Real-time Settlements - Why the Delay?
A defining characteristic of 21st Century society has been our obsession with speed. Delivering goods, information and services faster has preoccupied businesses of all kinds, giving us exponentially faster Internet services and news updates delivered to our mobile phones.
So it’s hard to see what’s delaying across-the-board adoption of real-time payments settling. It’s widely acknowledged that faster payments are advantageous for all parties involved: banks have greater insight into liquidity movement and corporates have faster access to their funds. The framework is also there – the UK Faster Payments Scheme is in place and the single euro payments area (SEPA) was designed with the adoption of real-time settlement in mind. But existing payments systems generally work as they should, so why change what is not broken? Yet, if real-time settlement benefits everyone, why have UK and European financial organisations been so slow to move in this direction?
Certain myths or perceived barriers to adoption still hold some institutions back. Whether it’s the fear of increased fraud or the cost of making a change – but in reality, the biggest barrier to real-time settlement is reluctance to embrace a different way of working. The old business models built around batch processes need to change. And what better time than now, when the global financial crisis is forcing firms to re-examine every element of their business. The opportunity for banks to offer a better, faster settlement service to their customers – and cut costs at the same time – is there, but only for those ready to try something new and work together with other stakeholder firms.
As payments are settled faster, does the risk of fraud increase? What held true in the past is not necessarily true today. With real-time settlement comes real-time monitoring. What firms gain from a faster network is visibility – insight into everything from high-level summaries of settlements between institutions to the essential exchanges taking place every minute. This data can be made visible to in-house teams, online fraud systems monitoring payment switches, or third parties, like merchants or interchange partners, giving them the chance to identify suspicious and fraudulent activity as it happens. Many existing and legacy fraud prevention systems focus on identifying fraud after it has happened, but a real-time network allows firms to take action immediately, alerting and stopping fraudulent transactions before they go through. In a real-time system the risk of fraud can actually decrease.
The UK Faster Payments Service (FPS) offers real-time and near real-time processing, yet the journey towards mass adoption has been slow. Of those banks that have engaged with the system, many are offering only a reduced service for specific types of payments with transaction limits.
This can be attributed to key stakeholders’ reluctance to change the status quo, but commercial pressures are starting to make their mark. Even though the FPS was largely driven by consumer pressure, corporate clients are waking up to the advantages of greater insight into liquidity management. From a retailer’s point of view, insight into the movement of liquidity should be standard practice. Just as modern tracking systems enable firms to see exactly where their goods are 24 hours a day, the same visibility into the movement of funds should also come as standard. Corporates are stepping up the pressure on banks to provide more information on where their money is and what’s happening to it, which is what the FPS delivers. As one of the key elements of the current financial crisis is limited access to cash-flow and liquidity, banks that embrace the FPS will have a competitive edge.
SEPA is another piece of legislation designed to enhance the way payments are carried out in the eurozone. But like the FPS, progress has been slow. SEPA is intended to bring cheaper, more efficient and faster payments to Europe, with equal fraud prevention measures and straight-through processing (STP), building trust on a pan-European basis. Additionally, the Payments Service Directive (PSD), which will do much for harmonisation across Europe and speed up SEPA progress, is due for transposition into national law in November 2009. This will be the first step to changing the landscape of payments across Europe. To date, a reluctance to engage with this legislation at a high level and the vagaries still present in the documentation have put many firms’ plans for updating payments systems on hold. But this is set to change.
SEPA Credit Transfers (SCTs) have been in place for over a year and direct debits (SDDs) are due to come under the SEPA banner shortly – a change that will have much more than a regulatory impact on the way firms work. The promise of SEPA and the PSD is the chance to reinvent the financial supply chain to a modern and forward-thinking perspective. Systems that move funds in real time are vital to this progression and will in fact be key to the success of the legislation.
Modern payment systems are built with a different architecture than those built even 10 years ago. Making changes to an IT environment used to take many months and vast amounts of money, plus it kept valuable resources from other areas of the business. The difference today is open standards. Proprietary systems, once favoured by IT vendors, have no place in modern architectures. Systems based on open standards and commonalities have drastically cut implementation times. It’s now even possible to install and monitor applications remotely to exploit ‘follow the sun’ support strategies.
However, a complete systems upgrade is still too big a jump for some organisations, especially for firms that have customised system interfaces and functionality over a period of years. It makes sense for these firms to move to real-time settlement incrementally, which is also possible with modern systems. For example, a firm might not need real-time settlement with all of its payments but could see a business advantage in offering this service for one or more channels. In this scenario, a scaled down real-time payment system could be installed next to its existing switch. The legacy system might work tolerably today, but as business processes change and commercial pressures evolve, it’s possible to move more payment types over to the new system – and offer a faster service to customers in the process.
Regulatory pressures might force banks to make some changes to the way they look at payments, but real-time settlement, particularly due to its potential convergence with other online payments channels, actually requires a reappraisal of firms’ business models. Existing systems, processes and approaches to payments are slowly becoming obsolete as key stakeholders ask for more from their banks. Consumers and corporates are demanding the benefits of faster payment reconciliation and visibility into the movement of their funds, and firms that stick with legacy mainframe payment solutions will soon find themselves at a competitive disadvantage.
Mass adoption of real-time settlement will only come with greater interaction between the different stakeholders involved: banks, corporates and solution providers. Innovation comes from the free-flow of ideas and experience. With a closer working relationship, the good ideas behind SEPA, the FPS and real-time settlement can be executed properly, creating a 21st Century payments environment where everyone profits.