Aniruddha Maheshwari, Payments Consultant at Icon Solutions
The end of 2016 witnessed an excellent step by the Hungarian Central Bank (MNB) – the release of ‘Operational model of the instant payment service in Hungary’. It is remarkable for 2 simple reasons – one that it is intended as a ‘mandatory’ service and the other being the ‘clearly defined objectives’ behind the scheme. These objectives not only capture the pulse of the consumer payments business, but also acknowledges the clear need for evolution for the traditional payment methods.
From 2019, customers of Hungarian banks will be able to make instant credit transfers of up to HUF 10 million and the beneficiaries would be able to use these funds within 5 seconds from the transfer. This is a major shift from the slow and archaic payment methods that are the current norm in Hungary. Payments will be cleared on a continuous basis and settlement will be done at a gross level.
Unlike most instant payments schemes today, Hungary has opted for real-time settlement of individual transactions across the RTGS system. This is similar to the Australian NPP mechanism but it is not clear from the operation model document whether it will be identical or more like low value RTGS clearing. This contrasts with the settlement model adopted by EBA clearing, which uses deferred net settlement cycles, though funding / defunding by participants of the settlement accounts is possible anytime.
Also, the Hungarian model allows certain tweaks in payment limits to ensure that each bank participant can set their own liquidity funding appetite as well as to target a certain customer base. By setting the transfer limit per payment higher than SCT Inst, the central bank has made it possible to include a broader range of payments between customers and businesses. However, by not making the transfer limits too high, they have ensured a smooth start for scheme. This would further enable the smaller banks to be an equal participant in the scheme instead of relying on larger banks via the indirect participation model.
A key element about the planned Hungarian instant payments scheme is the clear guidance on usage of ‘Secondary Account Identifiers’. Secondary account identifiers like mobile phone numbers, email address, etc. allow customers to send payments to these identifiers. This is like the Paym service in UK and the UPI service in India. Such identifiers must be preregistered with a central authority, and the initiating banks do a look up to get the account details of the beneficiary before initiating the actual payment. Thus, eliminating the need to know the beneficiaries account number and further maintaining their privacy.
Even though the EPC fell short of making ‘Request to Pay’ (RTP) a feature in the SEPA instant (SCT Inst) payments scheme rulebook, MNB has confidently and rightly identified the benefits of such a feature from a consumer experience point of view. An RTP message packages the service & transaction information as a request and presents to the customer, who then approves the request, which is then converted in to a payment by the customer’s bank. A simple example would be, a plumber sending a RTP message through his bank’s app to the consumer mentioning the service offered and its associated charges, the consumer approves the request, the amount gets deducted from his account and sent to the plumber’s account. All this happens within seconds and greatly reduces the dependency on physical cash.
While the rules and principles of the Hungarian instant payments model are in line with the larger SCT Inst service offering, participation in the latter is optional. However, banks that make the investment to support the Hungarian scheme will be in a good position to join the SCT Inst scheme.
But, as Europe faces the tsunami of changes to be brought about by PSD2 in 2018, the banks would now have to compete with third party providers and aggregators. This means being the first to adapt to such changes will have a better chance of acquiring a larger share of the payments market. And to really be the first, bank’s must now go through the gruelling task of getting their backend IT systems in the right shape. The instant payment service is a continuous 24x7x365 service which necessitates the need of running backend systems like accounting, sanctions, fraud and AML checking 24×7.
Hungarian Banks now have only two years to upgrade their systems to cope up with the high volumes and straight-through processing requirements of instant payments. A good strategy is focusing on upgrading the payments hubs by mid-2018, but a better strategy is to start upgrading the back-end systems for 24×7 availability right away. Such projects are much more complex and key to driving instant payments. This is where the heart of processing lies and gives a game changing advantage to the bank. We would encourage Hungarian banks to act on this advice as with instant payments – the old rules are no longer relevant. Icon can assist the Hungarian banks with this transition by supplying its advanced modular instant payments framework product IPF and through offering instant payments consultancy.
Aniruddha Maheshwari is a Payments Consultant at Icon Solutions