Real-time payments: the next frontier
Customer driven innovation is powering change in the payments industry. Real-time Payment infrastructures (RTP) – whether they are called Faster Payments, Immediate Payments or same-day clearing – are now a reality, with many countries having implemented RTP functionality, and others actively considering the imminent roll-out of RTP projects in their domestic market.
Central banks have been quick to respond as well. The European Central Bank has identified RTP with immediate availability of funds as the next frontier for harmonisation and cross-border collaboration in payments.
This is echoed by EBA Clearing, which has recently announced the launch of a task force to lay the groundwork for a pan-European instant payment processing service. Without such a common pro-active approach, the EBA fears a fragmented market for RTP could otherwise emerge in Europe. The EBA plans to have the service fully operational by 2018. The US Federal Reserve is also jumping on the bandwagon and, after several months of consultation, has published its strategy for expediting the overhaul of the country’s antiquated payment systems. Whereas the US may address RTP, in the first instance, by extending operating times for the National Settlement Service and running more clearing cycles, other jurisdictions have chosen a more innovative or revolutionary approach.
The relationship between traditional payments, social media and e-commerce is becoming increasingly blurred and existing, by and large, 40-year-old legacy payment infrastructures and clearing houses are no longer fit-for-purpose. Digital technology applied in different fields, such as messaging or email, has largely fuelled customer demand for the ‘here and now’ expectations of today’s Internet generation. Payment infrastructures need to be sufficiently fast and flexible – while remaining secure – in order to fully leverage the opportunities of such industry changes.
RTP is a modern-day payment mechanism available to personal and business customers 24x7x365. RTP enable interbank funds transfers in (near) real-time fashion, typically customer initiated via on-line or Internet banking, and phone or mobile banking, or in-branch. It is generally recognised that RTP is the single most significant development in payments and transaction banking in recent years.
RTP infrastructures generally allow the processing of the following types of payments:
• single immediate payments
• bulk corporate payments
• forward-dated payments
• standing orders
• direct corporate access – usually via a secure IT-solution for sending bulk files for same-day processing.
Within a RTP environment, the funds must typically be available in the receiving customer account within two hours, although usually good value is available within minutes. Also, it is generally anticipated that the infrastructure provides response times to the sending bank within around 15 seconds, thus confirming the receiving bank has accepted or rejected the payment. Additionally, the receiving bank needs to provide a reason for the rejection. In some instances the receiving bank is unable to take immediate delivery of the payment. When this occurs, the customer should be given a response that indicates when they can expect the funds to be applied with good value into the account. Usually a maximum value threshold for payments that can be processed through RTP is applied, although individual banks or payment service providers generally set their own value limits.
Historically, low value payments were settled through domestic clearing or netting systems, where batches ran usually across several cycles per day. It’s only a couple of decades ago that banks were physically delivering magnetic tapes to the national clearing facility for processing and the entire settlement process would take up to five working days before the beneficiary obtained good value credit in the account.
Payments can now be executed end-to-end within the time it takes to send an email – how things have changed! The main limitations of earlier batch-based clearing was purely related to existing technology at the time, and, it is fair to add, the penchant for banks to earn float from every single customer payment. In some countries banks had an understanding whereby D-1 was applied for debiting the paying customer and the receiving bank would apply D+1 once cleared funds were obtained from the clearing system. Hence, often seven days’ float was lost by customers and, at the time, this was accepted as the norm. Since there is no clear business case for banks, the decision to launch RTP is often strategic and not financial.
The digital revolution is rapidly changing customer expectations and banks need to be alert and pro-active in order to seize this opportunity. New technologies drastically change the way we can execute payments today and this entails different systems, different processes and timelines. It generally also calls for the need for updated regulations and a suitable legal framework, e.g. to define finality of payment. A new, faster payment system also requires a new approach to often ancient, deep-rooted modus operandi. Many inter-dependencies exist and unless each and every function within the end-to-end execution chain – often encompassing various stakeholders – is upgraded accordingly, customers will not be able to reap the full extent of benefits RTP have to offer.
Historically, the mere concept of an ‘overdraft’, i.e. a debit position in a customer’s current account due to a shortfall of funds in the ‘overnight’ cash position, came about as a result of existing processes, whereby a batch was processed during bank working hours and the customer end-of-day position subsequently resulted in a shortfall. With today’s Martini banking – any time, any place, anywhere – customers expect (near) real-time payments execution, confirmation and credit with good value in the beneficiary’s account. Aside from any involvement of payments processors or aggregators in the payments execution value chain, this calls for banks and deposit takers alike to review and update related systems and processes, e.g. for real-time funds control and verification of available credit facilities. For larger or corporate customers this entails the ability for the bank or financial institution to obtain, almost instantaneously, their real-time cash position and overall credit utilisation at that point-in-time. We refer to this customer insight as the Digital Outside.
The Digital 360 initiatives of commercial banks consist of two complementary parts:
• The Digital Outside influenced by end-customers and its success defined by higher profits, higher transparency, lower exceptions and shorter transaction time windows.
• The Digital Inside influenced by the bank users and its success defined by higher productivity, higher quality, lower costs and reduced processing time.
In addition, appropriate messaging set-up for promptly processing related payment messages, such as for confirmations and/or rejections, is key in order to be in a position to process and apply credit to the beneficiary account immediately and with good value. Indeed, many different systems, often dispersed across various participants in the payments execution value chain, need to be updated and synchronised for RTP to yield the expected customer benefits:
• Anytime payments at the customer’s convenience:
• Secure and reliable RTP with improved efficiency and speed
• Status confirmation (paid/rejected)
• Improved information about the payment
• Increased traceability and clearer view of cash-flow.
Apart from an updated central market infrastructure at country or regional level, participating banks also need to upgrade their payments execution platforms so as to empower their client-base with the benefits RTP offer.
How do best-in-class banks typically accommodate RTP in their payments infrastructure?
Most banks nowadays view an international payments hub for servicing clients across the regions, as best practice. An international payments hub covering both domestic and international payments simplifies payments operations through centralisation and makes disparate payment systems at country level redundant.
The functionality for the RTP stream of payment messages can be incorporated into this payments hub, alongside existing ACH or RTGS streams. Any specific format requirements for RTP can best be addressed via a flexible middle-layer, or configuration layer, without the need for hard coding into the payments application itself. AML and other compliance checks are taken care of by the existing orchestration layer within the payments hub. Some processes – e.g. for query responses, ACK/NAK type messages or funds control – will require re-visiting in order to comply with promulgated maximum response times.
It is, indeed, imperative that (near) real-time funds control functions are applied to each and every outbound RTP message and these functions are to work hand-in-glove with the functionality available through the payments hub. In a traditional ACH environment with next day or even more deferred settlement, these limit controls plus available funding verifications were/are often applied overnight, in an ‘off-line’ environment, before the payment would be queued for execution.
The overall funds control function can, at times, be rather complex e.g. for global clients with specific or regional liquidity solutions in place, whereas a go/no-go response is now required in (near) real-time. Given this immediacy requirement of RTP, the luxury of a large time-window for payments decisioning becomes but distant nostalgia. Banks need to leverage the benefits of their current funds control solutions, which should be amply capable since these should also already facilitate RTGS payments. Such an approach, whereby existing infrastructure and processes are leveraged, is widely recognised in the market as best practice in payments execution.
By consolidating all payments and payment types into a single processing location and operations function, thus embracing more of an enterprise payments approach, the customer experience is further improved and greater transparency is available into the payment profiles of bank customers – the Digital Outside. In such an environment, customers are able to make any type of payment, in any currency, and to any payee, from a similar location in a similar way. The deployment of an International payments hub helps put banks in the privileged position whereby they can fulfil the ever-exacting requirements and expectations of their customers in rapidly evolving markets for global transaction banking. This can best be illustrated by the fact that banks operating an international payments hub often see improvements in STP rates in the range of 15 to 20%, or more. Also, time-to-market for new or customised products is reduced, since it allows for more clarity from a product-technical and costing point of view through digital insight.
Besides cost reductions through enhanced STP, a robust and reliable international payments hub solution brings additional benefits to the bank itself – the Digital Inside. It simplifies operations through centralised functions, thus generating improved operational efficiencies and reduced costs for the bank. Operations centralisation brings about better Governance and Control functions, e.g. for payment flows, liquidity management (Basel III), product support, plus efficient cost allocation. It also drives economies of scale and helps to reduce marginal cost-of-processing – a key performance indicator in the Payments Industry.
The digital transformation of payments also opens opportunities to non-bank competitors of all kinds, PSP’s who will operate under a new regulatory regime, without the burden of heavy legacy systems, who are more agile and more customer-centric – thus addressing the emerging ‘wants and needs’ of the digital economy. Banks need to adopt a new mind-set and move away from a traditional siloed vision in order to address disruptions and opportunities emerging from digitisation. Monetising these payment solutions presents yet another challenge for banks, hence detailed analysis of the cost-base is necessary for any sustainable solution.
About the author
Jan Gonnissen is senior vice president – payments with iGTB-Intellect in London, part of the Polaris Group. He has a long-standing experience in treasury and global transaction banking and is a frequent public speaker and contributor on topics affecting the Networked Economy.