Like it or not, it’s now totally impossible to have a meaningful conversation about global payments systems without making heavy reference to the world of real-time payments. Regulators, fintechs and financial institutions have all spent the better part of the last five years scrambling to better understand, plan and implement these systems – and they’re making considerable progress.
More than 20 markets across the globe have already developed their own instant payment infrastructures, with 12 more domestic systems expected to go live by 2020. Why the big push for implementation? Market participants say that real-time payments can provide enourmous opportunity and benefits for all stakeholders involved in the global payments ecosystem, and will drastically reduce friction for businesses and consumers alike.
Yet as with the rapid uptake of any other payments trend, there have been several loud critics dragging their feet and wondering aloud if the notion of real-time payments is actually as brilliant as banks and techies make it out to be.
So, are real-time payments overrated? Before delving into the potential pros and cons of real-time payments, it’s worth pinning a finger on precisely what financial institutions are referring to when they’re giving the corporate sales pitch for real-time payments systems.
Understanding real-time payments
Real-time payment networks go by many names – from the UK’s Faster Payments Service and Italy’s Jiffy, to India’s Immediate Payment Service and Australia’s New Payments Platform. Yet at their respective cores, all these systems are similar data messaging systems that enable instant financial communications to be sent between debtors, creditors and financial institutions in a common language.
Message types range from credit transfers and requests for payment, to remittance advice, payment aknolwedgements and more general requests for information – but unlike batch ACH messages, each real-time payment message moves instantly alongside its cash sum and can be sent and received 24 hours a day, 365 days a year.
While individual financial institutions are able to develop their own instant payment systems, these networks are typically industry-led and centrally maintained by a larger group of market participants. For example, America’s RTP Network was created and is facilitated by The Clearing House, which is a banking consortium co-owned by a number of large commercial FI incumbents.
Smaller banks or corporates will typically join these centrally controlled networks via a private connection, VPN or third-party service provider – and using an established real-time payments network, transfers can be initiated and completed in just a few seconds. According to researchers at Mastercard, not only is that more convenient for network stakeholders, but it’s also cheaper.
The average cheque costs about $2.79 to process for 10 transactions per capita, versus just $1.95 for real-time payments. Studies also indicate real-time transaction costs tend to decrease as a system matures. For example, since the launch of UK’s Faster Payment Service in 2008, the cost of a real-time transaction has shrunk from 14p per transaction to just 2p per transaction.
That cash savings ultimately has big implications for business, too.
Around 63% of corporates say their organisation maintains some sort of cash contingency in order to cover the amount of time it takes to receive payments. By drastically reducing payment costs and the amount of time it takes to get those payments in, corporates are able to unleash trapped working capital and reinvest it in growing their business. That added liquidity is also a crucial lifeline and revenue lever for cash-strapped businesses, as it supports functions like last-minute payroll services, tax payments, disaster payments and more.
But freeing up these huge volumes of cash isn’t just great for corporates. The slow speed of existing payments systems means there are often considerable sums of money locked in the system and thus unavailable for use – and by speeding up transactions, financial institutions effectively mitigate the need for cash floats. This in turn speeds up the overall cash speed of an economy and increases financial inclusion by making financial services more accessible and simplifying the budgeting process for ordinary users.
Financial institutions should also theoretically receive a decent revenue uplift by joining a real-time payments network, because net interest income on lending products and cross-sell opportunities should theoretically unlock sizable growth potential. Likewise, instant payments represent an easy way for retail banks to slash overheads because they reduce branch footfall and headcount because entire transaction process is automated.
But there’s also the value of data to consider, here.
With the help of digitalised supply chains, real-time payments networks empower businesses to collect and dissect transaction data instantly as that information rolls in. This gives treasurers the ability to analyse data and develop financial insights in real-time based on incoming transaction data – and because the vast majority of current instant payment infrastructures are built around ISO 20022 standards, corporates receive more information than ever before.
Each transaction is broken down by account balance and payment status on an intra-day and end-of-day level, which should help teams slash the amount of time and effort they spend investigating exceptions of checking up on payment statuses. As a result, treasury teams are armed with an influx of new information, are able to unlock working capital and are subsequently empowered to take a more strategic role within their respective organisations – all thanks to participation in a real-time payments network.
Barriers to adoption
Real-time payments systems go hand-in-hand with such a wide range of benefits that it can be difficult to understand why there are any sceptics whatsoever. On those grounds alone, it’s fair to argue that real-time payments are not particularly overrated. Yet it’s worth pointing out that global uptake has been relatively sluggish to date, and that’s because there are several key barriers preventing mass adoption.
According to Level Research’s 2019 Real-Time Payments Report, the biggest drawback of real-time payments is cost. Developing an adequate real-time payments infrastructure can be incredibly costly, and even the ongoing costs associated with use of a third-party service provider or a major banking institution in order to connect with an existing network are enough to stand in the way of adoption.
System incompatibility and difficulties implementing real-time payments capability also pose a major obstacle – regardless of institution size.
For example, larger financial institutions across many key markets are engrossed in complex hierarchies and complicated systems that make it difficult to integrate an additional payments network. Likewise, the diverse mix of vendors used by smaller banks inhibits these institutions from attempting to redevelop otherwise complicated client networks by deploying a totally new system that not all clients will be fitted to engage with.
That’s why adoption will continue to be slow, and the creation of additional networks across new markets will take years. Government participation in some major economies has been particularly sluggish. For example, while America’s privately operated real-time payments network has been in operation since 2017, the US Federal Reserve has only just announced plans to launch its own competing infrastructure in 2023 or 2024.
That’s amazing news for smaller banks operating in the US, as it will enable them to access real-time payments without paying a larger sums to The Clearing House. That being said, five years is an incredibly long time in the global payments ecosystem, and so financial institutions will be struggling to find affordable and practical ways of facilitating instant payments for clients without engaging existing networks or third-party service providers.
Despite this lag in adoption, there’s a certain inevitability surrounding real-time payments. The net benefits for businesses, banks and consumers are difficult to ignore, while barriers to entry will inherently continue to dissipate as resource and demand catches up with advances in technology.
At this point, it looks like real-time payments have quite a ways to go in terms of revolutionising global commerce – but after weighing the pros and cons, it’s clear that real-time payments are certainly not overrated.