Guest blogger Mark Quigley discusses what’s driving changes to payments in banking.
I needed to write a cheque recently and found myself thinking “How do I do this again!?” Due to my near-total migration to internet and phone banking, what used to be second nature to many people 20 years ago was turning into a bit of a hassle for me:
- Why I am writing out the numbers in word form?
- Why do I need to practice my symmetric line drawing to avoid any possible fraud?
- Where do I even find my cheque book?
Such inconvenience, I thought—in our increasingly digitalised world, lightning-fast delivery of goods and services is not just expected but demanded. We expect to make purchases whenever it suits us, often at a pace that some industries can’t keep up with.
The race to become the main instant payments service provider between banks, fintechs and tech giants has begun.
Convenience is key
To help businesses adapt, countries are adopting real-time payments (RTP) schemes to facilitate real-time and cost-effective payments. These instant payments can be initiated 24/7, 365 days a year, and buyers and sellers receive near-immediate notifications. Once sent they are final and irrevocable. The uptake of instant payments in mature economies such as Ireland and the UK is becoming widespread. Payments systems like Paym in the UK allow customers to send payments by simply knowing a mobile phone number. Fintech rivals are also becoming competitive providers: the cards of Revolut and Monzo are becoming part and parcel of wallets and purses across Europe. They’re even becoming their own payments verbs! Think how regularly you might hear someone say “I’ll Revolut you!” And, with instant messaging giant WhatsApp now successfully trialling their payments platform in India and poised to enter more countries, the tide of instant payments is set to rise.
It’s not just consumers who want instant…
Instant payments are also generating interest among regulators. The Central Bank of Ireland has even convened a newly formed Irish Retail Payments Forum to discuss instant payments solutions and offerings. It is expected that instant payments will expand access to banking services, support economic growth (by increasing the velocity of money through the economy), and break up the duopoly of Visa/Mastercard. Competition authorities see RTP schemes as a way of opening the payments markets to new entrants. Regulatory moves from the EU and UK Competition & Markets Authority such as PSD2 are also ensuring that banks and payments businesses provide application programming interfaces (APIs) to allow third parties to access data and process payments, in an effort to further increase competition. As traditional banking methods decline and the shift to instant payments continues, fintech companies will see payments as a basis for launching new and innovative products.
These instant payments are however less common within the corporate world. Appetites are being whetted, but thresholds like the SEPA limit of €15,000 per individual payment are limiting suitability for smaller transactions. Cash forecasting is also seen as a corporate challenge. With funds arriving into a payee’s account within seconds of being issued, treasurers will no longer have the luxury of a time buffer to decide how best to use the cash they are about to receive.
Benefits still remain unrealised
Despite these challenges, the benefits of maximising real-time and reducing float time (the length of time that money is stuck within a bank’s clearing process) offers numerous advantages. For business, instant payments adoption can facilitate sales and support “just-in-time” supply chains.
The increasing uptake of this once-consumer phenomenon in the business-to-business space does however place enormous pressures on banks to combat fraudulent behaviour. With irrevocable payments being cleared in a matter of seconds, the ability of banks to filter between criminal, fraudulent or sanctioned transactions will be challenged. For banks to manage these new risks inherent in faster payments requires investment in additional security to give clients peace of mind, especially once cross-border instant payments become commonplace.
Another important challenge for banks lies in aligning with corporate enterprise resource planning (ERP) systems. The current batch-processing approach to feedback limits banks to provide corporates with information updates every half hour or so. Instant payments are heightening the need for real-time liquidity management—for businesses and banks alike.
At the same time, banks need to deliver a user-centric platform. We are working side-by-side with a number of banks to create payments hubs as an anchor of modernisation within banks’ legacy payments infrastructures. The main drive is, of course, to enhance consumer convenience, essential for success in instant payments.
Consolidation is the likely flavour of choice
Around the world, companies like SWIFT gpi are rapidly gaining traction with financial institutions, answering the call for greater speed, transparency and tracking of cross-border payments. Analogous to the rise of electronic banking, the global trajectory towards instant payments will not be reversed. The future is not so distant now, so the question is how economic ecosystems adapt. The race to become the main instant payments service provider between banks, fintechs and tech giants has begun. A number of big international players are eyeing up acquisitions with the realisation that scale makes things an awful lot easier within the instant payments market. This is evident when using the “split bill” feature on Revolut or Monzo where you can divide up a restaurant bill with friends and receive the money from everyone in less time than it takes the waiter/waitress to retrieve the card machine (with an amusing GIF too!) However, if one of your friends is on a different instant payments platform, this real-time convenience is lost.
Once regulation places instant payments on a par with Open Banking, individuals and businesses will be enabled to provide trusted third parties access to their accounts to initiate instant payments on their behalf and complete online purchases. This move will cause real disruption to an ecosystem already experiencing innovation battles across a number of sectors.
The instant payments ‘Revolut’-ion is well underway but still has far to go!
Thanks also to my colleague, Peter Jackson, for his insights.