There was a time, in the payments arena, when the concept of ‘instant’ meant ‘tomorrow’ and that was largely acceptable. Not any more, for as life gets faster, business accelerates and our attention spans shrink, real-time can be faster than the blink of an eye.
With populations growing, markets becoming ever more global and business increasingly complex, the need for a faster payments routine has never been more crucial, needed or appreciated.
The introduction of real-time payments is inevitable and is being driven, in part, by client demand for speed and convenience. Consumers have been given a taste of the real-time experience through point-of-sale debit and credit card transactions, as well as e-commerce purchases – and now businesses are asking for the same swift service.
Faster payments are making old, slow processes redundant and uncompetitive but the industry still lacks the standardisation and collaboration required to support the accelerating growth of global commerce. Cross-border retail sales in Europe alone (to take one example) are expected to reach EUR 40bn by 2018, so it is essential that countries are aligned.
One of the main challenges for real-time cross-border payments is the multitude of systems currently deployed. The success of an instant cross-border payment event relies on these various systems being fully automated, as a minimum requirement and, preferably, synchronised with each other. The overall performance of any real-time payment process – which should involve data transfer, screening, validation, authorisation, posting, clearing, settlement and notification – is driven by the sequencing, pace and effectiveness of the slowest links in the chain.
But there are also regulatory hurdles to overcome with real-time cross-border payments, for obvious reasons. The faster the payment, the less time there is to screen a transaction and many financial institutions are nervous about issues such as anti-money laundering. At the moment, instant payments are, in some cases, restricted to domestic payments, which do not require the same degree of vigilance as international payments. Multi-bank collaboration, however, can go some way towards ensuring the upper hand against criminal activity.
One of the consequences of PSD2’s open account access is that real-time payments may be offered by alternative providers, potentially bypassing the traditional providers – the banks. In fact, innovative technologies and shortened processes well suited to faster, more
transparent and more cost-efficient payments are being developed by new providers such as fintechs.
Technology will undoubtedly provide one of the key drivers for the growth of real-time payments. There are already numerous schemes in progress and some countries have already pursued a path of real-time for domestic payments – including, for example, the UK, US, SEPA, Singapore, Denmark and Australia.
Some have deployed ISO 20022 in their Automated Clearing House (ACH) and Real-Time Gross Settlement (RTGS) systems in order to develop their real-time offering. The adoption of ISO 20022, which has the flexibility to position banks for a new real-time payment infrastructure without implementing a fresh data standard, is seen as a key pillar for improving the speed, efficiency and security of any payment system.
This can help banks and Payment Service Providers to rationalise their internal and external data standards. Others are using enhanced legacy or historical national formats to achieve the same objectives; and some are considering completely redesigning the landscape by adopting distributed ledger technology or blockchain-type technologies.
Clearly, these new technical structures represent the future, and certainly aim to meet client demand. They can also be leveraged by the banks directly to deliver the instant cross-border payment service expected by their customers.
Banks that do not adopt faster cross-border payments risk missing out on a growing sphere of business. Moreover, they will also miss the opportunity to add much-anticipated value to their client relationships.
Despite the implementation challenges they present, real-time payments are here to stay. And market forces will drive their evolution – in an instant.