Real-time immediate payments: the new reality

Banks are putting in place payment mechanisms that can support straight-through processing (STP) between different systems. These mechanisms have the capability to be real-time or near real-time, responsive to change, cost-efficient, and scalable for future upgrades.

The Case for Real-Time Immediate Payments

Technological advancement has created opportunities for non-banks to enter certain areas in payments where banks have often not played a role. Consider the payment value chain, which can be broadly divided into five phases: pre-transaction, authorisation, clearing, settlement and post- transaction. Non-banks have increased their presence in all phases of the payment value chain except the settlement phase, which is still core to banks’ activity.

A prime example is PayPal, where a person can store credit card information and other details by opening an account. Each time the person wants to transfer money or carry out an e-commerce transaction, they can just do so using their PayPal account and password, without keying in credit card details. There is also no need to go a bank website for initiating a payment; PayPal completes the authorisation and settlement offline for the customer.

Another example is proximity payment, like the recently-launched Apple Pay. This service lets Apple devices wirelessly communicate with point-of-sale (POS) systems using near field communication (NFC), a dedicated chip that stores encrypted payment information (known as the secure element), and Apple’s Touch ID and Passbook.

Global payment trends show that alternative payments are going to account for 59% of all transaction methods in 2017 up from 43% in 2012.

However, while the use of alternative payments is on the rise, they also have several shortcomings. Although they are simple to use and have fund verification, they are expensive and payment settlement can take several days. In addition, since accounts are funded by account payment or through automated clearing house (ACH), this payment method relies on traditional payment networks to operate.

Card payments are quicker and have positive fund verification, but are also costly and businesses are hindered by government regulations. ACH payments are inexpensive and scalable, but ACH networks lack instant fund verification and settlement can take up to three days, increasing the risk of non-payments for merchants and other billers.

This builds the case for real-time immediate payments, where customers have direct control over their money. Billers, consumers and businesses pay directly from their accounts. This payment method is inexpensive, quick, secure and has instant positive fund verification. It helps retailers and billers reduce their interchange costs, and also helps banks reclaim their direct relationships with customers.

Banks vs Non-banks

Banks have the historical advantage in tackling this new competition from non-banks. They just need to innovate with customers’ changing needs.

Among the factors where banks score over non-banks are the following:

• Trust: Customers believe banks are the safest places for their money.
• Reach: Banks have a vast network and a wide range of products to meet customers’ requirements.
• Knowledge of customers: Banks have a vast amount of data about their customers. They are well placed to anticipate their behaviour and know their likes and dislikes. This places banks at an advantage over non-banks in predicting the needs of their customers and offering customised products.

Coupled with these positives, banks need to offer speed that is real-time or near real-time. Secondly, they should be available 24/7 with service that can be used by customers whenever they want it.

These are the primary reasons that prompted central banks and decision makers at other big banks to redraw their strategy and plan innovations in these areas of payments. It was recognised that there had been no major innovation in the payments business in recent times, with traditional payment instruments such as cheque, draft, credit card and debit card still dominant. They have their own traditional business base but are not equipped to tackle the speed of payment services that non-banks provide. Thus the idea arose of a new real-time immediate payment service that is fast, reliable and operates 24/7 each and every day. This instrument aims to initially cater to retail business and should be scalable to support to any future payments needs.

The Importance of Real Time Immediate Payments

Banks are trying to build various features in real time immediate payment systems to tackle the competition from non-banks in different areas such as person-to-person (P2P), person-to-business (P2B), business-to-person (B2P) and business-to-business (B2B) transactions. These services are also fast, secure and round-the-clock.

Among the features are:

• P2P payments: Consumers can pay and transact via online or phone banking 24/7 within seconds. This aims to respond to competition in the e-commerce space.
• P2B payments: Consumers can use the service for bills, tax and other payments.
• Mobile payments: Consumers can pay using mobile. Mobile payment is among the fastest growing payment methods and real-time immediate payments intend to provide this service to tackle competition from non-banks.
• B2P payments: Companies can use the service to pay temporary workers and service providers.
• B2B payments: Businesses can use this service to send money to other businesses.

Additional benefits for consumers, banks and businesses:

• Consumers can perform real-time payments to purchase from businesses. Where issues arise, refunds can be credited back into their accounts quickly. Consumers can also complete emergency fund transfers anytime and issue international remittances as well.
• Banks can offer trusted solutions to retail and corporate customers, using gateways such as mobile devices for payments. This gives them an edge over non-banks in efforts to attract more customers to use their service.
• Businesses can use real-time payments for functions like payroll disbursement and bill payments. Real-time immediate payments can equip businesses, especially utility companies, with mobile payment capabilities combined with electronic billing and real-time payments. A single platform can be provided to customers for viewing bills and authorising each payment. There can be other features such as immediate payment rejection notifications, better cash forecasting and speedy disbursement of funds, which help businesses manage their liquidity positions in the entire financial supply chain efficiently.

Real-Time Immediate Payments

Real time immediate payments enable an interbank account-to-account payment, which is posted and confirmed to the originating bank within one minute (so the payee receives and can use the value instantly and the payer has confirmation of the transaction’s status). There is a variation with frequency of settlement though, which can be in real-time or in batches throughout the day.

The origin of real-time immediate payments can be traced back to 2006 when immediate payment infrastructures were rolled out in Mexico and South Africa. Today, the evolution of internet and web technology means the world is connected and operates 24/7. Payment technology also has evolved from overnight batch to real-time. In order to capitalise on this new technology, the payments industry must innovate to offer service that is incredibly fast, reliable and very secure.

The various steps involved in the immediate payments process are as follows:

•  Balance check at the originating bank.
•  Send payment.
•  Validate and credit account at the receiving bank.
•  Notification to the beneficiary.
•  Account postings at the receiving bank.
•  Update the status to the originator.

At a time when banks face increasing competition from newer market entrants, the advantage that immediate payments have provided cannot be over emphasised. According to a recent study by Fundtech, 20 countries are set to institute such schemes over the next 10 years, and 50 more over the next two decades. Opportunities provided by this payment mechanism are huge, as can be seen from the adoption by consumers in the countries where they have been implemented. Banks and technology players should collaborate, learn from previous rollout experiences and make it a success.

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