Ubiquitous Real-Time Payments – 24x7x365 days

Overview

What Is Real-Time Payments?

‘Real-Time Payments’ as it’s named clearly means “paying or receiving payments in Real-Time*”

Real-Time* means within few seconds anytime – 24/7, 365 days

Real-Time payments also know as “Immediate Payments” or “Instant Payments” have been dubbed as the “New Cash” of this era of digital payments as it works at least as fast as cash (if not faster than cash).

According to the ERPB, Real-Time payments are defined as –

 “An electronic retail payment solutions available 24/7/365 and resulting in the immediate or close-to-immediate interbank clearing of the transaction and crediting of the payee’s account with confirmation to the payer (within seconds of payment initiation). This is irrespective of the underlying payment instrument used (credit transfer, direct debit or payment card) and of the underlying arrangements for clearing (whether bilateral interbank clearing or clearing via infrastructures) and settlement (e.g. with guarantees or in real time) that make this possible.”

Why Real-Time payments?

Real-Time payments are set to drive the most significant transformation in the global payments landscape since the introduction of today’s electronic payment mechanisms.

In the digital era, it is incomprehensible why e-payments should take longer than e-mails or Real-Time messages/ SMS, live movie streaming or Instagram. There is definite growing demand for immediacy of retail payments transactions and delaying things would be denying customers of their needs and expectations.

What are the key drivers of Real-Time Payments?

  • Customer’s need for overlay services – To meet the Customer’s growing demand for immediacy of retail payments Customers expect to pay for and receive their purchases as fast as possible. Suppliers, on the other hand, wish to have the certainty to be paid as soon as they release their goods and services.
  • Need for banks to remain competitive – Real-Time payments will help banks to not just stay competitive by improving the transaction velocity, reducing fraud risks in the transaction processing but also boost its business growth by offering holistic payments solutions spanning the value chain in order to differentiate from Non-Bank Players.
  • Regulators need for encouraging competition and digitalization – Regulators and central authorities top agenda is to promote fair competition, Anti-Money Laundering, customer protection, and improving clearing & settlement mechanisms and digitalization of the economy.
  • Need for ubiquitous Payments – Industry’s growing demand to modernize legacy payments infrastructure across countries to offer more ubiquitous payments instruments.
  • Non-bank players need for customer acquisition – There will be a level field in a post PSD2 world and Non-Bank players want to enter into this space and use Real-Time Payments as a potent tool to drive significant market customer growth.

What are the main benefits of Real-Time Payments?

  • Dramatically improves the transaction velocity, overall efficiency and therefore customer’s satisfaction.
  • Reduces fraud risk in the transaction processing by reducing transfer time.
  • Creates new revenue sources and business growth by offering holistic payments solutions.
  • Reduces transaction, treatment and settlement costs and nearly zero cost of cash management, handling and reconciliation for merchants.
  • Reach new markets
  • Obtain competitive advantage of being providers of holistic payment services

What are the challenges for Real-Time Payments?

  • Real-Time Payments currently does not have a proven business case – there is uncertainty on if customers would be willing to pay premium for the service?
  • Banks would face investment costs (both one-off & ongoing maintenance) as a key challenge – depending upon the complexity of the implementation with the existing systems.
  • Implementation would be challenge especially when banks would like to integrate it with its existing infrastructure/systems and implement in parts.
  • How will banks handle AML and KYC requirements in an Real-Time environment?
  • Interoperability could be a key challenge where different regions may operate with different schemes.

Is there Regulatory framework or set standards for Real-Time Payments?

ISO 20022 is emerging as a dominant International standard for Real-Time Payments. It has been around for a decade and has matured sufficiently to be adopted more broadly. It is currently accepted as a set standard by many countries including India, South Africa, Japan, Singapore, Switzerland and Australia, Canada, the United Kingdom, and New Zealand.

In the US – the Federal Reserve is making strides to adopt ISO® 20022.

The Federal Reserve Banks (Fed) and TCH will coordinate their respective adoption of ISO 20022 payment messages for domestic and cross-border Fedwire® Funds Service and CHIPS® payments.

What is ISO 20022?

ISO 20022 is a international, harmonized set of XML messaging standards across major financial services domains (Cash, Securities, Trade, Card and Foreign Exchange) based on a shared data dictionary and business process model. It has emerged as an enabler of a single, common “language” for global financial communications that can assist organizations in responding to evolving demands.

What’s the current state of Real-Time Payments Landscape, current deployments?

Real-Time payments are set to drive the most significant transformation in the global payments landscape since the introduction of today’s electronic payment mechanisms.

There are currently 25 countries (including UK, Poland, Sweden, Switzerland, Denmark, Czech Republic, Iceland, India, China, Japan), which are already live with Real-Time Payments, and another 17 are in planning phase (like Canada, Finland, Turkey, Singapore, Australia, and Eurozone countries).

What are the types of use cases for Real-Time Payments?

There are four principal use cases:

  • P2P (Person-to-Person): Like – Real-Time money transfer of funds between consumers to instead of cash.
  • P2B (Person-to-Business): Like – Real-Time eCommerce or bill payments for utility bills – electricity, rent, gas, other payments for for services like – electrician, cleaner etc.
  • B2P (Business-to-Person): Like – Real-Time payout of salaries, pensions, insurance claims, etc.
  • B2B (Business-to-Business): Like – Paying taxes or fines/penalties in Real-Time or simply one company paying for certain services from other company. (eg printing brochures)

What sort of investments is needed to launch Real Time scheme?

According to some experts the investment required may go up to USD 5 million but the actual amount may vary from an organization to another, depending on the level of existing payment infrastructure and systems and the amount of time and efforts needed to integrate them with the existing systems – it could also be as low as only USD 500,000/-

Define Real-Time Payments in the banking ecosystem

According to the European Central Bank (ECB) in order to preserve the ecosystem from fragmentation and leverage the harmonization and integration achieved with previous initiatives, the Real-Time Payment ecosystem should be divided in three main layers.

These three layers are the

  • Scheme layer (end user scheme and banking scheme layers)
  • Clearing layer
  • Settlement layer

Has block chain technology any role to play along with Real-Time Payments?

Yes, experts believe that block chain technology is a perfect companion for Real-Time Payments when used in the clearing and settlement layers.