Peter Caiazzi, Senior Vice President of Product Development, TAS Group
Customer expectations are driving the instant payments demand, and technological advances are ready to meet them. So why do many banks seem reluctant in adopting Instant Payments?
In assessing their readiness, banks are finding several hurdles including the inability of legacy systems to encompass instant payments structures; the high costs and downtimes necessary to overhaul their existing payments infrastructure, the incapability of in-house anti-money laundering (AML) and anti-fraud solutions of performing verifications in real-time on high volumes of transactions, potential conflicts in regulations across borders, and impacts on intraday liquidity.
Out with the old, in with the new
Over the past decade banks have invested significantly in adapting existing systems to the SEPA framework. Their legacy systems were originally developed when no one could imagine that real-time clearing and settlement would replace end-of-day batch settlement. Further aggravating the challenge, patches and add-ons to expand and extend these systems have resulted in a silo effect over time. Modernization is needed in order to implement instant payment capabilities and create the flexibility necessary to prepare for the evolution brought about by the digitalization of banking processes but “rip and replace” is too risky and cost prohibitive for most financial institutions.
Although a payment hub may offer the most flexibility for future expansion and technological developments, the related large investment plus time-to-market concerns puts it out of consideration. A more feasible approach, especially for small to midsize banks, is modular overlays to enhance legacy systems. By adding an instant payment gateway, implementations are less costly, less disruptive to workflow and provide faster time to market.
Even with a less disruptive modular approach, implementing instant payments brings an inherent set of unique challenges that must be addressed. Processes that previously served customers during traditional banking hours must be available 24/7/365. This applies to both IT systems operations and stakeholder support. The front-end applications like P2P, mobile and online banking will likely require only minor changes, while message-based payment processing will cause more significant changes especially to batch based back-end support systems.
The Gateway – a layered approach
Zero/low latency is key in the definition and implementation of an instant payments solution. When implementing the instant payments gateway on top of a bank legacy system, different methods can be used – such as web services or SOAP/REST API – allowing the entire orchestration and processing of a payment to be completed within the 10 seconds timeframe fulfilling the European Payments Council (EPC) requirement.
Traditionally, the legacy systems in use by banks are unavailable for a certain time each day, which creates issues in accomplishing the mandatory 24/7/365 availability. An Instant Payments Gateway solves this problem by using ‘mirror accounts’ – to process payments immediately during this time when legacy systems are off-line. Once online and available again, the instant payments gateway synchs all transactions with the bank’s legacy applications.
Top options to consider are an ad hoc/customized approach or the implementation of package of modules that add instant payment functionality to legacy systems from a larger payments hub solution. This allows for modernization by phasing out old infrastructure as budget and resources become available.
Fast tracking fraud protection
Fraud prevention is an increasing challenge in our digital age, and instant payments raises even more concerns. Although most systems do have AML and fraud protection solutions in place already, financial institutions are expressing concerns about their capability to deal with instant payments. Will the software in place properly manage prioritization of instant payments? Can AML compliance be achieved as funds are moving faster? Can thorough enough verifications be performed in real-time to reduce potential risks? What scalability issues may arise as instant payment transaction volumes increase?
Instant payments do not necessarily imply instant fraud, though. Banks need not go it alone, nor rely solely on their IT systems to manage fraud prevention with instant payments. In the UK, an early adopter of “Immediate payments” (aka instant payments), the Digital Policy Alliance has done extensive research into real-time payment fraud. The alliance members, consisting of academics, public administration, and corporations involved in the fintech sector, increased the effectiveness of fraud detection by 10% to 70% through data sharing between banks, even within the confines of data protection laws. Multi-bank collaboration also made the identification of “money mules” easier to flag for money laundering investigations.
Blurring lines and blending schemes
Several countries are in the process of or have already instituted their own schemes to manage the flow of instant payments domestically. However, online retail sales across European borders is forecasted to reach €40 billion by 2018, with an expected growth rate of 11% in five years, according to a 2015 research from Forrester. In light of this, aligning instant payments schemes between countries is a necessity.
For the time being, there is no inter-operability between the various existing IP schemes. The European Banking Authority (EBA) scheme will be the first truly European IP scheme, initially only accessible via SiaNet, although as volumes rise, more network service providers will almost certainly want to be part of the game, too. Other clearing and settlement firms are also considering a launch of their own pan-European instant payments schemes.
Using an instant payments gateway gives banks another benefit – the flexibility to incorporate new domestic and pan-European schemes, as soon as they become available or whenever the bank is ready.
Instant Liquidity for Instant Payments
Consolidated liquidity management practices of banks will be significantly impacted by instant payments. Bank treasurers must find a way to control and manage liquidity for pre-funded instant payment accounts in a round-the-clock environment.
To allow a pan-European settlement of payments in real time, the Eurosystem is taking two steps. First, a new ancillary system procedure, known as ASI 6 Real-time, operating in the present Target2 operational hours will become available in November 2017. Second, a dedicated TARGET Instant Payments Settlement (TIPS) service is being designed to guarantee 24/7/365 operations, with a launch expected no sooner than November 2018.
With both steps in place, bank treasurers will have the proper tools to timely fund and defund instant the pre-funded payment accounts ensuring dedicated liquidity covers the needs of bank customers, avoiding the cost of blocking excess liquidity in central bank accounts. This ability will be more relevant once the new TIPS is in place, particularly to cover overnight and weekend pre-funding.
Adopting a specialised solution in liquidity management will help treasurers monitor liquidity variations during current cut-offs managed through ACH-related services and forecast the optimal amount of required liquidity for instant payments through the statistical analysis of historical cash consumption as well as identification of timely defined patterns.
Despite these challenges, banks that do not adopt instant payment capabilities risk losing out on adding value and increasing their relevance through expanded offerings to consumers, merchants, corporates and public administrations. In addition to increased market liquidity, customer satisfaction and loyalty, instant payment allows banks to lead again as payment service providers and creates opportunities for new services.
On 8 March 2017 TAS Group is hosting a webinar titled “Revolution in payments and opportunities for new services” where multiple subjects, including the implementation of Instant Payments, will be discussed. For more information, or to register for the webinar, click here