General consumers and businesses have embraced the “always connected and available” digital world. While the speed, convenience and low cost one enjoys in digital commerce is no longer noteworthy; the payments industry has not kept pace. Finally, all that is changing. In the last decade, the momentum behind “Immediate Payments” has picked up across the globe. The single country/domestic immediate payment schemes are being adopted at a rate of 1-2 countries per year; and adoption has reached an early majority stage of over 35 systems globally. Additionally, even the much more complex multi-country/multi-currency immediate payment schemes are starting to develop.
Domestic Immediate Payments
It is no wonder that domestic immediate payments schemes are the primary focus right now. The volume of domestic payments still dwarfs cross-border flows by a large margin. The conceptual framework (often phrased as “real-time ACH”) is easy to understand. The societal goals of reducing costs and friction imposed by the use of cash and check are domestic in nature.
The first immediate payment schemes were launched in Asia—namely Korea and Japan—and focused on the speed of clearing. Since those early beginnings, the concept of immediate payments has evolved from just the speed of authorisation and clearing to encompass several other common elements (See: Table A). At the same time, other features of immediate payment schemes are continuing to evolve, such as the ability to handle various payment instruments, or transfer funds using email or phone (Table B).
Common Elements of Immediate Payment Schemes:
24x7x365 is standard
15 sec from submission to final confirmation. No returns, no charge-backs
Availability of funds to the recipient
Notification in minutes, availability in hours with the goal of eventually driving it to seconds
ISO20022 standard. The latest ISO versions provide capability for almost unlimited information potential
Most schemes have elected to place ceiling limits on the value that can be transferred in a single transaction. This limits the risk to the bank and to the system, but at a cost of excluding top end of B2B and B2C transactions. UK has now raised the limit 10 fold (from £10K to £100K) expanding the usefulness well beyond P2P and C2B cases.
The majority of countries have adopted pricing on the order of $.25 to $2.00 – trending towards the low end of the scale. In fact, the Business Case for US assumed the average cost to customer of $.27
Aspects of Immediate Payment Schemes that Continue to Evolve:
Push credits are standard, but other variations (Direct Debits, Request For Debit) are in the mix as well
Ability to transfer to an e-mail address or phone number, which require those directories to be available.
Whereas earlier efforts focused on interbank reachability, the newer efforts focus on being available and desirable to the widest segment of the population and businesses
Multiple models have been adopted: Net Settlement (with optional Collateralization component), pre-funded in CB funds and most recently Real Time Settlement has been proposed by Australia.
Cross-Border (and Cross-Currency) Immediate Payments
Cross-border payments represent the fastest growing segment of the payment market, with some of the highest margins. Aite Group estimates that there were US$553.9 billion in global remittances made in 2014, and expects that figure to grow to US$622.4 billion in 2016iii. And since there is no shortage of challenges in cross-border transfers—including high costs, slow and uncertain processing times, government regulation, and a lack of a common message standard—it is no wonder that cross-border payments have become a hot-bed of innovation across multiple dimensions. This includes:
Process Innovations: Banks are leveraging their global network to position their account transfer capabilities to be closer to real-time. One such step is to provide CASH FX rates, thus making same-day, cross-border payments possible within the bank’s network. Coupled with immediate payments infrastructure in a country (e.g. Faster Payments in the U.K.), reach/ubiquity is expanded to all the banks served by the scheme, while preserving reasonable costs and time parameters.
Product/Business Innovations: Established providers are expanding their offerings. For example, FRB is considering expanding its current suite of FedGlobal® international payment service offerings to address market needs for predictable fees, exchange rates and timing of cross-border payments. And while average costs per transfer have dropped to around 8%, the leaders in the industry (e.g. Xoom) show costs at 50% lower while providing excellent customer service.
Technology Innovations: The most radical innovations being tried now are virtual (aka crypto) currencies and digital ledgers. The most famous of them is bitcoin – which aims to disrupt not just payments but the whole idea of what money means. Specifically to payments, these providers aim to provide “Transfers not in 5 days but in 5 seconds; not for $8 for $100, but $1.”
Naturally, it is a combination of all of these innovations, blended in various proportions and permutations that are being put in place and tested in the market. For example, Ripple combined the decentralised ledger concepts of the Blockchain with a new business model for provision of competitive FX liquidity and the process model of “country gateway” banks already used in international ACH implementations to deliver real-time settlement for US/EU corridor.
Kamal Quadir, CEO of bCASH said, “Mobile Money is a global phenomenon, but it is a very local implementation. The same can be said of immediate payments. We are now witnessing a once-in-a-generation paradigm shift, where country after country is investing in the infrastructure to remove the friction imposed by the legacy payment solutions and to drive a cashless and paperless economy. Alongside these core objectives, newer initiatives (e.g. NPP in Australia) are enabling the evolution of future capabilities—from new data to new flows to new customer solutions—and further innovation.
At the same time, we are seeing innovators test and refine various models to bring cost and service levels of cross-currency money transfers in line with their domestic counterparts.
For banks, the time to act is now. Even in the case of a domestic bank in a country that has not yet adopted immediate payments, future investment decisions should be informed by the fact that in the near future it will likely have to support the timeliness and availability requirements of immediate payments.
For regional and global banks, the urgency and the opportunity are even greater. They may be implementing these solutions in multiple countries concurrently and repeatedly, as the wave of the immediate payment schemes rolls on. These banks should consider making strategic technology investments (e.g. installing a payment hub) and adopting operational and governance policies that will allow them to bring economies of scale and decrease the learning curve to what will likely be a multi-stage, global roll-out.
In planning their programs, banks should avoid the “innovator dilemma” - the trap of thinking that current systems are good enough and seeing innovation as a mere cost/regulatory burden. In fact, innovation represents a significant opportunity to reduce costs and improve internal efficiencies while providing new, more innovative and more responsive services to their customers across all segments and channels. Banks that approach this opportunity strategically will position themselves to win out in the new industry landscape of real-time payments, and capture a disproportionate share of customers’ wallets, loyalty, and lifetime value.
By Gene Neyer, SVP, Product Management, Fundtech