Real-time Payments: The Time is Now  

real time payments

 

Real-time payment infrastructures are spreading around the world with projects in Australia, the US and EU set to join Singapore, UK, India, Denmark and many other countries. The time is now for these payment backbones, but why are they popular, can they help banks retain customers and are they standardised yet on ISO20022, asks Neil Ainger.

The key driver for the adoption of real-time payment infrastructures is customer expectation of a better, faster service that can handle mobile, online and data reporting in a modern electronic world. Closely linked is regulatory demand that banks provide this for citizens.

“You cannot justify slow payments when consumers can order and get goods delivered in the same day,” says Carlo Palmers, Swift’s Market Infrastructures Manager. “The disintermediation threat from financial technology (FinTech) newcomers, challenger banks and alternative payment service providers (PSPs) – such as Venmo, Amazon, PayPal and so on – are also a driver because banks don’t want to lose customer immediacy and become ‘dumb plumbers’ without value-adding data, speed or convenience offerings.”

National real-time payment infrastructures can meet these customer expectations. Whether to let PSPs on the shared national real-time payment infrastructure to encourage competition is another debate. Many regulators want to ensure open access so banks and newcomers can fight fairly in the services layer, not the infrastructure layer which banks often pay for and sometimes operate via a third-party collective that runs the technology back-end.  Each country will decide the model based upon their finances, wants and needs.

This article first appeared in our Payments Revolution magazine

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Drivers for Real-time Infrastructures

“There is a significant drive towards real-time payment platforms everywhere,” says Lauren Jones, Head of Standards at the Payments UK trade body. “We’re seeing central payment infrastructures implementing real-time systems the world over. The need comes from increased customer demands – for greater speed, mobile and online 24×7 access and tracking and reporting desires. Consumers are far more digitally insistent and fast-paced. They want to have the ability to make payments to anyone, anywhere, at any time.”

“Corporates are also beneficiaries of real-time systems in terms of immediate bill presentment and greater transparency over their cash flow,” adds Jones. “Central banks can use them to enable strategic and regulatory change, introducing more innovation and competition on the front-end, which sits atop the shared back-end platform.”

According to Stig Korsgaard, engagement director for Nets, the Danish real-time platform which launched Q1 2015, such platforms are “good for banks” and “allow banks to participate fully in the on-demand economy and compete on service”.  Speaking at SWIFT’s recent Sibos 2015 trade show in October, Korsgaard said that user case studies emerge as you roll out real-time infrastructures. “We’ve seen taxi drivers, florists and many others use Nets in Denmark,” he said, as he argued peer-to-peer (P2P) consumer demand led to merchant usage and, ultimately, corporate and widespread uptake.

“Use cases have been strengthened and client demands increased,” agrees Michael Bellacosa, Head of Global Payments, BNY Mellon Treasury Services. “Now that expectations are approaching critical mass, banks are beginning to put their effort – and considerable weight – behind the development of new, more rapid payment networks.”

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ISO20022 XML harmonisation on real-time platforms would help corporates get more out of such platforms because standardised messaging helps cross-border interoperability. As infrastructures roll out around the world in Poland, Mexico and elsewhere ISO20022 standardisation is becoming a hot topic. Efforts are underway to deliver a global ISO20022 framework for real-time payments projects via the London-based Real Time Payments Group (RTPG) and other initiatives such as the Swift Harmonisation Charter which will map to it in this area. ISO 20022 XML messaging also offers data-rich payment information to treasuries and its extra characters – typically 140 against say 18 in Bacs payments at present in the UK – mean mobile phone numbers can be used to initiate a payment, aligning it against a bank number. A range of other data services become possible too.

It is intended that new fast payment services in the US, under the auspices of the US Federal Reserve, and in the eurozone, under the auspices of the Euro Banking Association (EBA), will run on ISO20022 as they are rolled out in the next few years. Nigeria and India, with its extensive authentication services, and approximately 25 other countries already have a real-time payment platform in place with various levels of functionality. Instant confirmation of payment and, at the very least, same-day settlement is the bare requirement. Some countries run three settlement cycles per day, while others go for instant settlement. The originator, beneficiary, respective banks, clearing houses and others involved in the payment chain must all receive fast service to meet the definition of ‘real-time’, although the actual speed differs from country-to-country. Australia is aiming for seven seconds, for instance, on its new platform, while others use 15 seconds as an operational parameter, with regular same-day settlements to follow. Other big nations still to migrate to a real-time system, however you define it, include China and Russia.

Ubiquitous Access is Essential

According to George Evers, immediate payments services director, at platform provider, VocaLink: “Ubiquitous access drives uptake.” When his firm launched the UK Faster Payment Service (FPS) technology back in 2008 it went live with 10 core banks covering 95% of the population, with each encouraging uptake.

The UK FPS was one of the early pioneers in this field. Mediated corporate access has since been granted and discussions are underway about directly opening up the UK infrastructure to new challenger banks and PSPs that weren’t included in the core launch. More than 400 PSPs currently take part via a sponsor bank.

A new mobile P2P payment platform, Paym, has also been launched off the back of the UK FPS technology platform. “Mobile commerce can be a big usage driver,” adds Evers. A fact backed up by the Danish Nets example and recent Swish mobile payment launch in Sweden. VocaLink has since gone on to provide technology and advice for the FAST real-time payment system in Singapore, which is also adding mobile functionality, and many other nations around the world.

Other players are also contributing to the global roll out of real-time platforms. SWIFT, for instance, is involved in delivering Australia’s new payments platform (NPP). “This is due to go live by Q2 2017 with the technology design by SWIFT signed off in July this year,” said David Brown, NPP Program Director at the Reserve Bank of Australia (RBA) during a presentation at the recent Sibos 2015 trade show. “We’re now doing the build out with mid-2016 the first delivery date, with testing to follow. RBA is a participant, but will act as ‘middleman’ between regulators and banks.”

The key objectives of the NPP programme, as laid out by RBA’s Brown, are:

A 24×7 payment system.

Real time funds availability.

Richer data with payments – “It’s why it’s ISO20022-enabled,” added Brown.

Easier addressing of payments – “So you can send payments using a mobile number or email, and not rely solely on bank account numbers.”

A modern platform for future innovation – an overlay services platform should enable new entrants, PSPs and others to take advantage of the new platform to drive payment and banking innovation.

The above NPP objectives could act as a ‘how to’ guide for other real-time projects, although each project will differ slightly depending on individual nation’s particular needs. Not every country, for instance, will in effectively merge its Fast Settlement Service (FSS) with its central bank’s Real Time Gross Settlement (RTGS) solution with one backing the other up to ensure 24×7 out-of-office hours service in Australia, but a common set of structural priorities and practices is discernible for all real-time platforms.

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Payment limits, access protocols and other characteristics will differ but all real-time platforms should offer:

Confirmation in seconds: to reassure the consumer and provide certainty and trust.

Instantaneous immediate transfer: the money should actually move quickly after procedural confirmation is sent. Some back-end platforms may move money in seconds, others run three payment cycles a day. But it must be same day and fast.

Irrevocability: a payment must be final once it’s made.

24×7 Operation: this is important in an e-commerce world where customers are used to shopping, working, ordering goods in the supply chain and transacting outside of normal work hours. It does mean infrastructure providers and banks using it will have to think carefully about when and how they do upgrades and IT maintenance; relying on standby hubs, mirroring, back-up resiliency facilities and so forth. You cannot do upgrades over the weekend anymore.

There will no doubt be many implementation challenges along the way to Australia’s NPP launch in 2017, especially as this is a new area for SWIFT, even with its historical background as a global financial messaging and payments hub for correspondent banks. All such projects face implementation challenges, however, and the benefit is that they can learn lessons from other early adopters.  The pioneering UK FPS, for instance, was launched before ISO20022 messaging was on its present path towards becoming the de facto financial services XML standard. FPS instead used an old ATM and cards payment standard, utilizing VocaLink’s history as a provider in this area in the UK, to launch the service in 2008. It was convenient at the time and subsequent VocaLink projects around the world instead look to ISO20022.

Implementation challenges

As nations roll out real-time payment infrastructures there are bound to be implementation challenges, both of a technical and business case nature. Technologically, established banks may struggle to connect easily to a centralised modern real-time processing hub due to aging siloed IT systems that are inflexible and require an upgrade, or newcomer banks might not have sufficient security, resiliency or messaging standard capabilities to be allowed access to the core. There are always ways around such issues – a vendor aggregated solution could help FinTech newcomers or smaller banks gain access, or the core could cater more for their needs via an open access service orientated architecture (SOA) with simple application processing interfaces (APIs). In regard to the business case, each nation will have to decide for themselves who they want to let access the real-time platform but true competition dictates more is better.

Service level agreements (SLAs) will have to be put in place for each platform participant and platform provider, especially if it’s an out-of-country third party. Most nations set up their own national real-time payment company to run a service and liaise with third-parties as required.

Banks will also have to speed up their fraud monitoring capabilities. However, the essential elements of fraud monitoring in a real-time environment will not change drastically from present arrangements. The use of pattern spotting behavioural software, anti-money laundering (AML) checks and so forth will just have to get faster.

About the author:

Neil Ainger is a freelance treasury, financial services and technology business journalist. Previously the editor-in-chief of the gtnews and bobsguide online titles, covering treasury and fintech respectively for the Association for Financial Professionals (AFP, 2 years), Neil has also worked as deputy editor at Informa’s Banking Technology [1.5 years] and edited Financial Sector Technology (FSTech) magazine for five years. In addition, he has worked at Reed Elsevier’s offices in Oxford [2001-2005] as a technical journalist in the Elsevier Advanced Technology (EAT) unit.

This article first appeared in our Payments Revolution magazine

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