The Rise of Instant Payments
In this age of tablets and smartphones, customers expect instantaneous access to information and services. Emails, tweets, shopping: everything is now real time or forget about it. As a result, instant payment is upon us, writes David Andrieux.
Benefits of instant payments aren’t hard to see. For the economy, they allow consumers and businesses to immediately exchange monetary value, increasing market liquidity; faster payments also reduce settlement risk. And with the rise of fast and convenient payment instruments, the use of cheques and even cash will likely diminish, reducing the cost of payment processing. For consumers, instant payment notifications offer a better user experience and a more convenient way to manage personal finances.
But there is undoubtedly going to be investment needed – cost for banks to migrate legacy instruments to all these superfast, mobile-driven, faster instant payment systems. Even if payment costs go down dramatically, the Federal Reserve Bank estimates that the overall business case for most financial services institutions would be at best neutral.
The question then becomes, do those non-monetary, ‘soft’ benefits to the banks – customer satisfaction, increased market liquidity, reduced risks – justify instant payment infrastructure investment? Ultimately, like many digital developments, the decision is not a bottom line one as much as a general strategic one. Instant payments will become not only a must-have to compete with Third Party Providers and non-bank Payment Services Providers, but also a general business enabler. In particular, the real value of instant payments will come from the new services that are going to propagate off the back of it.
Beyond the payment – but where?
Chasing after those new services (and the customer dollars they’ll attract) are a side spectrum of payment service providers, retailers, tech companies, all moving into the payment space. This is not surprising, as the battle over the payment space is, in reality, a battle over the customer relationship, as winning the customer relationship means gaining control over customer data and the ability to offer high-margin services, within and beyond payments.
In parallel, new end-user services are being created, by both banks and non-bank payment service providers (examples include optimisation of loyalty schemes, budgeting or receipt management). These new ‘overlay services’ will span the entire purchasing experience, i.e. they go beyond the payment itself. Examples include automated matching of purchase orders to invoices or in-store promotions that are dynamically triggered by a consumers’ geographical position, their loyalty profile and their purchase history.
Many of these services are based on or leverage instant payment services. However, the payment infrastructure has not kept pace with all the innovation at the app and mobile device end. It’s far from unusual to have physical goods delivered faster than the corresponding payment transaction; a case in point: Amazon Prime Now offers one-hour delivery in the London area. But as consumers and merchants are used to immediacy, they naturally expect digital payments to keep up at the same pace their smartphones seem to be on.
Centre of the relationship
This presents a challenge. And moving to real-time has a number of impact points. First, true modernisation of IT systems is needed, as batch-based, legacy systems cannot cope with real time requirements. To support many of the new services, instant payment systems also need to be fully integrated with other systems and services, such as cash management. Meanwhile, banks’ internal processes will have to be more transparent and faster, because banks may end up having too many idle funds or not enough funds, risking endless fluctuations in liquidity.
In addition, banks must secure the necessary resources and processes to support a fully 24/7 service proposition. And because even near-real-time payment systems reduce the time to check for fraud, banks will need to build out enhanced fraud detection applications and payment interdiction processes. As transactions are irrevocable in instant payment schemes, banks will look to stronger customer authentication and strong encryption processes for their Web and mobile banking applications, at the minimum, for robust security.
As stated, instant payment solutions allow the development of new high-value services within and beyond payments. As a result, the world of instant payments is in a positive feedback dynamic; the development of new overlay services accelerates the development of instant payment solutions, while the development of instant payment solutions accelerates the development of new services.
These new services not only bring new revenue opportunities, but keep the bank at the centre of the customer relationship. This is critical, as the upcoming Payment Service Directive 2 will give third-party providers access to bank accounts for payment initiations. It’s a sobering thought that the combination of instant payments and regulation in the shape of PSD2 will jointly drive innovation in the European payment space. Consequently, instant payments seem key to controlling the payment flow and to competing with mobile network operators, cards, and non-banks.
The winners in the instant payments race will be the banks that can best capture and leverage the context of their customers to offer them timely (instant) and relevant services. Is that going to be your institution, or are you happy to let the race go to the non-traditional entrants?