The rapid growth and development over recent years of real-time payments is examined in this article from Imran Ali, payments manager for Europe, Middle-East and Africa (EMEA) at Citi, which reviews specific national schemes from Poland, in the UK, Nigeria and Singapore. The advantages for corporate and retail banks and their customers are examined alongside the future development of these real-time cross-border schemes.
Real-time payments are here and are changing the way that banks, corporates, and consumers alike make payments. Since UK banks launched the Faster Payments Service (FPS) initiative in 2008, which I was involved in designing when working at VocaLink at the time, Nigeria and Poland have also introduced real-time payments services. In addition, Singapore, Australia, Ireland, the US and the Nordics are all currently developing real-time infrastructures.
The emergence of real-time payments brings opportunities as well as technical IT challenges. Its growth aligns well with global online and mobile m-payment take-up, and could indeed be a powerful facilitator for attracting volume to these new payment services. Real-time payments represent a new phase of evolution in the payments industry. Its use domestically will increase and the payments sector could eventually see a new real-time cross-border service emerge, which would be useful for corporate bank customers. Five to ten years from now you should expect a very different domestic and international clearing landscape around the world with those nations that don’t yet have real-time or at least same-day payment and clearing platforms fast catching up.
All real-time, or near real-time, payments systems share common characteristics that differentiate them from traditional clearing. These shared characteristics are:
• 24x7: Payments are sent and received all times of the day, every day of the year.
• Instant payments: Payments sent within seconds.
• Irrevocability: Once payments are sent, they can’t be recalled.
• Certainty: Payments sent to a beneficiary bank - or others in the financial supply chain - are actively acknowledged or rejected, giving certainty to the sender that the payment was/was not successfully received.
• Delayed settlement: Periodic net settlement between participants after the payment has been made.
The countries which have launched real-time payments have built on the above core characteristics, offering varying services and value-added modules. For instance, mobile m-payment services can often use these infrastructures. Remittance or mobile money services in say India, where the national payments platform has recently been overhauled to include identity and verification capabilities opening up financial services to newcomers, are also potential beneficiaries.
The following gives a brief overview of some of the real-time payment platforms that have already been launched, as well as Singapore’s Immediate Payments G3 scheme due to launch in 2014:
• UK Faster Payments Service (FPS): supports transfer of payments instantly, although the beneficiary bank has up to two hours to credit the account. It limits risk in the system by placing a liability ‘cap’ on each bank, and settles three times a day. Last year saw a surge in volumes flow through the service as FPS became the default payment mechanism on UK online banking portals. With almost 100% domestic reach enabled, there is strong focus on growing volume across the service, enhancing its brand, improving the customer experience, and enabling mobile payments. The shared UK mobile m-payments platform is due to launch next year.
• Nigeria’s NIBSS Instant Payment (NIP): supports direct debits, as well as credits. It supports bulk file submission, and is enabled to support the initiation of payments via branch, online banking, mobile, automated teller machine (ATM) and through point-of- sale (POS) terminals, according to information in the ‘Introduction to NIBSS Faster Payments (NFP)’ by Nigeria Inter-Bank Settlement System (NIBSS) Plc, Version: 1, which was published on 26 October 2010. Nigeria’s clearing infrastructure for the future, NIP embodies all the elements a real-time payments infrastructure should have to facilitate growth and innovation.
• Poland’s service, Express Elixir: enables banks to be available for restricted hours in offering real-time payments without the need for them to transform their architecture to 24x7. It also has no concept of ‘indirect agency banks’, restricting payment transfers only to those banks directly connected to the scheme. With no mandatory participation, it is clear that Express Elixir is a slow progression towards real-time payments, allowing the industry to migrate in its own time as market forces allow. Able to support mobile payments, and using an internationally-recognised message format as an exchange standard, it is also future proofed. Simultaneously a local Polish m-payment initiative is also underway although the international reach of this and its ability to assist corporate bank customers will be limited.
• Singapore G3: Singapore will be the next country to launch real-time payments, in 2014. The scheme, called G3, will support credit transfers and direct debits, and settle twice daily. Coming after the launch of multiple real-time infrastructures elsewhere in the world, and re-using the same software as the UK’s FPS, G3 has been able to learn from the lessons of its predecessors.
Other countries, at an earlier stage of development, are evaluating real-time payments seriously. The key drivers for adoption include improvements to existing processing times, upgrades to existing infrastructure, and offering new services such as mobile payments. The presence of real-time payments inevitably has a significant impact on both corporate and retail bank customers.
Real-time payments are facilitating a change in consumer behaviour. According to Citi’s experience, in January 2013 30% more tax payments were made on the 31st, the last day of the self-assessment tax deadline in the UK, than in 2012. Of these payments, 46% were made outside of the hours of 9am to 6pm, showing that consumers are no longer restricted to only making payments during business hours.
Real-time payments enable corporates to improve their proposition to customers by offering services or goods in a quicker timeframe. ‘Consequence payments’ are a category of payment where a particular consequence results when a payment is made. Quicker payments have greater value as they trigger quicker consequences. A prime example is online purchasing of goods. The goods are only released when payment is received, so a real-time payment transaction enables a corporate to dispatch their goods either the same day or the next day, instead of a few days later. Similarly, insurance firms can initiate customer insurance protection with a very late cut-off, with certainty that payment has been received. A UK sole trader could even follow such a model a model when the UK shared mobile m-payment platform launches next year, taking advantage of its peer-to-peer (P2P) payment technology. These benefits become even more powerful when considered against a 24x7 environment. Consumers are increasingly shopping late into the night and expect to purchase goods or make payments at any time of the day.
Although these advantages have also become possible via card payments, real-time payments are cheaper for merchants, allow closer budgetary control for the consumer (as they are made directly from the bank account), and have less risk attached. The integration of online banking and real- time payments is key in enabling consumers to pay for goods from their bank account. Models exist already, such as iDeal in the Netherlands, Sofort in Germany, and the newly launched European Banking Authority (EBA) initiative MyBank. These services are layers over an existing payments infrastructure, looking to extend their capabilities into real-time and the online environment.
Another layer that can be built on real-time payments is mobile. The announcement in January by the UK Payments Council that the UK shared mobile m-payments scheme will now go live in 2014 shows how the UK is moving to supplement FPS clearing with a mobile payments proposition supported by all the largest banks.
Other real-time payments infrastructures already support mobile payments. Being able to make a payment not just at any time of day but from any location can only increase real-time payments volumes. Customers will be able to purchase goods, make tax payments or settle their gas bill on their mobile any day of the week.
There are of course challenges for banks, foremost among them being the overlaying of single real-time payments on to an existing batch processing infrastructure. Back end systems operate in batches for increased efficiency and reduced cost. Processing single payments presents a cost issue and this applies right across the infrastructure, from channel to payment processor, including general ledger, sanctions and anti-money laundering (AML) systems, reporting databases, customer accounts payable/receivable (A/P and A/R) and reconciliation.
There is increased operational overhead also, as 24x7 coverage is required outside of traditional payment operating hours. Although real-time payments are straight-through processing (STP) automated, so there is no repair function, an outage can have serious consequences. Being unavailable for a few minutes can cause several hundred payments to fail and the consequences of any downtime becomes even more serious.
Operating in a 24x7 environment also impacts how banks perform end-of-day batch jobs. With real-time payments flowing uninterrupted banks can no longer afford the luxury of having downtime to process end-of-day runs, which have to be done while still processing payments from customers. This requires banks to run two processing sites in live (known as hot/hot), enabling them to switch from one site to another if downtime on one infrastructure is required.
Once banks have made the transition to a real-time payments infrastructure they can insulate customers from some of the change by offering additional services. These include bulking and debulking of payments so corporates don’t have to convert their infrastructure into a real-time one, or simply faster consumer payment clearing. Banks can also offer businesses reconciliation services providing bulk entries on statements if required.
Momentum for real-time payments is growing and it is likely that parts of the world will make an evolutionary leap in offering instant payments. Countries hampered by existing clearing infrastructures will need to decide whether they should rationalise going forward. Certainly in the UK the case is growing to rationalise three electronic payment (e-payment) clearing systems down to no more than two.
As more countries adopt real-time payments it is only a matter of time before we see the birth of real-time cross-border payments. This is particularly true of instances where banks become members of multiple schemes. To realise such a vision would require a real-time cross-border connection between banks and a clearing and settlement provider managing exposures and liabilities. It would be a natural evolution for a domestic real-time payments clearing provider to promote themselves to a pan-regional level, bringing with them the principles of domestic clearing and settlement to a regional stage.
Corporate clients and consumers, for whom real-time payments is becoming the standard, will no longer see borders as a barrier. They will expect the ability to conduct transactions online or on their mobile and to be able to send money to family or merchants instantly from their account, irrespective of where the beneficiary is. International remittance is possible today, but real-time payments enable banks to offer a standardised service more cheaply than current providers in the market.
A real-time payments cross-border service would be good news, potentially reducing transaction fees. Real-time payments coupled with a 24x7 service window could help improve corporate cash flow, and open up trading opportunities across multiple time zones.
Cross-border Real-time: SEPA
For a cross border service to be successful, banks would of course need to work together to develop common standards and agree pan-regional scheme rules. The single euro payments area (SEPA) has shown that implementing a regional clearing solution can be time-consuming and somewhat torturous. SEPA’s biggest obstacle has been to harmonise domestic schemes into a ‘one size fits all’ scheme.
The lesson to be learned from SEPA is that as new real-time payments schemes launch domestically, regulators and banks should maintain a longer-term international real-time vision - using industry standards and principles where possible. This will facilitate harmonisation at a regional level in years to come. We are already seeing divergent domestic schemes and, rather than build unique schemes, countries should be looking to mirror existing real-time payments services where they can.
As a global bank, Citi is a founding member of the real-time payment services in the UK, Nigeria and also the soon-to-be-launched Singapore scheme. The group also plans to join Express Elixir in Poland in 2013. Looking to the future, Citi is working with clients to lead them into a 24x7 digital economy. We are keen to use our experience to help the payments industry and our customers to understand the opportunities and challenges that real-time payments present.
To summarise, real-time payments are here already and payment models are changing in many countries, where customers are already adapting and benefitting. As mobile and online payment services steadily launch, as layers over a base real-time payments capability, banks and corporates will need to understand how they connect to such services and what their customer proposition is. And likewise, countries launching real-time payments need to ensure that each service meets the needs of its users and aligns with evolving consumer behaviour.