Mobile Instant Payments: a driver for payments modernisation
In this blog, Sailesh Panchal, Chief Technology Officer at Orwell Group, discusses how mobile instant payments are evolving with the implementation of PSD2.
Mobile – first for customers
Consumers will use apps on their smartphone instead of a computer to do their banking by as early as next year with 75% of the adult UK population using their smartphone as their primary bank channel by 2023 (BBC).
This conservative estimate, will only accelerate as mobile apps consolidate more banking and retail functionality, becoming the focus for marketplaces and AI driven personal financial advice, underpinned by convergent PSD2/Open Banking API revolution. Additionally, free/low cost mobile data will make it the preferred choice for making payments anywhere at anytime.
Enabling mobile payments is a natural part of the customer “digital experience factor” and not just a cost of doing business. Advanced retailers and corporates are now realising that a digital payment infrastructure is vital, not just for influencing conversions and returns, but for actually reducing costs of operation and creating new consumer insights.
Instant Payment for who?
Mobile is the perfect platform to enable instant payment features for both senders and recipients of payments:
- Security – biometrics (Are), mobile (Have) and knowledge (Know) significantly reduce the fraud risk inherent in instant payments and provide PSD2 compliance
- Experience/Wallet payments – payments directly from the merchant app, like Starbucks (23.4m in 2018) 1, ApplePay (22m), GooglePay (11m)
- Bank App Instant Payments – bill payments, local and international payments and Peer2Peer (mobile)
- Message Pay – GAFAA (Google, Apple, Facebook, Amazon, Alibaba) Peer2Peer payments
For the Sender of a payment, instant payments seem to happen immediately. Their account is debited and they get an ‘OK’ message on their smartphone. They may even see the debit applied instantly (Payments), but most don’t see pending debits (Cards) on the accounts.
For the recipient, the payment is visible when the funds hit their account. This time can be 10–15 secs later, for instant payment schemes (UK Faster Payments, SEPA Inst, et al), or minutes (SWIFTgpi), days (SEPA/SWIFT), or even weeks (Cards) later. Any error or refund process can make the process last even longer.
This gap in time between sending and receiving is where the various payment market infrastructures play a critical role.
Who pays for Instant Payments?
Today Mobile “Instant Payments” are bank account (debit) or credit card funded wallet payments at PayPal, Apple, Google, Samsung or in the case of Alipay and WeChat, funds held at the messenger app. Free to the consumer and paid for by the merchant (0.65%–3.4%), in addition to any acquirer settlement time.
PSD2 seeks to replace this model, with payments sent directly to the receiver’s account, from the customer. This removes the cards costs (0.65%–3.4%) – which is a significant improvement for a merchants razor-thin margins, with additional operational benefits, with the expectation that this will nudge them into changing customer behaviour away from cards, with help from PISPs (Payment Initiation Service Providers, under PSD2).
However, there are countries where consumer payment instructions are not free, like the UK and Europe, (a SEPA Credit Transfer is typically €0.5–1 and SEPA Inst €1–1.5, and most countries seeking to introduce Instant Payments may be seeking to charge even more than that) . PSD2 will enable greater fee transparency as the customer will see these charges at the authorisation step at their bank. This transparency may start affecting customer choice and resulting in sending banks seeking lower cost options for instant payments.
Cross-border instant payments – the next challenge
Moving funds across borders creates further complexity and cost, generally for the merchants/corporates.
Cards operate cross-border with up to 10% FX fees, on top of transaction costs, depending on the selection of home or local currency and the issuer or acquirer’s FX charges. Merchant receipt of actual settlement funds can again be 30 days or more.
Cross-border wire payments can be made via mobile, depending on what is offered by the client’s bank, and while debit will be in real-time, SWIFT GPI confirmation is at best between 10–30 minutes depending on the beneficiary bank support, excluding the time for operational reviews.
SEPA Inst will be the first viable cross-border model, across the EU, processing within 10 seconds and initially up to €15,000. When combined with PSD2 Payment Instructions and as more PSPs join, this is likely to start creating new innovation models across the industry. However costs will remain a barrier for small value transactions.
What drives the cost of instant payments?
The main costs of implementing instant payments lie in these three areas:
- There is a need to replace legacy batch based core banking platforms and associated systems, or introduce costly “shadow” accounting models which introduce further risks and instability.
- Strong Customer Authentication (SCA) & Authorisation, using multi-factor security creates a strong “lock” on the account, which reduces a significant portion of fraud risk, together with cross-channel Transaction Risk Analysis, based on the customer, the transaction and the beneficiary.
- Development and integration of a new centralised market infrastructure, which results in complex cost recovery models, and ensures early adopters face a difficult business case.
This results inevitably in being passed on to the consumer as cost for a new service. The significant saving to be made with real-time automation of reconciliation and simplifications to the technical and operations from real-time instant, vs batch are discounted in the short-medium term because of parallel running of old and new schemes.
PSD2 & Instant Payments drives the commoditisation of Cash Management and Payments
All of this cost of improving core platforms and adopting new market infrastructure to enable consumers to transfer value to merchants, while meeting regulation has to be done at the lowest pricing possible. These highly regulated activities will not remain the profit centres they once were. Even in the corporate space, as PSD2 Account Information Service Providers (AISP) increase transparency, merchants will look for cost differentials and APIs, which will mean the data-lock PSPs once held with host2host solutions will gradually diminish.
Modern Mobile Instant Cash Management & Payments
PSD1 & PSD2 already provide a solution, one which Orwell Group has used to create a regulated and technical solution for cross-border instant cash management & payments.
PSD1 created the Electronic Money Institution (EMI), a new type of institution specialised in Cash Management & Payments which enabled Orwell via it’s pan-European current account product ipagoo to provide real current accounts with local IBANs in the UK, France, Spain Italy and potentially all EU countries, with access to payment schemes. The UK has taken this a step further, enabling EMIs to become direct participants to central schemes, Orwell/ipagoo has now gained direct access to the UK schemes and has a settlement account at the Bank of England, thereby providing the ultimate safeguard for client funds. So client funds can be settled using Faster Payments or CHAPS to their full value, unlike a Credit Institution (normal bank) that has to manage its liquidity position. With local IBAN Euro accounts, in the countries ipagoo operates, real-time cross-border transfers – for free, can be realised across real IBAN addressable accounts in the UK, France, Italy and Spain. Euro to Pound Sterling is also supported utilising Faster Payments Originated Overseas (so called POO payments).
With support for PSD2 APIs, AISP and Payment Initiation Service Provider (PISP) services Orwell enables the provision of white-labeled access to our accounts and payments services – inviting brands, merchants and banks to use our Cash Management & Payments as-a-Service tools, while we innovate customer KYC on-boarding, cash management and treasury services, implement regulatory changes while providing high-performance, resilient and low cost access to schemes.
Mobile Instant Payments and cash management for consumers and merchants will become a commodity like data was to mobile phones, and similarly drive costs to a “free” to use model.
Orwell Group is a regulated payments systems provider, focusing on providing white-label cash management & payments for banks and merchants seeking to expand geographically or reduce their operating costs utilising a Banking Platform-as-a-Service model. Orwell is leading the creation of innovative PSD2/Open Banking solutions in their sandboxed Payment Initiation and Account Information as-a-Service, in conjunction with multi-national organisations such as IATA.
Sailesh is Group Chief Technology Officer at Orwell Group. Sailesh is also Chief Architect for the UK Payment Strategy Forum’s New Payments Architecture. Sailesh was previously Head of Regulatory Technology Architecture at Lloyds Banking Group.