Navigating the instant payments highway
Written by Graham Buck
The recent PSD2 outage suffered by Visa is something the payments group can ill afford as PSD2 encourages innovation in the field of instant payments.
Instant Payments not marred by card scheme outage
If the road to instant payments was ever regarded as a superhighway, events are a regular reminder that there are more than a few speed bumps and skid patches along the route.
This month had hardly got underway when a hardware failure affecting Visa’s back-end processing system left businesses across Europe unable to process card payments and some cardholders finding that their attempt to make a single payment resulted in multiple transactions.
For many, it was a relief to find that Visa’s problems resulted from a glitch rather than a hack, which speaks volumes about the concerns consumers have about the security of their credit and debit cards.
As the popularity of cash and cheques continues to wane and the vulnerabilities of card payments unsettle consumers, the impetus driving pan-European mobile P2P instant payments shows no sign of relenting. General consensus is that the region’s payments landscape will have changed beyond recognition by 2022, fuelled by the rise of alternative payment methods. Estimated annual growth for electronic payments over this period is nearly 11%.
The role of PSD2
The introduction of the Payment Services Directive (PSD2) has already opened up competition in the payments industry. The big unknown is how big a slice will be carved by GAFA (Google, Apple, Facebook and Amazon), along with the fintechs and, potentially, major retailers and utilities. PSD2 offers scope for the supermarkets to become payment initiation service providers (PISPs) and for customers to make instant payments using their app rather than a debit or credit card.
In the meantime, recent months have marked a watershed. Last November saw the first stage of the Sepa Instant Credit Transfer (SCT Inst) initiative introduced in eight European countries. At the same time, EBA Clearing’s RT1 pan-European instant payment system went live and within three months had processed more than 500,000 transactions.
Instant Payments is a worldwide trend
Across the Atlantic, the same month saw The Clearing House (TCH) and 25 member banks launch real-time payments in the US, while a five-year infrastructure investment programme preceded Australia’s launch of the New Payments Platform (NPP) in February 2018.
Later this year, a further contender enters the ring as the European Central Bank (ECB) introduces its Target Instant Payment Settlement (TIPS) platform. The ECB regards instant payments initiatives such as TIPS as a potential springboard for other service enhancements and value-added services such as person-to-person mobile payments.
Industry veterans observe that this apparent innovation isn’t new, with Japan introducing its Zengin real-time payments system way back in April 1973 and both Korea and Switzerland following its lead in the Eighties. However, the trio of new technology, regulation and customer demand mean that instant payments must now respond to the new challenges of the digital age.
Instant Payments don’t need to be expensive
As distributed ledger Ripple notes, moving to a faster payments experience comes at a cost. “Many central banks have examined their own national payments infrastructure and have found a hodgepodge of systems, built as silos for each popular method of payment: a silo for cheques, a silo for credit cards, a silo for low-value bank account payments, and a silo for high-value bank account payments,” it comments.
Rather than attempt to dismantle each of them, countries such as the UK, Australia and Singapore have instead added a new silo, offering new front-end services, messaging such as ISO 20022 (although the UK hasn’t yet transferred from ISO 8583), user-friendly aliasing and a high-volume, real-time settlement system under the auspices of the central bank. However, in each case an industry-wide initiative was needed, typically spread over a period of three to five years and costing participants – principally the commercial banks – hundreds of millions of dollars in development costs.
It’s not a luxury available to emerging markets, which nonetheless also need to move to instant payments if they are to make their cross-border payments more efficient, galvanise their economies and keep the engine of global trade motoring.
In many developing countries, smartphones have long been firmly established as “the bank in your pocket”, with an estimated 2.5 billion people still unbanked, despite initiatives to reduce the number. Mobile technology is a widely-trusted method of transferring funds cheaply and efficiently to friends and family, particularly by those working overseas and regularly sending money home.
In the world’s second-largest economy, China’s consumers and businesses have shunned plastic cards and instead embraced the easy-access mobile payment options provided by the likes of Alipay and WeChatpay. While many SMEs in the western world are still resistant to payments via digital, online or mobile technologies, they are accepted by two-thirds of China’s smaller enterprises.
Does Australia, which has been among the countries at the forefront of moves to a cashless society, also provide a template for the future of instant payments? Australians appear to be increasingly as willing to give up their cards as they are to relinquish cash, with nearly 72% of consumers turning to digital payment solutions in the four key categories of bill payment services, online payment platforms, contactless/cardless mobile payments, and buy-now-pay-later payments.
“It is already feasible for someone to go about their daily activities without the need for a physical wallet or card,” says Michele Levine, CEO of Australian market researcher Roy Morgan. “This is being aided by the growing proliferation of smart phones and wearables with integrated payment technology such as Apple Pay and Google Pay, and an increasing number of financial institutions enabling their customers to make payments with these devices.”
Progress in Europe is likely to be rather more sporadic – for example the first wave of SCT Inst involved only certain payments service providers (PsPs) in eight (Austria, Estonia, Germany, Italy, Latvia, Lithuania, the Netherlands and Spain) of a potential 34 European countries. A number of them, including the UK, already have their own well-established domestic instant payment schemes or are about to introduce one.
Europe might also take a leaf from the US where TCH’s real-time payment system incorporates a request for payment (RfP) function, which can be used for electronic bill presentment, e- and m-commerce sales. An RfP message is issued to the buyer, with payment executed as soon as he/she approves it.
One persisting concern is that instant payment methods are widely regarded as being riskier than their older, more cumbersome predecessors. This is an opportunity for the new emerging technologies to allay such fears and demonstrate that they can be safer as well as more efficient.