Adding value via IP and why it requires patience
24 November 2017
Nicolas Cailly, deputy director of payments & cash management, GTB, Société Générale, explains the drivers for instant payment (IP) schemes, such as Europe’s SCT Inst, and the bank migration challenges and opportunities that mean the IP trend will be evolutionary as business models emerge.
As domestic instant payments schemes are rolled out globally in the US and in Europe, with its single euro payments area (SEPA) instant credit transfer (SCT Inst) scheme going live on 21 November, momentum is gathering behind real-time payments (RTP) and operations.
The SCT Inst scheme was designed as a voluntary initiative by the European Payments Council (EPC) and instituted by the European Central Bank’s (ECB) requirement for a RTP solution for the eurozone. It is intended to reach the 34 SEPA Countries in Europe from Austria to Italy, Poland to France, as the scheme rolls out and uptake grows in future years via national and pan-European automated clearing houses (ACHs), partnerships and clearing and settlement mechanisms (CSMs). The cross-border RT1 platform from EBA Clearing is live alongside other compliant CSMs. SCT Inst is intended to give users the ability to:
- Move up to 15,000 euros from one account in Europe to another
- Maximum of ten seconds allowed
- Operate on a constant 24×7 operational basis.
These main EPC scheme framework requirements are not easy to achieve and the 21 November ‘go live’ is just the beginning of the process for many banks and payment service providers (PSPs). The challenge for many multinational banks spanning borders is to link up with other IP schemes in other nations, or indeed regions in the world. Internally we banks’ also have to integrate real-time operations into our technological and procedural ways of working.
Aligning IP with fraud and financial crime compliance activities, for instance, is necessary and correspondent banking and payment relationships with some far-off countries will need to be maintained on traditional ‘rails’, alongside IP and other types of payment flows.
In addition, banks will likely want to take the opportunity to overhaul their IT systems to accommodate new IP schemes, and ensure they are more flexible and welcoming of financial technology (FinTech)-led customer facing tools in the future.
In the case of Europe, it is a significant achievement bringing instant payments to the eurozone. But it will take time for everyone to be able to offer this functionality and integrate it. SCT Inst builds on the single euro payments area (SEPA) project, which was launched a decade ago, and took many years to come to fruition. Nobody wants or expects the rollout of instant SEPA Credit Transfers to take anywhere near as long to reach ubiquity, but it is illustrative of the challenges.
Real-time payments in Europe will likely develop in a variety of slightly different regional ‘flavours’, as happened with SEPA direct debit instruments, varying XML ISO20022 messaging adoption, and so on. Different countries may want to keep or increase the EUR15,000 maximum limit at different speeds, depending on their different risk appetites. This will be a challenge too.
There is disagreement between countries about how fast real-time systems should be, ranging from a few hours down to a handful of seconds. In addition, the regulatory focus is on the reuse of funds, rather than transfer of information or predictability of funds receipt. To meet this reuse requirement is very demanding on banks and on corporates.
To achieve RTP in Europe, the industry will have to move forward together and above all be patient. Authorities have opened the door to bilateral and multilateral agreements regarding value limits and speed of transactions. The industry must move together in order to avoid local variances.
We should seek inspiration from banks operating in countries where IP schemes have already gone live, such as Singapore. The next steps in the IP evolution will be to consider how we can send some types of IP to those banks to achieve cross-border IP. When banks have sufficient payments traffic for certain flows, investment in end-to-end IP will be justified. It will take time, but we will get there.
Finding an SCT Inst business model is a bank challenge
SEPA was the European payments industry’s response to the regulatory requirement for cross-border payments in euros to be treated as domestic payments. European financial authorities were looking to increase competition for the benefit of consumers and businesses, and to keep pace with the ever-evolving and integrating economy. It is the same philosophy behind the instant payments rollout now.
SEPA and its Credit Transfer instrument is a very good starting place for European IP because clients and back- and middle-offices understand the SCT instrument. But the industry has to find real-time services that customers want and are happy to pay for.
At present finding a business model is difficult, while ensuring payments remain safe and resilient. This can be hard with consumers who just want speed and the transaction, and no value-adding data element that they’re prepared to pay for.
For many in the corporate sector, security is a paramount concern, rather than speed of payment, and the present SCT Inst maximum of EUR15,000 may discourage initial commercial uptake until it rises.
Global IP drivers
There are two main, interrelated, drivers for instant payments around the world:
- The actions of regulators
- & the changes in corporate and consumer behaviours where tech-enabled instant service & 24×7 availability have become the normal expectation.
The latter customer-driven requirement for instant service started in the consumer space with the rise of technology, e-commerce and social media companies. But it is spreading to corporate treasuries and the banks that serve their cash management, payment, liquidity, data and other needs.
Corporate data and instant demands
One of the most significant trends in corporate banking operations is the move towards instant, self-service digital offerings, mirroring earlier consumer demand. Multi-banked global corporate clients want to access information, make changes to accounts and initiate transactions ‘right now’ and on any device.
The commercial corporate banking sector has moved from an anytime, anywhere banking stance to an even faster: anytime, anywhere, right now data-rich operational stance. This is a new frontier and many innovations are now focused on meeting this demand for instant service and information. The trend requires banks to invest significantly in their IT systems to improve speed and efficiency and give corporate clients effectively a ‘bank in their pocket’. This must be able to deliver value-adding analytics, tracking and other information, alongside the transaction service.
Investing in technology
By investing in technology and overhauling their IT systems, banks can avoid becoming the so-called ‘dumb plumbers’ behind e-commerce firms, FinTechs and other competitive PSPs that could hive off value-adding front-end services for themselves.
The European Union’s (EU) second Payment Services Directive (PSD2) regulation, mandating more open access and competition, will reinforce this trend, alongside the move to instant data-rich payments.
Cross-border & global interoperability challenges
The challenges of moving to IP are not only technological, but also include regulatory and cultural issues. It is no surprise that the initial schemes have been domestic in nature (even SCT Inst is ‘domestic’ in nature to some extent as it applies to euro payments). Developing cross-border IP schemes that span regions, as well as European nations, is a greater challenge. It will require ISO20022 messaging standards and a lot of industry cooperation.
The first level of improvement for existing IP schemes would be to ensure that within a single currency, such as the eurozone, the various instant payment market infrastructures (PMIs) can interoperate. In the EU, the ECB will look to the different stakeholders to achieve this. Interoperability presents some technical challenges, but it is achievable in the long-term.
Payment fraud, embargoes and anti-money laundering (AML) regulations, plus sanctions enforcement and other compliance obligations, are an everyday challenge in the industry. Real-time payments are an even bigger challenge as every payment needs to be screened, analysed and filtered within seconds rather than hours, while aligning with existing obligations.
Banks will not compromise on compliance or on transaction security as both represent a significant asset of traditional banks. Trust matters. But banks are willing to maximise user experience prioritising simplicity and immediacy with IP. It is the bank’s challenge to align it all. That challenge can only be met by heavily leveraging cutting-edge technologies to meet the 10 seconds maximum delay stipulated in SCT Inst between a payment’s origination and its reception at the beneficiary end.
Security & AI for efficiency
Security is one of the biggest advantages that banks have over FinTechs and other PSPs and we are reluctant to compromise it for anything. Most banks still continuously add scenarios to their filters to detect as many ‘true’ cases of a potential compliance problems as possible. Some of this work is manual and therefore expensive. A number of financial institutions (FIs) are already applying artificial intelligence (AI) to meet the challenge of payments security in an automated, cheaper fashion, with manual exception fallbacks as low as possible. That way the trust advantage is maintained, but at a reasonable cost.
In fraud detection, by identifying suspect patterns, more scenarios can be added and processed very rapidly. It is hoped that technology such as AI will help banks to combine the necessity to have safe and secure cross-border, IP payments at a low cost. Latecomer IP schemes such as those in the US can likely benefit from AI as the technology comes to fruition.
Separating different payments
As IP takes hold globally, correspondent banks may separate international instant payments flows into high-volume, low-value & low-volume, high-value types.
In the former consumer space, customers are looking for fast, low-cost payments. In the high-value space, corporate clients would benefit from additional information attached to payments, along with greater security. The two types of payments flows may co-exist, and banks may even consider different IP schemes for different payments flows. For example, if a trade corridor to a country that operates an IP scheme generates many transactions, it may be worthwhile for that bank to set up a bilateral arrangement with a counterpart, thus enabling instant, cross-border payments.
Existing IP schemes are not yet close to becoming the sole way of sending international payments and it is likely there will be an intermediate period during which correspondent banking and IP systems will coexist. IP could replace correspondent banking in certain corridors but because of cost and risk issues, not all of them. The sector is still evolving and it will be fascinating to see how it does so.