by Shirish Wadivkar, Managing Director, Head, Payables, Receivables & Flow FX, Transaction Banking, Standard Chartered Bank
One of the features of our digital lives today is that we live them in ‘real time’. From downloading media content to booking holidays, breaking news or making video calls to friends and family, our digital experience is instantaneous. The next step in the development of an efficient digital economy, and to extend the real time experience to businesses and the wider financial supply chain, is to accelerate the payments process that underpins consumer, business and government transactions. A crucial means of addressing this is the development of immediate, or instant payment schemes. Already mainstream in some countries, instant payments will play an increasingly important role in facilitating international commerce and supporting the business models of the future.
Taking root in domestic markets
The concept of ‘real time’ or immediate payments is not new. Japan’s Zengin scheme has been in operation for more than 40 years, while Faster Payments and FAST are now well-established in countries such as UK and Singapore respectively, and a number of others. According to SWIFT’s recent white paper, The Global Adoption of Real-time Retail Payments Systems (RT-RPS), immediate payment schemes are live in 18 countries, 12 are planned or in development, and a further 17 are exploring ways to introduce instant payments. In Cap Gemini’s World Payments Report 2016, the introduction of immediate payment systems in many markets is seen as one of the most important regulatory initiatives that will have an impact on the global payments business.
Instant payment schemes have a number of characteristics. They usually operate 24/7, with an end-to-end payment process, from payer to payee, of one minute or less. Payments are confirmed or rejected immediately, allowing payment instructions to be corrected and retransmitted promptly and without loss of value or time. Successful payments are final and irrevocable, so they cannot be recalled after transmission. From an inter-bank perspective, participants periodically settle transactions on a net basis once payments have been made, either intra-day or end-of-day.
Extending the value proposition
These characteristics are attractive to both consumers and businesses but there are various issues that limit the value of instant payment schemes at present, particularly for businesses. Immediate payments are only available for domestic payments, and in a limited number of markets, which hampers corporations’ efforts to standardise payments regionally or globally, and there is a threshold on the value of payments.
This is changing, with a variety of initiatives under way involving banks and infrastructure providers to deliver immediate payments to benefit businesses as well as consumers, including multinational corporations with cross-border payment requirements. For example, the European Automated Clearing House Association (EACHA) is encouraging members to connect on a bilateral exchange to achieve instant cross-border payments, rather than creating a new scheme, therefore effectively linking multiple domestic instant payment schemes to create a regional infrastructure. There are also discussions under way to deliver pan-European euro instant payments via EBA Clearing.
At a global level, the most compelling proposition so far is SWIFT’s Global Payments Innovation Initiative (GPII), announced at the end of 2015 and comprising 45 leading banks so far. Standard Chartered is a founding member of this initiative, which aims to leverage the SWIFT network to deliver immediate cross-border payments with a new rulebook providing the opportunity for smart collaboration across the banking community.
The corporate advantage
The first phase of the GPII will focus on business-to-business payments, marking a huge shift in payments and supply chain efficiency for multinational corporations. Instant, cross-border payments change the financial supply chain dramatically. GPII is supported by a clear service level for end-to-end payment processing: corporations, and their suppliers, will receive value in near real-time, without the current constraints of settlement periods and cut-off times. By enabling ‘just-in-time’ payments, treasurers and finance managers can improve days payable outstanding (DPO) whilst improving supplier relationships by avoiding late payment. Companies can control working capital and intra-day liquidity more precisely by triggering outgoing payments based on incoming flows. Furthermore, international trade transactions are accelerated, eliminating credit issues and avoiding expensive delays.[[[PAGE]]]
There are cost benefits too. Compared with other payment methods such as cash, cheques or cards, electronic payments, including immediate payments, are far cheaper for both payers and payees, in addition to the benefits of immediate value. The other key saving is in the ‘float’ costs of clearing when the funds are in transit over a day. The SWIFT GPII is focused on ensuring transparent fees, status tracking, and the transfer of rich information between counterparties to facilitate automated identification, reconciliation and account posting.
A virtuous value cycle
For immediate payment initiatives to become a reality, however, there need to be benefits for the whole spectrum of stakeholders. In fact, all users benefit from instant payments which is one of the key factors creating momentum in these initiatives. National governments are motivated to support immediate payments as increasing both liquidity and the speed of the payments system brings economic benefits. For central banks, there are also advantages to increasing the velocity of cash, while instant payments also encourage consumers and businesses to move away from high risk, high cost payment instruments such as cash and cheques. Banks too are set to benefit. Firstly, they will derive value from incremental liquidity, but more importantly, instant payments will allow them to deepen their cash management proposition and therefore provide better services to customers.
Some of this additional value is likely to be derived not from an instant payments infrastructure alone, but also from the overlay services that will undoubtedly evolve to provide more specific functionality for specific groups of users or types of payment. For example, businesses making supplier and employee payments, governments paying state benefits and consumers paying other individuals, utility bills, suppliers and making retail purchases whether in store or online all have quite distinct payment needs. Overlay services already exist in countries such as UK (e.g., Zapp’s Pay by Bank App) and India (UPI – unified payments interface), and this is a trend we expect to continue. As instant payment capabilities develop, leading banks will also be investing in delivering innovative payment solutions through mobile and other digital technologies to meet the specific needs of different payment users.
Cash killer or cards replacement?
One common query relating to the growth of immediate payments is whether these will mark the end of card payments. After all, card payments already allow cross-border, cross-currency immediate payments, they are widely accepted globally, and payers benefit from the credit element. As a result, we are unlikely to see the demise of cards in the foreseeable future. From the evidence so far of established instant payment schemes, use of cards has not been eroded. In the UK, for example, card usage continues to grow year-on-year, even though Faster Payments were introduced nearly a decade ago. Instead, the use of cash and cheques is declining.
A likely scenario is that instant payments will complement cards by meeting payment needs that cards currently cannot support. Card usage is more common in some countries than others, and they are not applicable to every payment user or payment type. For example, cards are rarely suited to high value transactions as a result of credit and transaction limits, and do not meet the full spectrum of payment needs, such as consumer-to-consumer payments, salary payments in most markets, or larger business-to-business payments. While cards are ubiquitous, cost-effective and convenient for both customers and merchants, the costs to merchants are higher than the costs of discounting offered by banks on the merchant’s receivables, and they may need to deal with multiple acquirers for better coverage.
Disruptive collaboration
Instant payments are an important illustration of how banks, central banks and infrastructure providers are collaborating to create the efficient, secure payment infrastructure of the future, which has the potential to disrupt existing payment practices considerably. In addition to the wider industry initiatives discussed above, banks are also evaluating opportunities to combine distributed ledger technology (blockchains) and instant payments to connect to each other directly and settle cross-border payments between banks as book transfers. This fundamentally changes the concept of correspondent banking, with the potential to reduce costs, maximise access to liquidity, and revolutionise supply chains.
However, while instant payments are becoming more widely adopted at a domestic level, the ability to make immediate cross-border payments 24/7 remains a promise rather than reality. It is too early to say which of the various instant payment initiatives that are under way will ultimately succeed, but the level of motivation, expertise and technology that is coming together, with the support of regulators, to meet the needs of the payment user community is encouraging. It is not only instant payment infrastructures themselves from which payment users will ultimately benefit, but also the overlay services and specific bank solutions that will leverage these infrastructures to enhance consumers’ and businesses’ ability to make payments efficiently, robustly and securely... and quickly.
