The Emergence of Real-time Payments

Real-time payments are here and are changing the way that
banks, corporates, and consumers make payments. Since UK banks launched the
Faster Payments Service (FPS) initiative in 2008, Nigeria and Poland have
introduced real-time payments services, while Singapore, Australia, Ireland,
the US and the Nordics are all currently developing real-time infrastructures.

The emergence of real-time payments brings opportunities as well as
challenges. Its growth aligns well with global online and mobile payment
take-up, and could be a powerful facilitator. Real-time payments represent a
new phase of evolution in the payments industry. Its use domestically will
increase and the treasury and payments sector could see a new real-time
cross-border service emerge. Five to ten years from now you should expect a
very different domestic and international clearing landscape.

All
real-time payments systems share the common characteristics that differentiate
them from traditional clearings. They are:

  • 24×7:  Payments sent and received all times
    of the day, every day of the year.
  • Instant payments:
    Payments sent within seconds.
  • Irrevocability: Once payments are sent, they can’t
    be recalled.
  • Certainty: Payments sent to a
    beneficiary bank – or others in the financial supply chain – are actively
    acknowledged or rejected, giving certainty to the sender that the payment
    was/was not successfully received.
  • Delayed
    settlement:
    Periodic net settlement between participants after the
    payment has been made.

The countries which have launched
real-time payments have built on the above core characteristics, offering
varying services.

Brief Overview

The
following gives a brief overview of each real-time payments service that has
launched, as well as Singapore’s Immediate Payments G3 scheme due to launch in
2014:

  • UK
    Faster Payments
    supports transfer of payments instantly,
    although the beneficiary bank has up to two hours to credit the account. It
    limits risk in the system by placing a liability ‘cap’ on each bank, and
    settles three times a day. Last year saw a surge in volumes flow through the
    service as FPS became the default payment mechanism on UK online banking
    portals. With almost 100% domestic reach enabled, there is strong focus on
    growing volume across the service, enhancing its brand, improving the customer
    experience, and enabling mobile payments

    Nigeria’s
    NIBSS Instant Payment (NIP)
    supports direct debits, as well as
    credits. It supports bulk file submission, and is enabled to support the
    initiation of payments via branch, online banking, mobile, automated teller
    machine (ATM) and through point-of- sale (POS) terminals*. Nigeria’s clearing
    infrastructure for the future, NIP embodies all the elements a real-time
    payments infrastructure should have to facilitate growth and innovation.

    Poland’s
    service, Express Elixir
    enables banks to be available for
    restricted hours in offering real-time payments without the need for them to
    transform their architecture to 24×7. It also has no concept of ‘indirect
    agency banks’, restricting payment transfers only to those banks directly
    connected to the scheme. With no mandatory participation, it is clear that
    Express Elixir is a slow progression towards real-time payments, allowing the
    industry to migrate in its own time as market forces allow. Able to support
    mobile payments, and using an internationally-recognised message format as an
    exchange standard, it is also future proofed.

    Singapore will be the next country to launch
    real-time payments, in 2014. The scheme, called G3, will support credit
    transfers and direct debits, and settle twice daily. Coming after the launch of
    multiple real-time infrastructures elsewhere in the world, and re-using the
    same software as the UK’s FPS, G3 has been able to learn from the lessons of
    its predecessors.

Other countries, at an earlier stage of
development, are evaluating real-time payments seriously. The key drivers for
adoption include improvements to existing processing times, upgrades to
existing infrastructure, and offering new services such as mobile payments. The
presence of real-time payments inevitably has a significant impact on both
consumers and the corporate world. 

New
Opportunities

Real-time payments are facilitating a change
in consumer behavior. According to Citi’s experience, in January 2013 30% more
tax payments were made on the 31st, the last day of the self-assessment tax
deadline in the UK, than in 2012. Of these payments, 46% were made outside of
the hours of 9am to 6pm, showing that consumers are no longer restricted to
only making payments during business hours.

Real-time payments enable
corporates to improve their proposition to customers by offering services or
goods in a quicker timeframe. ‘Consequence payments’ are a category of payment
where a particular consequence results when a payment is made. Quicker payments
have greater value as they trigger quicker consequences. A prime example is
online purchasing of goods. The goods are only released when payment is
received, so a real-time payment transaction enables a corporate to dispatch
their goods either the same day or the next day, instead of a few days later.
Similarly, insurance firms can initiate customer insurance protection with a
very late cut-off, with certainty that payment has been received. This benefit
becomes even more powerful when considered against a 24×7 environment.
Consumers are increasingly shopping late into the night and expect to purchase
goods at any time of the day.

Although these advantages have also
become possible via card payments, real-time payments are cheaper for
merchants, allow closer budgetary control for the consumer (as they are made
directly from the bank account), and have less risk attached. The integration
of online banking and real- time payments is key in enabling consumers to pay
for goods from their bank account. Models exist already, such as iDeal in the Netherlands, Sofort in Germany,
and the newly launched European Banking Authority (EBA) initiative MyBank. These services are layers over
an existing payments infrastructure, looking to extend their capabilities into
real-time.

Mobile Channel

Another layer that can be built on real-time payments is mobile.
The announcement in January by the Payments Council of a delay in the UK
mobile payments scheme until 2014
, while regrettable still shows how the UK
is moving to supplement FPS clearing with a mobile payments proposition
supported by the largest banks. Other real-time payments infrastructures
already support mobile payments. Being able to make a payment not just at any
time of day but from any location can only increase real-time payments volumes.
Customers will be able to purchase goods, make tax payments or settle their gas
bill on their mobile any day of the week.

Figure 1: Real
Time Payments and Additional Services.

Citi real-time payments graph

Source: Citi.

Challenges

There are challenges also for corporates and banks, foremost of
them being the overlaying of single real-time payments on to an existing batch
processing infrastructure. Back end systems operate in batches for increased
efficiency and reduced cost. Processing single payments presents a cost issue
and this applies right across the infrastructure, from channel to payment
processor, including general ledger, sanctions and anti-money laundering (AML)
systems, reporting databases, accounts payable/receivable (A/P and A/R) and
reconciliation.

There is increased operational overhead also, as
24×7 coverage is required outside of traditional payment operating hours.
Although real-time payments are straight-through processing (STP) so there is
no repair function, an outage can have serious consequences. Being unavailable
for a few minutes can cause several hundred payments to fail.

Operating in a 24×7 environment also impacts how banks perform end-of-day
batch jobs. With real-time payments flowing uninterrupted banks can no longer
afford the luxury of having downtime to process end-of-day runs, which have to
be done while still processing payments from customers. This requires banks to
run two processing sites in live (known as hot/hot), enabling them to switch
from one site to another if downtime on one infrastructure is required.

Once banks have made the transition to a real-time payments
infrastructure they can insulate corporates from some of the change by offering
additional services. These include bulking and debulking of payments so
corporates don’t have to convert their infrastructure into a real-time one.
Banks could also offer reconciliation services providing bulk entries on
statements if required.

Momentum for real-time payments is growing
and it is likely that parts of the world will make an evolutionary leap in
offering instant payments to corporates and consumers. Countries hampered by
existing clearing infrastructures will need to decide whether they should
rationalise going forward. Certainly in the UK the case is growing to
rationalise three electronic payment (e-payment) clearings to no more than two.

As further countries adopt real-time payments it is only a matter
of time before we see the birth of real-time cross-border payments. This is
particularly true of instances where banks become members of multiple schemes.
To realise such a vision would require a real-time cross-border connection
between banks and a clearing and settlement provider managing exposures and
liabilities. It would be a natural evolution for a domestic real-time payments
clearing provider to promote themselves to a pan-regional level, bringing with
them the principles of domestic clearing and settlement to a regional stage
offering benefits to treasurers.

Corporate clients and consumers,
for whom real-time payments is becoming the standard, will no longer see
borders as a barrier. They will expect the ability to conduct transactions
online or on their mobile and to be able to send money to family or merchants
instantly from their account, irrespective of where the beneficiary is.
International remittance is possible today, but real-time payments enable banks
to offer a standardised service more cheaply than current providers in the
market.

A real-time payments cross-border service would be good
news for corporates, potentially reducing transaction fees. Real-time payments
coupled with a 24×7 service window would help improve cash flow, and open up
trading opportunities across multiple time zones.

Cross-border Real-time: SEPA

For a cross
border service to be successful, banks would of course need to work together to
develop common standards and agree pan-regional scheme rules. The single euro
payments area (SEPA) has shown that implementing a regional clearing solution
can be time-consuming and somewhat torturous. SEPA’s biggest obstacle has been
to harmonise domestic schemes into a ‘one size fits all’ scheme.

The lesson to be learned from SEPA is that as new real-time payments schemes
launch domestically, regulators and banks should maintain a longer-term
international real-time vision – using industry standards and principles where
possible. This will facilitate harmonisation at a regional level in years to
come. We are already seeing divergent domestic schemes and, rather than build
unique schemes, countries should be looking to mirror existing real-time
payments services where they can.

As a global bank, Citi is a
founding member of the real-time payment services in the UK, Nigeria and also
the soon-to-be-launched Singapore scheme. The group also plans to join Express
Elixir in Poland in 2013. Looking to the future, Citi is working with clients
to lead them into a 24×7 digital economy. We are keen to use our experience to
help the payments industry and our customers to understand the opportunities
and challenges that real-time payments present.

To summarise,
real-time payments is here already and needs to be considered by corporates and
banks going forward. Payment models are changing in many countries, whose
corporate clients and consumers are already adapting and benefitting. For
corporates and banks there are benefits to be had but challenges to be
addressed. 

As mobile and online payment services steadily launch
as layers over a base real-time payments capability, banks and corporates will
need to understand how they connect to such services and what their customer
proposition is. And likewise, countries launching real-time payments need to
ensure that each service meets the needs of its users and aligns with evolving
consumer behaviour.

*Introduction to NIBSS Faster
Payments (NFP), by Nigeria Inter – Bank Settlement System (NIBSS) Plc,
Version: 1.0, October 26, 2010

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