Time for Real-Time Payments: Banks Embracing the Payments Revolution

Significant change is under way in the world of payments, with new, client-centric capabilities transforming how we transact. Carl Slabicki discusses how the real-time landscape is evolving, and how banks and the wider industry can make real-time payments a reality on both the local and global stage. 

Real-time payments are increasingly becoming a global norm for domestic transactions. Over 35 countries have now adopted – or are transitioning to – some form of faster payment scheme . Regulation, outdated payment systems, the influx of fintechs entering the market, and growing client demand are driving this change, with the emergence of seamless peer-to-peer payments increasingly influencing what is expected of the corporate payment experience. 

As a result, banks are committed to not only providing enhanced transaction capabilities, but also collaborating to ensure the most effective services can be provided to clients – both in the short term, but also in the future, as they look to apply real-time functionality to cross-border payments.

Realising real time in the US

The launch of US Real-Time Payments (RTP) in November 2017, which saw BNY Mellon processing the first ever transaction, has been a watershed moment [2]. 

Before this, there had not been a significant overhaul of clearing and settlement systems in the US since the introduction of the Automated Clearing House (ACH) four decades ago; businesses and consumers had been somewhat limited in terms of experience. With the global payments landscape evolving faster than ever before, with threats of competition from non-banks, and with real consumer need, The Clearing House (TCH) and its member banks recognised that a radical change was required to continue to offer real value in the transaction space. 

The RTP concept was born in 2014 and, recognising the opportunity that it could bring, BNY Mellon has been heavily involved in the initiative since its inception, playing an active role in shaping the operating rules and best practices in order to effectively represent the interests and needs of clients. 

RTP delivers a 24/7/365 solution that clears and settles payments within seconds and provides real-time transparency to both parties. The improved visibility provides huge benefit to clients in terms of cash management and reconciliation. In fact, the introduction of real-time payments is altering the very culture of US payments, changing the dynamics of how clients and banks interact and creating a shift in terms of how and when consumers and businesses choose to transact, with payments no longer restricted to ‘business hours’. 

What’s more, the flexibility of RTP will allow it to communicate and inter-operate with other solutions, thereby further enhancing transactions. For example, by connecting with directory services, clients can make payments that utilise non-sensitive identifiers (i.e., tokens), such as an email address or mobile phone number, and RTP will enable them to settle in real time. Stitching together RTP with such solutions allows banks to provide an improved, more comprehensive payments experience to clients – including enriched connectivity through the use of application programming interfaces (APIs), which can help integrate payment messages and status with other key enterprise IT such as order fulfilment systems and CRM platforms.

RTP does more than transform transactions, however. The drive to revolutionise payments has sparked unprecedented collaboration amongst banks in the US. From the outset of the initiative, banks have been working in partnership with other banks, regulators, industry groups and fintechs in order to help ensure the most effective RTP design and outcome could be delivered to clients.

A key part of this is the effort to work towards ubiquity. The aim is for every account at every US financial institution (FI) to have RTP access by 2020. With over 10,000 active FIs in the US, this is a huge undertaking. Seven of the largest US banks are currently on the network, with the remaining top 20 expected to connect directly to the RTP network imminently. There is also traction across other tiers of the US banking sector – driven by increasing advocacy across the finance sector, and a growing number of opportunities to connect to RTP. A recent report indicated that 50% of US commercial banks plan to increase their IT spending in 2018 to facilitate RTP [3]. Further momentum is expected to build as banks that have held back now face growing pressure from clients to deliver new capabilities – and increasing competition from those who have implemented RTP and are able to offer significant added value to clients. 

Given the benefits of and demand for RTP, FIs need to develop a strategy regarding their approach to real-time payments if they are to meet evolving client expectations. Of course, investing in a new payments infrastructure and connecting directly to the RTP network can present a significant challenge, and may be beyond the reach of many FIs. But outsourcing some or all of the capabilities by partnering with a correspondent bank can considerably reduce the level of investment required, as well as the time to market, thereby enabling institutions to modernise their payment solutions efficiently and effectively, and offer a cutting-edge transaction experience to end-clients.

Real time: the next step

But the need to apply similar capabilities to cross-border payments is equally important. The same factors that are fuelling the need for enhanced speed and transparency in domestic payments are driving the need for innovation in the global payments space – and are, in fact, amplified on the cross-border side. Indeed, with multiple banks involved in the chain and money moving between the networks of different countries, payments can sometimes take days to settle, tracking is more complex (resulting in an even greater lack of transparency) and costs are higher.

Developing solutions that provide an optimised, client-centric global payments experience is becoming increasingly important, and banks – and the wider industry – are committed to working to deliver updated, innovative capabilities. But implementing real-time functionality on a global level is far easier said than done. Transforming payments on a global scale requires standardisation and interoperability between payment systems, alignment of processes and standards, regulatory harmonisation and widespread support and adoption across the industry to achieve what is known as the network effect. 

Despite the challenges, significant strides are being taken to enhance global transactions, and numerous projects are under way. SWIFT’s global payments innovation (gpi) initiative is already improving the speed, traceability and transparency of cross-border payments, with end-to-end payment tracking possible and nearly 100% of payments credited within 24 hours [4]. What’s more, due to SWIFT’s established infrastructure, the network effect is already in place, and it is possible to deliver these capabilities without the need for banks to invest in a major overhaul of their existing payments systems. Over 160 FIs have signed up to SWIFT gpi, and it is now being used to track and credit over 160,000 payments a day [5].

Elsewhere, it is believed that distributed ledger technology – while still at an exploratory stage – has the potential to add value and be utilised between a private network of banks with respect to enhancing cross-border payments.

It is also hoped that the domestic infrastructures that are being introduced by individual countries could act as a framework to help bring real-time payments and transparency to clearing and settlement on a global level. If the global industry can leverage common standards, such as ISO 20022, it offers the potential to ultimately interconnect these systems. ISO 20022 is now recognised as the global standard format, and is the messaging system behind most of the newest real-time initiatives, including those of the US and Australia, as well as Europe’s SEPA Instant Credit Transfer (SCT Inst) scheme. In fact, while the US RTP initiative is very much a domestic system, it is also part of a longer-term aim to establish international interoperability, and TCH is working closely with payment system operators around the world in efforts to plan for the alignment of domestic systems in the future.

The concept of interconnectivity could also be applied in a way that would encompass a trend seen in many emerging economies. With mobile payments effectively the norm in certain countries – particularly those where it is actually more common to have a mobile phone than a bank account – there is the possibility of interconnectivity with mobile payment networks, which could help to enable real-time cross-border payments to be made to and from such countries. For real-time payments to become truly global, interoperability with such mobile payment networks will likely play an important role.

The exact path to reaching the ultimate goal of delivering global real-time payments is yet to be established, but what seems the most likely course is that a combination of – or connectivity between – solutions will be required; one of these solutions alone will not provide the answer.

While considerable work is still to be done for real-time global payments to become a reality, the importance of implementing real-time transactions is clear, and significant progress is already being made. As we continue to advance the transaction space, banks are embracing the concept of real time and the opportunity to bring transformational change to payments. The industry is committed to leveraging new capabilities and working together to provide solutions that are fast, low cost and data rich, and truly optimising the payment experience – both local and global – for clients.