An Executive Interview with Michael Bellacosa, Head of Global Payments Product Management Group, BNY Mellon - by Helen Sanders, Editor
There is a lot of industry discussion about instant, or real-time payments: what’s the background to these discussions?
Discussions on instant payments seem to have happened quite quickly, but in reality, other than advances in cheque electronification, there have not been any fundamental changes to the payments industry in the United States since ACH payments in the 1970s. Three major developments have converged to create the current focus on real-time payments. First, consumer expectations have evolved rapidly in recent years, as we all become more accustomed to real-time, on-demand digital experiences. Second, evolving consumer expectations have been accompanied by regulatory and economic views that there needs to be greater transparency and efficiency in the payments industry to drive innovation and growth. Third, financial technology or ‘fintech’ companies are becoming more active and influential, further heightening consumer and bank awareness of the opportunities that exist.
These three developments are interrelated, and if banks and clearing systems want to drive the payments agenda, it’s increasingly important for them to align their services with evolving customer expectations. Real-time payments are a key part of this realignment. So far, we have seen a variety of different initiatives emerging. The Federal Reserve Faster Payments Task Force is a key one, demonstrating the government’s commitment to a new payments model. This task force will be offering a variety of proposals, and it will be interesting to see where these lead. As that initiative moves forward, other operators in the payments space are also considering what can be achieved singly or in collaboration with others.
What are the likely advantages of instant payments for corporate payment users?
We have worked closely with corporates both directly on a one-to-one basis or indirectly through seminars, workshops and customer forums to model a variety of use cases and gauge interest and potential benefits from their perspective. This interaction shows that there is definite potential for real-time payments to deliver benefits for corporate users. But the form these benefits will take will vary depending on a given firm’s specific business model, customers and suppliers, and payment and collection models. Everyone seems to agree that instant payments will solve some issues, such as alleviating supply chain challenges created by payment delays. The cost and resources required to change legacy processes can be prohibitive, however. For some corporates, the offset for these cost considerations is the opportunity that real-time payments present to drive innovative ways of interacting with customers and suppliers via new channels in the future.
What are the obstacles to instant payments?
For instant payments to be successful, there needs to be ubiquity and reachability across all market participants. This is particularly challenging in the United States, given that there are around 12,000 participants in the US banking industry, virtually all of which will need to be engaged. For many of these participants, justifying the necessary investment won’t be an easy matter, since they’ll effectively be investing in an ‘add on’ to existing payment services, and also taking on additional customer education and system integration requirements. Realistically, only some banks will be in a position to increase market share through the development of innovative client solutions. For others, the investment in real-time payments will simply be a cost of doing business to keep up with changing customer demand and trying to maintain payment volume, market share and margins.
While most real-time payment initiatives, including those in the United States, are focused on domestic payments, what are the potential implications for cross-border flows?
Most of the instant payment initiatives that are already live or in development worldwide anticipate the interconnectedness of real-time payment systems to facilitate cross-border flows. As part of this anticipation, there have already been some efforts in standardisation and interoperability, which in turn will support trust and transparency in the international payment system. Real-time cross-border payments almost certainly will become a reality. But given the challenges involved, not the least of which include currency conversion and the difficulties of compliance harmonisation, the journey will be far more complex than delivering real-time domestic payments.
The most important initiative in regard to global payments that has taken off so far is SWIFT’s global payments innovation initiative (GPII). GPII was announced at the end of December 2015, and 45 leading banks are already engaged. The idea behind the GPII is to leverage SWIFT’s network to facilitate real-time messaging between member banks as an interim step to interconnectedness between clearing systems. This has potentially important implications for cross-border payments by effectively creating a real-time correspondent banking model.[[[PAGE]]]
What are the likely implications of real-time payments for cards?
There are still a number of use cases for cards that real-time payments do not replace, such as point-of-sale payments, purchasing cards, etc. That being the case, real-time payments realistically are unlikely to threaten the use of cards for many use cases today. One major feature of card payments is that the payer does not need to store the beneficiary’s payment details, which is potentially a drawback for large-scale use of real-time payments by consumers and businesses. As a result, real-time payment initiatives are being accompanied by innovations in directory services and tokenisation to allow payers to identify and route payments to beneficiaries (whether domestic or cross-border) without the need to obtain full payment instructions, which is inconvenient and potentially introduces security risks.
When are treasurers likely to see the first real-time payments in the United States?
The Clearing House’s initiative for instant payments in the US has targeted early 2017 for start-up. Given the need for ubiquity we discussed earlier, and the other obstacles posed by real-time payments for both banks and clients, it is not yet clear how quickly adoption will ramp up, or what volumes are likely to be in the early stages. Our intention at BNY Mellon is to begin offering real-time solutions for US payments, including client support, in early to mid-2017.
As the initiatives currently under way move forward, additional obstacles will inevitably arise — indeed, if that weren’t the case, real-time payments would already exist in the US. But with the proven success other countries have achieved, and the strong levels of political, economic, banking and consumer motivation now prevalent in the US, the prospect is close to becoming a reality. With this new reality will come opportunities to fuel innovation and growth through new business models and ways to engage customers and suppliers both in the US and globally.
