Instant Payments: The new normal in Netherlands in 2019
In this overview of the Dutch market and its expected introduction of a national instant payments service in 2019 that adheres to, and in some cases surpasses, the European Payments Council (EPC) rulebook for the continent-wide single euro payments area (SEPA) instant credit transfer (SCT Inst) scheme, Fred Bär, an InstaPay Advisory Board member from the Payments Advisory Group (PAG) looks at the drivers and blockers for the domestic initiative that will offer faster still five second delivery speeds and 10 seconds for processing, while not enforcing the EUR15,000 maximum limit internally. Recent ECB research insights are used in this article.
As the InstaPay Tracker reveals there are currently 30 live Instant Payment (IP) schemes worldwide and 18 more announced for the next few years, so we are in the midst of a global wave of IP market launches. In the global village, with ubiquitous network connectivity, having 24x7x365 availability of services to move money in seconds is becoming more and more the standard that modern businesses and consumers expect.
SCT Inst, for instant payments in Euro, went live in November 2017 after two years of EPC work but it is a voluntary scheme, so it is up to market participants, banks and their customers (business and citizens), to adopt and use it as they see fit within the specified parameters. A number of countries outside of the Eurozone have already launched instant payment schemes and experienced adoption, but the rest of Europe is catching up and I intend to look at the Netherlands plans in this article. The EPC Register of Participants shows continent-wide adoption rates so far for payment service providers (PSPs) like banks, to clearing and settlement mechanisms (CSMs), which can be domestic automated clearing houses (ACHs).
A team of researchers from national central banks under the auspices of the European Central Bank (ECB) made a comparative study recently, entitled ‘Are instant retail payments becoming the new normal?’ (see chart). The report contains some interesting ‘lessons learned’ from past IP adopters outside of the Eurozone, which may be used to shed light on adoption patterns and trends that newly launching countries can expect to see. In my reading, the research indicates that it is highly likely that the Dutch will adopt SCT Inst very quickly once the country moves en masse to its planned national system in May 2019.
The report authors examined structural drivers and blockers to the adoption of instant retail payments based on an analysis of observed adoption in six countries – Denmark, Poland, Sweden, UK, Mexico & Singapore – where instant retail payments have already become operational in the last decade.
Source: Chart from Hartmann M.; Hernandez L.; Plooij M.; & Vandeweyer Q. Entitled ‘Are instant retail payments becoming the new normal? A comparative study’
–ECB Forthcoming Occasional Paper Series.
The chart shows some large differences in adoption speeds between the six user case studies examined. For recent introductions (only 2-3 years in operation) it is evident instant payment uptake grew faster than where schemes were launched longer ago (5-12 years in operation).
In summarized form, the study found the following drivers, supporting faster adoption patterns:
- Involvement of central banks and other public authorities.
- A significant increase of speed of execution compared to the existing legacy instrument(s).
- Low, or no, fees for instant payments.
- Availability of complimentary services. For example, mobile numbers as a proxy for bank account numbers.
- Availability of good payment and telecommunication infrastructures.
The report found the following blockers, that is to say factors slowing down IP adoption rates:
- High fees for instant payments.
- Fragmentation of the payment services sector, low concentration ratio.
- Lack of cooperation between banks.
The researchers concluded, “consumer characteristics, and their payment preferences and habits, will play a key role in the adoption of instant retail payments”. I agree and expect to see these factors playing out as well in the Netherlands.
Expectations for the Netherlands
Dutch banks were early movers towards instant payments when they announced their intention, early on in 2015, to prepare a four-year plan to launch a national instant payments service by May 2019. This was even before the EPC had started to prepare the continent-wide SCT Inst cross-border scheme, but it was already clear that payment users were expecting and demanding banks to provide instant payment services. On the expectation that IP would be coming to the country sometime soon, in some form or other, the industry wanted to get out in front of the trend.
The nation’s banks tasked the Dutch Payments Association (Betaalvereniging Nederland), whose responsibilities lie in the areas of infrastructure, standards and collective, shared product features for its membership – consisting of PSPs and electronic e-money institutions – to develop a plan and coordinate the necessary steps for the industry.
Betaalvereniging Nederland developed the business requirements and service specifications, working ahead of the EPC but at the same time committed to aligning with the SCT Inst rulebook as the basis for the Dutch national IP scheme. But the country will use the options available in the scheme to tailor the service as much as possible to the particular Dutch market characteristics.
The Association is also tasked with ensuring that the national scheme is fully interoperable with other European services based on SCT Inst, so no regional differing ‘flavours’ are allowed. This means that in due course, as demand and volumes grow, cross-border (EU-wide) instant payments will be easily supported.
Dutch ‘tweaks’ to SCT Inst
The tailoring of the service to the Dutch market can be seen in the following aspects. Where the SCT Inst standard sets less than 10 seconds as the rulebook norm, the Dutch implementation is set at less than five seconds.
The maximum processing time of 20 seconds falls to 7 seconds, and there will also be a ‘non-time critical’ variant. The default maximum amount of €15,000 specified in the SCT Inst rulebook will also not be applied between Dutch participants. It is only relevant for cross-border European instant payments.
The four largest banks in the Netherlands, and one smaller bank, have publicly committed to offer the new national IP service from the planned start date in May 2019. This will ensure the necessary scale.
New normal for the Netherlands?
What can be expected for the uptake in the Netherlands, if we take into account the findings of the aforementioned researchers’ findings from their comparative study?
Bearing in mind that Dutch banks have on several occasions communicated an intention and expectation that IP should, or could, become ‘the new normal’, I think the picture is quite promising. Let’s take a look at the drivers and blockers identified by the research and applicable here:
The Drivers for IP
The key drivers found in the comparative study are:
- Involvement of central banks & other public authorities: This has been high and visible with the Dutch central bank participating in the planning and design phase, and being informed of the general progress of the strategically important programme.
- A significant increase in speed of execution compared to the existing legacy instrument(s): Dutch consumers are used to iDeal, a well-known service that debits their bank accounts in seconds. However, the merchants receive only an immediate payment guarantee – they cannot dispose of the money received until usually a day later. For ‘normal’, older and non-fast SEPA Credit Transfers (SCT) payments, the SEPA norm of one day maximum applies. For interbank transactions about 3-5 hours on average is the experience – with the proviso that where transactions are within the same bank, the current norm is already down to seconds. The banks’ current plan is to migrate all online banking transactions to IP in a ‘big bang approach’, which will mean a significant boost to adoption rates in 2019.
- Low, or no, fees for instant payments: The banks have not published their pricing plans yet and will decide individually. However, the lesson learned in Poland (High fee, low adoption) runs counter to Dutch banks’ collective published intention to make IP the “new normal”. Hence it seems reasonable to expect no, or low tariffing. It’s important to remember this is only a likely scenario and pricing remains an uncertain factor.
- Availability of complimentary services: For example, mobile numbers as a proxy for bank accounts. In the currently popular mobile payment services sector in the Netherlands, brands such as ‘Tikkie’, or some of the banks’ own mobile banking apps, are popular. Consumers are already used to making a payment to a WhatsApp, or a mobile number, in the country.
- Availability of payment and telecommunication infrastructures: The Netherlands is among the most densely cabled and mobile-covered countries in the world. It has among the highest global penetration of mobile phones and internet so is ready to take advantage of SCT Inst and the EU’s second Payment Services Directive (PSD2) regulation, which is designed to encourage a new era of open data and retail banking, including the payment sector, and will further drive mobile and e-commerce.
Another driver: PSD2 & the effects expected from its advent
Another factor that will impact the Dutch pattern of IP adoption, and indeed many other countries, is the EU’s wide-ranging second Payment Services Directive (PSD2), which entered into law on 13 January 2018. Even though only eight countries were actually ready in time with their transposition into national law (including ‘Brexiting’ UK), the other 17 countries will be following within six to twelve months, which then opens up a level playing field for new Payment Initiation Service Providers. This will force competition and new payment and data options into the service layer, where banks will have to compete in the future. They will have to be able to offer new data-rich corporate and mobile-enabled consumer payment, monitoring and reporting options to be able to compete and will often rely on an instant payment backbone in order to do this and a technology overhaul internally. Its another driver for Dutch and other banks to get ready quickly for real-time instant 24×7 operations and speed up their move away from batch towards real-time systems.
The increased competition in the retail payments arena, which is now more open to these new parties under PSD2, is likely in the medium term to mean:
- lower end-user costs;
- improved services;
- & generally lead to a further spiralling of user expectation towards 24×7 operations – not to mention customer demand for convenience in payments and speed of execution.
The availability of an IP scheme in a country, together with the entrance of third-party providers (TPPs) offering alternative payment services, is therefore likely to spur the growth and quick uptake of instant payments. However, at this moment in time, many uncertainties still exist about what the new business models for TPPs will look like, principally how the access to banks’ back offices via application programming interfaces (APIs) and how this will be implemented in the face of ‘screen scrapping’ debates and accusations of substandard APIs. Questions also remain about how these new players and connections will perform when fully live, and how interoperability between non-bank schemes and bank initiatives will be realised.
The PSD2 Regulatory Technical Standards (RTS) 18-month delay occasioned over uncertainties regarding ‘screen scraping’ and the Strong Customer Authentication (SCA) rules have now finally dissipated somewhat. The SCA rules were published in the EU Official Journal, and will enter into force on 14 September 2019, with the rest of the RTS. An intense and concerted effort is now unfolding over the next 18 months, as the countdown towards actual usage of the new possibilities envisaged under PSD2 gets underway. It is a promising landscape, but new players and a new era of open data, APIs and services will impact traditional payments, players and instruments, so be in doubt a response is necessary to maintain incumbent banks dominant position.
The Blockers of IP
The key impediments to widespread IP adoption, as found in the comparative study, are:
- High fees for instant payments: As mentioned already, pricing is as yet uncertain but high fees are unlikely as the marketplace would not sustain them especially as the advent of PSD2 dawns.
- Fragmentation of the payment services sector, low concentration ratio: The Dutch payments sector is relatively concentrated. It may become less concentrated over time if the challenger banks now competing with the Big-4 banks in the Netherlands become really successful. But, as yet, there is no sign of that happening at a large enough scale.
- Lack of cooperation between banks: Cooperation between Dutch banks to define the programme and prepare for joint launching of instant payments has been high, even if the institutions themselves decided that the provisioning of their services from infrastructure providers should not be done jointly or centrally.
Consumer characteristics & payment habits
The Dutch public and companies are today using a payment mix leaning toward electronic e-payments. Cheques were phased out 18 years ago when the Euro was introduced. Cash usage is on a slowly declining path. Electronic e-purse capabilities were introduced very early in the 1990’s, but have already been phased out two years ago. Contactless Point-of-Sale (PoS) payments, involving debit cards, have been rapidly adopted.
Mobile banking apps are used everywhere in the Netherlands and trust in the operational performance of these apps and in the banks offering them, is generally high. Experimenting with new payment types will come naturally to many consumers.
The drivers are either certain or very likely to point in the direction of fast adoption of instant payments in the Netherlands. Conversely, the blockers are either absent, or unlikely to occur.
The public is generally not averse to try out new payment methods, and at the same time expects 24×7 immediate services, like everywhere else in the global internet-enabled digital economy.
It is therefore, in my opinion, highly likely that once the domestic Dutch launch happens in May 2019 the Netherlands will see IP adoption on a speed comparable with the fastest examples yet seen in any other country to date.
Note: The author is a consultant and partner with the Payments Advisory Group (PAG ) in the Netherlands. The views expressed in this article are those of the author.