While cryptocurrency and blockchain garner most of the headlines, a quiet revolution in payments is gathering momentum: the emergence of real-time Request to Pay (RTP) collections from bank accounts. The subject of real-time payments has been written about extensively – this article focuses on lesser known developments in real time collections.
The RTP revolution is about regulators creating open digital markets, merchants reducing the friction and cost of collections, fintechs building new services on top of banking rails and financial institutions figuring out how to maintain the customer relationship. There is a paradigm shift underway as banking systems and processes migrate from batch to real-time processing.
This article describes what is happening, but more importantly what the changes may mean for regulators, merchants, marketplaces, fintechs and banks. It is also a call to action, because RTP schemes will fall flat if they fail to meet the detailed needs of payment system users. Citi’s goal is to enable progress of RTP as an efficient digital method of payment by highlighting critical success factors and sharing best practices from around the world.
How RTP works
RTP is a collective term for schemes that trigger payments from bank accounts. In contrast with direct debits, RTPs are real-time and suitable for single or ad hoc payments. They do not require a static upfront mandate from the payer and are not subject to extended rights of revocation. RTP may also be thought of as an upgrade of electronic bill presentment & payment (EBPP), enabling the payer to approve and execute the requested payment in real time. RTP schemes work in broadly similar ways. This is the high-level process for a consumer-to-business (C2B) RTP:
- Checkout: A consumer shops on a merchant’s website and chooses to pay through their bank.
- RTP initiation: The merchant initiates an RTP to the consumer’s bank, sending details of the purchase.
- Authentication: The consumer authenticates with their bank through a web or mobile channel.
- Approval: The consumer is presented with details of the payment then approves the transaction. Confirmation: The merchant receives assurance from the payer’s bank that the payment is on the way, enabling the release of goods or services.
- Payment: The consumer’s bank sends the payment to the merchant’s bank through a clearing system, ideally in real time.
When implementing an RTP scheme, countries can choose between two models:
- Centralised clearing system — a standardized national infrastructure that provides connectivity to the banks, e.g. UPI in India.
- Open banking — each participating bank is accessible through Application Programming Interfaces (APIs), e.g. PSD2 in Europe.
These models have their pros and cons — the central clearing system is harmonized but may be inflexible for future developments. The open banking model is potentially more extensible to add new services, but runs the risk of fragmentation unless standards are imposed. Each RTP system should choose the degree to which it is centralized and standardized for efficiency and harmonization without harming the potential for innovation and being open for new players to participate. The options are not mutually exclusive — it is likely that centralized systems and open banking will operate side by side in several markets.
In the payments space there is the contest between physical and digital instruments. Within digital payments there is a battle for supremacy between payment instruments. While credit card, debit card and electronic wallet based payments are expected to grow strongly, RTP has a number of benefits that could result in mass adoption.
- Reach: RTP provides real-time access to bank accounts, reaching a larger population than cards or wallets. In Asia, for example, 1.8 billion people have bank accounts but not credit cards. Low cost: RTP may result in a step change in merchant costs, potentially moving to a model in which fees are measured in ‘cents’ rather than ‘percents’. New RTP providers may see payments as a data business rather than a direct revenue opportunity.
- Risk and Controls: RTP may reduce fraud and chargebacks because the consumer authenticates with their bank and approves each transaction. A reduction in payment decline rates could improve customer experience.
- Reconciliation: information is captured along with the payment transaction ensuring a perfect match between payment and purchase. Rich information is facilitated by adoption of ISO 20022 messaging standards.
- Real-time settlement: when RTP schemes are built on real-time payment rails, the merchant receives funds instantly rather than waiting for two or more days.
- Tokenization: a powerful feature of RTP in some countries is that payments can be initiated through an email address or phone number; i.e. banking details are not obtained from the consumer. This makes customer registration easier, may facilitate consumer adoption, reduces merchant pain points with Payment Card Industry Data Security Standards (PCI DSS) and reduces the risk of personal data breaches.
- Reduction in late B2B payments: businesses in many countries suffer from late payments – an efficient RTP process may help them get paid quicker and reduce Days Sales Outstanding (DSO).
- Cashless (or ‘less cash’) society: a real-time mechanism to debit bank accounts is a powerful infrastructural capability with the potential to drive further reductions in cash and cheque usage. RTP protocols may also empower machine to machine payments in the Internet of Things (IoT).
As well as being a potentially exciting C2B and B2B collection method for merchants, RTP is significant as a base infrastructure for fintechs to build on top of. For example, digital wallets become more useful if movements between the wallet and bank account are instant, low cost and frictionless. Wallets that are currently linked through cards can be expected to connect directly to bank accounts as a funding source.
RTP gaps to promise
While RTP shows great promise, there are a number of concerns from merchants around the practical utility of the payment instrument. The following issues will need to be addressed for RTP to gain consumer and merchant acceptance. Whether RTP exceeds or undershoots expectations is in the hands of regulators, banks, merchants, marketplaces and fintechs.
- Strong customer authentication (SCA): customer experience is an overriding consideration in the digital world and merchants have concerns about users being forced through two-factor authentication requirements for every transaction. The most painful experience would be for a user to first log into their bank and then have to go through additional two-factor authentication to release the payment. Merchants seek a frictionless, risk based approach that enables smooth checkout and minimizes abandoned carts.
- Mobile Experience: mobile commerce is a fast growing segment of ecommerce that is particularly sensitive to the checkout experience given the small screen size and variable internet connection speeds. RTP needs to be optimized for mobile commerce through integration with banking mobile apps, fingerprint or One Time Password (OTP) solutions.
- Recurring payments: related to the issue of SCA is the ability for RTP to process recurring payments like monthly subscriptions, which can be fixed or variable amounts. Merchants are looking for a seamless customer experience and risk based approach, with only the first transaction subject to SCA.
- Confirmation: RTP schemes must provide merchants with an unequivocal confirmation for each successful payment so that they can release goods or services in the expectation of being paid. An acknowledgement by the bank that they have received the RTP is not sufficient.
- Authorization/earmarking: in several merchant use cases card authorizations serve a useful purpose, e.g. in the travel segment and sharing economy where a service is booked but the final payment amount is unknown. When RTP is delivered through the open banking model there is potential to check the customer’s account balance, but this does not fulfill the purpose of earmarking or holding funds in cases where the actual collection will take place later.
- Credit: RTP may be used to debit a bank account with an overdraft/line of credit attached, but this may not be the preferred method for consumers to finance purchases. Merchants are interested in the maximum available purchasing power delivered to the checkout, which is comprised of available bank balances plus available credit.
- Loyalty: In the current paradigm merchants are not content that their collections fees are used to fund loyalty with third party organizations through the medium of card rewards. In the new direct to bank world loyalty will be provided by merchants to encourage take up of new payment methods, and the merchants will seek to keep that loyalty within their own ecosystem.
- Purchase insurance: Existing card schemes have embedded protection for consumers that are not inherent in RTP. This will be an area where banks and/ or fintechs may need to offer an unbundled service that is separately billed to the consumer.
- Chargebacks/disputes: Consumers need to be confident that they are protected when they don’t receive the goods/service that they have paid for. Card schemes have well developed mechanisms for chargebacks that will have to be replaced by new procedures in the RTP world.
- Point of Sale (POS): RTP has been built with retail ecommerce in mind, with less consideration of how it will apply at the physical POS. While ecommerce is growing fast, POS is still 20-30 times larger in terms of volume. Wallet providers are likely to adopt RTP as a funding method for consumer wallets that can be used at POS and there may be greater take up of light touch methods like Quick Response (QR) codes to accept RTP transactions at the POS.
- Business to business (B2B): Retail ecommerce values are dwarfed by B2B ecommerce, which is 4-5 times larger. Many businesses have reconciliation issues collecting from other businesses and suffer from late payments. It is challenging to get businesses to accept Direct Debits because the payer wants control. RTP has great potential in B2B, but schemes will need to adapt to commercial realities, like higher payment limits (e.g. UPI in India is currently limited to INR 100k, or around USD 1,500), multiple corporate signers and integration with electronic invoicing processes.
- Multi-currency: With few exceptions, RTP schemes only process local currency transactions. Existing card schemes support a merchant in one country collecting from a payer in another country, albeit at retail rather than wholesale foreign exchange rates. With the growth in cross border ecommerce, market participants will need to build solutions to eliminate foreign exchange risk (e.g. through a guaranteed FX rates program) and settle RTP collections with merchants in their currency of choice.
- Bank readiness: Banks are built on batch processing and ‘store and forward’ messaging. Banks have to make significant investments to upgrade general ledgers, payment, credit and fraud systems to connect to real-time RTP schemes.
- Unbanked populations: RTP schemes work with bank accounts and do not in themselves address the issue of financial inclusion. India has shown with Aadhaar how identity is the first step in addressing this issue. There is the potential to extend RTP schemes to enable tokenized collections from all types of payment account, including cards and non-bank wallets. This list of RTP gaps and challenges may seem daunting, but do not be deceived – there is an inexorable trend towards merchants having cost efficient, real-time access to bank accounts and this list is actually a roadmap of opportunity for forward thinking fintechs, banks and technology companies.
While revolutionary, RTP is part of larger trends that will change the payment space beyond recognition RTP schemes are revolutionary, but they should be considered as part of larger digital and business model transformations in payments, financial services and the global economy.
- Hyper-connectivity: The denizens of the digital world are platforms that connect through multiple API connections to take on new forms and capabilities. Ultimately all banks will open APIs for consumer and corporate banking. The development of RTP as an instrument is driven by regulators with specific aims, so it is limited in scope – there is nothing stopping merchants and banks from connecting to each other through bilateral API connections to overcome these limitations.
- Real-time banking: Low value and high value clearing systems will move 24/7 and this will change existing concepts like ‘end of day’ and ‘cut off times’. When domestic clearing systems force banks to upgrade their systems to process in real time, they will then be ready to connect internationally through real-time networks.
- Open competition: Competition from non-bank entities — regulated or not — is going to be a feature of life. These Over the Top (OTT) providers will seek to replicate the success seen in the telecoms space.
- Customer relationships: Whether we look into telecoms, banking or the world of FMCG brands the battleground is, ‘who has the customer digital relationship?’ New players may see payments as a means to establish a data relationship with a customer rather than a separate line of business. These developments mark a shift from batch processing to real-time processing which follow developments in other parts of the economy. Ecommerce is global, data rich and real-time: it is only natural that the banking systems adapt to this new reality.