583 has been adapted – after all, few standards exist in the real world without some adaptation. But there comes a point where a standard is no longer standard enough for long-term use. As a result, ISO20022 is becoming the default format, because of the flexibility of the underlying XML message format. For countries that are still using heritage message formats, this will require significant changes across the value chain. A good case in point is Canada. Real-time payments are being put on hold whilst the industry plans a move to adopt 20022 first.
Another obvious challenge is availability, it still seems to surprise a number of banks about how many systems are required in the process – all of which in theory no longer have any downtime (and of course, real-time, themselves). The corollary to this is that traditional customer support hours will also need to change. As customers seek to take advantage of the extended availability, they will expect to resolve any issues that arise at that same time (and speed) as well.
Some questions fall somewhere between a myth and a worry. The key question for many banks is what will be the impact on other payment types. Will it, as feared in the USA, cannibalize their wire volumes, and therefore wire revenues? Inevitably, there is no simple answer, and, certainly, no universal answer. The answer varies from country to country because the payment systems in each country that it will compete with differ.
Platform for Growth
After the talk of competitors, the realization of the cost of potential investments required and the potential impact on existing revenue, it’s important that we point out that it’s not all bad news. It is true that in many markets, adoption of real-time payments has been mandated. Here, the benefit is in the future. Payment systems are created once in a lifetime on this scale, and so the benefits ought to be measured over the long term. For example, debit cards are the overnight success that took nearly three decades to happen. It’s therefore important to think of the opportunities as well, and to envision what this enables. One feature of the proposed Australian system is the view that the real-time payment system should be the platform on which innovative new offerings could be built.
Consumers are increasingly used to “anytime, anywhere”, particularly with mobile shaping their experiences.
Systems in other countries are showing how that might work. Zapp (UK) is seeking to effectively build an alternative to the card system, by allowing ways for a consumer to initiate payments directly from their bank account. The model has also been designed to try to reward all participants in the system. That is, rather than the merchants effectively paying the banks, both banks and merchants share the value. Both the merchant and the consumer see the transaction in real-time.
For a very small merchant who may wait days for their settlement, this has a direct, positive impact on their cash flow. The IMPS system in India puts electronic payments into the hands of millions of consumers. It works on any phone, and on any network. It’s designed to be account-to-account, and it’s very simple for merchants to set themselves up. At its most basic, they have to register for the scheme, and publish their mobile phone number and ID on their webpage. In theory at least, small merchants could be up and running within minutes.
Read the complete PoV for detailed insights on Real-time payments.