Instant Payments: a Clarification of the Vision, the Benefits and Implications of the “new” Cashless Cash.
In an on-demand environment where both digital communication and commerce grow in importance, expectations of new available payment solutions that offer the same experience as cash, begin to rise. Due to improved technologic advances and ongoing regulator pressure, the awareness of and demand for instant payments is expected to further increase in the future and could potentially harm the existence of cash. It is therefore the question if and how financial institutions should participate in this journey of cashless cash in order not to lose out to new innovative players entering the market.
Consumers nowadays expect their funds to move as fast as their goods, since they are able to use their mobile devices to access m-commerce services all around the clock. In order to meet these new expectations and to respond to the appetite for real-time information, initiatives regarding the implementation of instant payments solutions offered by banks and non-banks are going global. At the moment, showed in the figure below, at least 13 countries are currently live or in development with their (near) Instant Payment Scheme, of which six have been developed in the last three years. Examples include the Faster Payment Service in the UK, the FAST scheme in Singapore, BiR in Sweden, SPEI in Mexico and IMPS in India.
Definition of the new Cashless Cash
Instant payments are defined by the ERPB as “electronic retail payment solutions available 24/7/365 and resulting in the immediate or close to immediate interbank clearing of the transaction and crediting of the payee’s account (within seconds of payment initiation), irrespective of the underlying payment instrument used (credit transfer, direct debit or payment card, electronic money) and of the underlying clearing and settlement arrangements that make this possible.”. The main steps of the flow of an Instant Payment are illustrated below.
The increased penetration is driven by 5 main forces; New entrants, technology innovation, expectations, regulation and globalization. First of all, new players, both bank and non-banks, are looking for ways to correspond to the increased mobile and e-commerce penetration by offering accelerated payment methods to their customers. These (non-bank) players often do not have to comply with the more stringent financial regulations, fostering an easier way to market new products and services. Secondly, as a result of technological improvements and the corresponding fall in the cost of technology, instant payments are becoming more realistic. Virtual currencies and blokchain technology for example, can further facilitate the use of instant payments in the future. For further reading about Virtual Currencies, click here. In addition, as information is now available on a real-time basis thanks to these innovations, consumers also expect their payments to keep up at the same pace. Merchants in contrast look for ways to improve their cash flow managements and liquidity position. The awareness is further increased by regulators all around the world through the introduction of new initiatives and directives, with reasons differing across the diverse regions. The introduction of PSD II in Europe for example has stimulated innovation and has lowered the barriers for third party players to enter the market. For further reading about PSD II, click here. Lastly, a growing number of countries are putting pressure on other countries by adopting an (almost) Instant Payment Scheme. As more and more of the commerce happens across country boundaries, demand for faster international payments arises.
Instant payments offer benefits for each stakeholder
Instant payments can offer benefits to different stakeholders of the payment environment and should be considered when assessing its attractiveness. These benefits are summarized in the table below.
The introduction does not come without any issue
Notwithstanding the fact that public authorities will continue to push these initiatives to financial institutions, the aforementioned benefits should be weighed against the additional challenges this new payment scheme imposes.
First of all, the initiative will be very costly due to the considerable initial investment and ongoing operating costs. The operating costs increase due to a need for better liquidity management, better and faster risk management, appropriate resources to guarantee 24/7/365 and costs related to testing. This could potentially form a barrier for smaller players to participate. Also the additional risks are of a concern. As transactions are completed in a matter of seconds and are not recoverable, additional AML, fraud avoidance and compliance measures should be put in place. In order to guarantee a suitable scheme and to avoid fragmentation, stakeholders have to collaborate, both within and across countries as no single bank can create a scalable payment scheme on its own. Differences in regulations, standards and requirement make this however a challenging topic.
How are the EU and its financial institutions planning to be participants of this journey?
The pace of development and usage is increasing in Europe, with instant payments clearly becoming a key strategic topic of today. In June 2015, the EBA Clearing launched a blue print of a Pan-European Instant Payment Scheme they are planning to introduce in the SEPA zone. With the formation of a task force composed of more than 20 representatives of EBA clearing service users, the EU hopes to start piloting in 2017 in order to respond to the increased risk of fragmentation due to national initiatives in different EU countries. In addition, the EPC has published its first guidelines and requirements for a Pan-European Scheme in November. These requirements focus on performance rather than clearing & settlement, which is expected to be determined by the participants themselves.
Instant payments are having a transformational effect on the payment environment financial institutions are currently active in. As new players will try to disrupt the landscape even more in the future, financial institutions have to look for ways to strengthen their position with value-added services and products. Thanks to instant payments, the business cycle becomes shorter, more efficient and less expensive, offering benefits to all stakeholders; consumer, merchant, society and banks. It is however important, all stakeholders collaboratively look for a suitable solution in order to ensure interoperability and efficiency gains, this to avoid fragmentation across the payment landscape. To move forward, financial institutions need to show open-mindedness towards these new technologies in order to fight the competition from players inside and outside the traditional banking environment.