Interview: “Not participating in immediate payments will be detrimental to a bank’s competitiveness”

This year, real-time payments are advancing in the US and Europe. Global financial services provider D+H has been working closely with the banks to help them prepare for this change.

PaymentEye sat down with Moti Porath, Head of Product Management, Global Payments Solutions at D+H, to find out how the adoption of instant payments will affect the payments landscapes in these markets, what factors are having an impact on innovation in payments, and how blockchain is changing the instant payments market.

What is driving the growth trend of innovation in payments? Is the desire from banks to innovate stemming from fear of competition from challenger banks?

Numerous factors have converged to drive growth in payments innovation in recent years. Certainly, banks see a need to innovate in order to compete with challenger banks. At the same time, new technologies such as blockchain and regulatory reform such as PSD2 (mandating that banks open APIs [application programming interfaces]) help to enable new payments innovations like never before. Banks are increasingly recognising the opportunity to defend and grow market share not just by creating new products and services, but also by partnering and working with fintech disruptors, which open up new opportunities they could not have easily realised on their own.

However, the bank response has not just reactionary. Innovation in any industry flourishes when the environment is receptive. That is certainly the case in financial services – and specifically in payments: technology advanced to deliver new solution options, consumers and businesses are receptive to try new ideas which attract innovators and their VC backers, regulators are not just being lenient but are actively encouraging advancements.

In this environment, both incumbent FIs and new players engage in robust competition (sometimes as adversaries, sometimes as partners) to keep or capture market share.

Is visibility into payments and cash management one of the primary benefits of an instant payments system?

Instant payments will obviously improve visibility into payment status and cash positions, and by extension help businesses manage cash and liquidity much more efficiently. However, the benefits of instant payments extend far beyond the obvious. They range from providing payers and payees with new ways of doing business with each other based on an acceleration of the financial supply chain, to their ability to enhance banks’ revenue streams and their evolution into fully digital businesses. They provide certainty, the rich information of ISO20022, and a level of automation that makes payments frictionless.

Looking at the big picture, immediate payments have the potential to alter the way society operates, reducing the use of cash and cheques, and increasing the velocity of money. Because of this broad impact, we feel that immediate payments are primed to advance rapidly. As immediate payments become ubiquitous, not participating will be detrimental to a bank’s competitiveness in the market.

Is there any regulation on the horizon that could curb innovation in payments adoption or is sentiment from regulators positive?

As the pace of life increases, payments are expected to occur immediately, and regulations are being implemented in every region in the world, geared toward transparency and consumer protection. So far, sentiment is positive—all regulation on the horizon is in support of innovation. In fact, innovation is seen as required to advance each market’s social and political agenda.

Is Europe behind other parts of the world when it comes to instant payments adoption?

In some regards, Europe has been on the forefront of instant payments innovation and adoption. The UK introduced its Faster Payments Scheme (FPS) in 2008. In 2016, that processed over 1.2 billion transactions worth over £1.2tn. Sweden’s immediate payments scheme, Swish, has been live since 2012, and was actively used by more than half of the country’s population in 2016.

Today, there is an initiative underway that will allow for instant euro payments at a pan-European level. EBA Clearing is launching a pan-European instant payment infrastructure solution that will enable European payment service providers to comply with the European Payments Council’s SEPA Instant Credit Transfer Scheme. Contrary to being behind other parts of the world, the nature of the EU, and regulation like SEPA, is driving Europe to become the first multi-country region to implement cross-border immediate payments.

D+H is providing banks in both Europe and the US with test environments for real-time payments. Can you tell us more about this?

A cloud-based test environment can provide banks with the ability to simulate the execution and clearing of payments on the EBA Clearing and TCH networks, in Europe and the US respectively. In essence, this allows banks to easily assess the benefits that real-time payments provide and accelerate their adoption of this new payment mechanism with minimal risk and investment.

D+H’s goal is to facilitate the adoption of real-time payments around the world by enabling the banks to reap the benefits of real-time payments. This includes enhanced operational efficiencies, access to new customers, and increased competitive advantage, through a low risk, high quality implementation, on time and on budget.

What would an implementation timeline look like for instant payments adoption? How long would it take before we see mass adoption of instant payments in the European region?

Adoption by banks will be fast (just like SEPA, this is regulation), but adoption by consumers will be slower. Historically, it takes five to seven years to get to the point where instant payments become a prominent payment instrument (i.e. the rate of growth is no longer exponential and is in line with the growth of the industry). However, because PSD2 is happening at the same time, open APIs may be a catalyst for an even faster adoption.

How does PSD2 impact the instant payments landscape?

While PSD2 does not address immediate payments explicitly, it could facilitate instant payment adoption, or at least help remove some of the financial barriers.

There is a vital relationship between immediate payments and open APIs. To realise the full potential benefits from immediate payments, banks will need to expose their immediate payments capabilities and APIs to other parties or utilise other parties’ APIs in the value chain (especially transaction enablers such as Square and ApplePay). This will enable users of these platforms to initiate payments themselves from the platform, for example by using a mobile device to execute the immediate payments transaction through their bank accounts, rather than having to use other payment methods such as credit cards.

To create and operate these links with third-party payments enablers, banks will need to invest in both building in additional security and delivering infrastructure, including moving to a payment hub model in the back office. However, as regulations like PSD2 already require that banks open their APIs, this is an investment that banks will likely already be considering, regardless of immediate payments.

What impact could blockchain have on the instant payments markets?

In our view, payments is one of the areas within a bank best positioned to benefit from the transformational potential of blockchain, though not likely for a few years yet as the payments industry is still largely in the POC [proof of concept] and pilot phase of blockchain. In the context of immediate payments, blockchain could to bring two main advantages that will increase value for participants.

The first is enhanced privacy. Especially in commercial transactions, the ability to exchange value and complete final settlement very quickly using blockchain distributed ledger technology brings enormous benefits to both banks and customers in terms of privacy and security.

Secondly, it can reduce the costs of running the payments infrastructure. Today’s infrastructures require a high degree of post-payment processing in areas like reconciliation and reporting. Through its distributed ledger capabilities, blockchain can remove these steps by absorbing them into a single, automated end-to-end transaction flow, thus delivering dramatic reductions in both cost and complexity.

Find more information about D+H’s Instant Payments Cloud Test Environment on the PaymentEye resource page.

You can also download your complimentary copy of the D+H whitepaper: Immediate Payments – Innovation is Knocking

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