Driving new overlay services with instant payments

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1 Point of view Driving new overlay services with instant payments a point of view document by sopra banking software Digitalisation is changing the face of trade, retail, commerce, business and social interactions all over the world. Instant payments offer consumers and businesses an easy, costeffective approach to payments with the speed and certainty expected in the instantaneous, real-time world of the internet. They also provide the foundations for new overlay services for both bank and non-bank payment services providers.

2 The rise of instant payments Instant Payments is actually not a new mode of payment. The first instant payment initiative started in Japan back in 1973, followed by Switzerland in Today, a multitude of fast payment initiatives, in different stages of development, can be found around the world (Exhibit 1). Of the multiple faster payment systems in operation today (except the Japanese and Swiss ones), all appeared after And the trend continues as many countries are planning to transition to a real-time environment (Exhibit 1). So why is the development of instant payment initiatives accelerating? In some countries such as the UK, bankers have been pushed into action by regulators, who aim to increase the velocity of money through the economy by accelerating the clearing and settlement of payments. A history of hyperinflation in the late 20th century in countries like Brazil resulted in an urgent need to develop efficient, electronic payment systems with fast settlements. In other countries the development has arisen in response to the threat from providers outside the traditional banking sphere. In any case, one of the main drivers comes from customers themselves. In this age of new technologies, such as tablets and smartphones, customers expect instantaneous access to information and services. s, tweets, shopping: everything is now performed in real time. And the number of transactions on mobile devices has increased dramatically over the last decade. In parallel, new end-user services are being created by both banks and non-bank payment service providers. Examples include optimisation of loyalty schemes, budgeting or receipt management. These new overlay services can span the entire purchasing experience, i.e. they go beyond the payment itself. Many of these services are based on or leverage instant payment services. However, the payment infrastructure has not evolved accordingly. It is common to have physical goods delivered faster than the corresponding payment transaction. As consumers and merchants are used to immediacy, they naturally expect digital payments to keep up at the same pace. Exhibit 1: Instant payments around the world. Countries in blue have Instant Payments systems in place (Singapore, although not visible on the map, has a fast payment system). Countries in orange are considering or transitioning towards faster payment schemes. Different countries have different systems for clearing and settlements, and can accommodate different payment applications, from person-to-person to customer-to-business, business-to-customer and business-to-business transactions.

3 Driving new overlay services with instant payments Instant is all relative Instant payment solutions comprise a scheme layer (i.e. rules and standards that allow an immediate transfer of funds based on existing payment instruments), supported by clearing and settlement layers. In a full real-time system all three layers are performed in real-time. However, many different hybrids do exist in the market, with different features in the terms of funds availability, payee and payer certainty and notification. Immediate confirmation is becoming a basic requirement for almost all type of payments. Market participants also expect immediate funds availability, even though not all payment types benefit equally from real time. In practice, most are real time in notification and authorisation, not settlement. For example, the UK and Singapore systems have deferred net settlement (2-3 cycles per day), whereas the Swiss payment system SIX has actual real-time settlements. In the Eurozone, a pan-european scheme for Instant Payments is under construction, which will likely mandate payment transactions to take place in a matter of seconds (Exhibit 2). A pan-european scheme for instant payments The demand for instant payments has led individual countries to pursue their own instant payments schemes. Examples include Spain, the Netherlands, Germany and Belgium which is not surprising given that approximately 95% of payments in such countries are purely domestic. However, setting up parallel systems does not necessarily appear to be the most efficient way forward and is somewhat in contradiction to the achievements made through the Single Euro Payments Area. This is why instant payments are considered to be the next European wide deliverable after the SEPA implementation. The Euro Retail Payments Board (ERPB) has mandated the payments industry to design a scheme for instant payments in euros by November The ERPB stipulated that immediate payment solutions should leverage the harmonisation and integration achieved as part of the SEPA implementation. The scheme will be based on the SEPA credit transfer and will be available to all payment service providers in Europe. It will result in the immediate clearing of the transaction and crediting of the payee s account with confirmation to the payer within seconds of payment initiation. The scheme will also lay the groundwork for future payment solutions like mobile person-to-person payments. Although voluntary, payment service providers that want to offer instant payments in euros based on credit transfers will be expected to adhere to the new scheme. Exhibit 2 Is there a business case for banks to invest in real time? All in all, the benefits are multiple for all stakeholders. For the economy as a whole, faster payments allow consumers and businesses to immediately exchange monetary value, increasing market liquidity. In particular, in a low interest environment turning around cash at low cost, in real-time provides opportunities for market participants to leverage their cash balances more efficiently in intraday arrangements. Faster payments also reduce the settlement risk. And with the rise of fast and convenient payment instruments, the use of cash and cheque will likely diminish, reducing the cost of payment processing. For consumers, instant payment notifications offer a better user experience and a way to better finance management. Despite these positive factors, there is undoubtedly a cost for banks to migrate legacy instruments to faster

4 payments. Even if payment costs go down as a result, the Federal Reserve Bank estimates that the overall business case would be neutral or negative 1. So, do the non-monetary benefits customer satisfaction, increased market liquidity, reduced risks - overcome the investment costs? Like many digital developments, the decision is not a financial one, but a business one. Instant payments will become not only a musthave to compete with Third Parties Providers and non-bank Payment Services Providers, but also a business enabler. In particular, the real value of instant payments will come from the new services that will be based on it. Focus: UK Faster Payments The UK Faster Payments (FP) is operated by a non-profit association owned by banks. The system offers 24/7 access to all UK banks. Faster Payments is, however, not a full instant payment scheme, as funds availability can take up to two hours. Nonetheless, this is a huge improvement compared to the 3-5 day wait needed previously. As a result, FP was very quickly adopted and volumes continue to grow by approximately 15% each year. It now represents 15% of total payment transactions in the UK Volumes (millions) Key figures: 2.9 million payments a day, for a total amount of 2.3 billion Posting time is 15 seconds Funds are available within 2 hours The Faster Payments system has become the backbone for a number of innovative payment solutions, such as Pingit, Paym and Zapp. Pingit is offered by Barclays to customers and non-customers for P2P, mobile point of sale and mobile bill pay. Paym is a mobile payment scheme that has been offered by the majority of UK banks as of 2014 and which uses mobile phone numbers as alternative identifiers. Zapp is the latest UK mobile payment service due for launch in October 2015 and will offer online retail payments. It will be embedded in a member bank s mobile banking applications and will facilitate online purchases. Zapp is expected to launch at the physical POS in the next 12 months. Exhibit3 New services within and beyond payments Payment service providers, retailers, tech companies are all moving into the payment space. This is not really surprising as the battle over the payment space is, in reality, a battle over the customer relationship. Winning the customer relationship means gaining control over customer data and the ability to offer high-margin services, within and beyond payments. Banks can leverage instant payments to offer new services to their clients, such as P2P payments. In particular, existing account-based services (e.g. low cost and convenience of credit transfers, credit lines connected to payment accounts and cards) could be utilised to develop instant payment solutions. Instant payments also enable new business models like low-value lending or P2B and P2P payments for used goods. But instant payments really shines when they serve as a basis for overlay services, i.e. services that can span the entire customer or purchase experience beyond payments. Examples include automated matching of purchase orders to invoices or in-store promotions that Instant payment systems are going to be all about the contextualisation of payments 1 Strategies for improving the U.S. Payment System, Federal Reserve System, January 26, 2015.

5 Driving new overlay services with instant payments are dynamically triggered by a consumers geographical position, their loyalty profile and their purchase history. These services are typically supported by digital wallets, or even better, by digital wallet management platforms. Instant payments will enable and drive innovation around these services, which brings new value to customers whilst allowing banks to best position themselves in the overall digital value chain (see also our companion paper, Contextualising digital banking with wallets ). Interestingly, instant payment can be offered as a service. In most cases, retail consumers do not expect to be charged a premium for real-time payments. On the other hand, business-to-business transactions could be monetized (although this may inhibit wide adoption). In return, banks can improve cash management services in commercial banking by reusing payment information for example, by improving notification of available liquidity/cash flows and by improving related forecasting services. Instant payments could also be positioned to small and midsize businesses, which are often not prepared to obtain or rent a point of sale system, as a way to reduce cost of acceptance versus cards while promoting the bank s account services (notably reconciliation and cash management services). Next steps Moving to real-time has multiple impacts. First, a modernisation of IT systems is likely needed, as batch-based legacy systems cannot cope with most real time requirements. Real-time payments mean everything that is involved (for example, account systems) is real-time, not just payments. Another important point to take into consideration is that, to support many of the new services, instant payment systems need to be fully integrated with other systems and services such as cash management. Also, banks internal processes will have to be more transparent and faster, because banks may end up having too many idle funds or not enough funds, and then face significant fluctuations in liquidity. In addition, banks must secure the necessary resources and processes to support a 24/7 service proposition. Also, because near-real-time payment systems reduce the time that can be used to check for fraudulent activities and laundered funds, banks will need to deploy enhanced fraud detection applications and payment interdiction processes. As transactions are irrevocable in instant payment schemes, banks will have to deploy stronger customer authentication processes for their Web and mobile banking applications. Summary and outlook The market is sending a clear message: consumers and businesses want fast, seamless payment services that are available all the time, everywhere, from any device. Instant payments contribute to more than just customer satisfaction. Instant payment solutions allow the development of new high-value services within and beyond payments. As a result, the world of instant payments is in a positive feedback dynamic. The development of new overlay services accelerates the development of instant payment solutions. In turn, the development of instant payment solutions accelerates the development of new services. These new services not only bring new revenue opportunities but keep the bank at the centre of the customer relationship. This is critical as the upcoming Payment Service Directive 2 will give third-party providers access to bank accounts for payment initiations. In effect, instant payments and the PSD2 will jointly drive innovation in the European payment space. Consequently, instant payments are key to controlling the payment flow and to competing with mobile network operators, cards, and non-banks. The winning banks will be those that will best capture and leverage the context of their customers to offer them timely (instant) and relevant services Instant payments, in combination with the PSD2, will drive innovation in the European payment space

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