What Is Real-Time Payments?
Real-Time payments also known 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 solution 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). “
What is NPP?
The NPP is Australia’s new payments infrastructure that enables businesses and consumers to make Real-Time payments. It will work along with the current online payment methods used in Australia, such as BPAY. However, what truly makes NPP popular is that it allows users to transfer money using a phone number or email address contrary to a bank account number or BSB number.
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.
What are the key drivers of Real-Time Payments?
- Merchants’ expectations: In addition to payment assurance and lower fees for transactions, many small businesses and large retailers are looking for real-time payment to enhance their cash flow management, reduce fraud activity and provide incremental value to their customers.
- Regulatory pressure: Regulators across the globe are leading efforts to accelerate payments. This can benefit consumers and the government, which can efficiently trace activity and help increase the fluidity of the overall economy.
- Consumers’ expectations: Due to rapid technological change, many consumers now expect immediacy of retail payments. 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 their business growth by offering holistic payment solutions spanning the value chain in order to differentiate from Non-Bank players.
- Need for ubiquitous Payments: Industry’s growing demand to modernize legacy payments infrastructure to offer more ubiquitous payment 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 hence customer 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.
- Better cash flow thanks to real-time and hassle-free payments. This is good news for transactions taking place between different Australian time zones
- At the macro level, the introduction of Real-Time Payments offer tangible benefits to a national economy by increasing liquidity and efficiency of the payments system, which in turn will support GDP growth.
- Reach new markets
- Obtain competitive advantage of being providers of holistic payment services
What are the challenges for Real-Time Payments?
- 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.
- 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 an 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 the evolving demands.
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 one 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 are:
- Scheme layer
- Clearing layer
- Settlement layer
Has block chain technology any role to play along with Real-Time Payments?
Blockchain technology promises to facilitate fast, secure, low-cost international payment processing services through the use of encrypted distributed ledgers that provide trusted real-time verification of transactions without the need for intermediaries resulting in more efficient and smooth Real-Time Payments.
What can we expect in the future?
Although Real-Time Payments have been around for some time now, the domain is undergoing rapid transformation. Over the coming years as interest in and adoption of real-time systems grow, we are likely to witness a cascading effect which will increase the demand for cross-border payments in Real-Time.
The future of Real-Time Payments seems quite bright, with a plenty of opportunities for banks to tap into and create new revenue streams.