PAYMENTS: The Global Trend From Faster to Instant
Modern banking and new fintech programs tend to get the spotlight in the today’s financial services industry, but payments (the exchange of value between two parties) remains the foundation.
Accustomed to rapid, frictionless journeys, consumers and businesses are demanding similar experiences from payment enablers. Fast, instant, low-cost money movement between peers, banks, and across borders is the ultimate north star in each country.
Fintech companies show what’s possible with innovating in this space by providing nimble alternatives to traditional providers. Regions across the globe have varying levels of execution, which are tied to regulation, technology, and user adoption. Here’s a roundup of global trend towards instant payments, starting with the core painpoints to be solved.
PAYMENT EXPECTATIONS OF SPEED VS. INSTANT
The demand for faster payments isn’t new. Employees want speedy payroll deposits from employers. These employers want invoices to clients to be paid quickly. Merchants expect to collect instantly from clients at point of sale. Banks and financial institutions want loan payments to be received quickly.
Unfortunately, the most widely accepted payment rails run through legacy networks — banks, card networks, clearing houses — that launched over 25 years ago.
Fintech companies with modern solutions built on top of these incumbent options by leveraging tech to abstract away some of the complexity. These startups are pushing the envelope in terms of what’s possible, but there is still a ceiling in place from traditional providers.
In the US, today’s best-case scenario is same-day payments via ACH and domestic wire transfer (Fedwire or CHIPS, private large bank gateway exchange networks for Real Time Gross Settlement, RTGS). Wires require a user to authorize a transfer through their financial institution — in-person at a branch, or through a bank website/app. However, the timing of the payment request (if made after a specific cut-off) can result in the funds settling into a recipients account the next business day. No settlement on weekends or holidays.
Zelle is a new option (created through a consortium of US banks) that allows for payment & settlement within minutes (no fee), but daily transaction amounts are capped — making this only useful for small-dollar transfers. Card network transfers can also go through in minutes, but there’s a higher cost to the sender (as a % of the transfer).
There is no non-bank, low-cost option for speedy payments in any amount. Enhancements to bank networks (including connectivity, ledgering, settlement, reconciliation across all financial institutions) is needed.
‘ALWAYS-ON’ IS NEEDED FOR INSTANT PAYMENTS
To go beyond payments becoming faster and bank-agnostic is to enter the world of instant payments.
Living in a 24/7, global marketplace for retail purchases and business-to-business transactions, around the clock availability and payment execution is in high-demand. The overall benefit: a premium lift to a customer’s digital experience.
The longest pole in the tent is with ‘always-on’ uptime. The legacy networks and current payment rails need to greatly improve in order to realize today’s definition of instant. A truly instant, real-time payment is one which isn’t only fast in authorizing a request, but also rapid in it’s settlement and posting of available funds.
This last component requires the ability to immediately debit one account and credit another — even if those accounts are located at different banks. Better connectivity with financial institutions is a prerequisite to instant payments becoming a widely-adopted reality. The countries leading the way with regulation supporting open banking (users allowing authorization of their bank data to 3rd parties) are also ahead of the game with executing instant payments.
TAILWINDS PUSHING towards INSTANT, real-time payments
As regulators in Europe and other regions/countries mandate banks to enable access to customer data (through open banking), the number of payment use cases and programs starts to increase.
Fintechs focused on small and medium-sized businesses (SMBs) can deliver invoicing and recurring billing solutions. Companies with revenue tied to bulk sales can take advantage of cash flow solutions that provide advances (based on sales transactions & deposits).
Besides open banking, global networks are pushing initiatives for standardization in payments.
An example is with the ISO20022 transition across the financial services industry — capturing a structured set of transaction data that’s applicable to all banks on the SWIFT network. This helps multiple parties that interact with global banking systems to enhance analytics and easily track payment status.
Besides Europe, other countries like Australia, Denmark, Sweden, China, India, and Singapore are taking the lead in the instant payment space either through existing networks (e.g. SEPA in Europe) or new ones (e.g. UPI for India). The growing adoption in these markets is a strong indicator of what’s possible in addressing the needs of consumers and business.
Maneuvering the ROADBLOCK with fraud
In the same way that card networks have security & fraud protections in place, so to must instant, account-to-account (A2A) payments.
The card industry has taken over 50 years to evolve into what it is today. In its current state, there are still concerns with frivolous disputes and provisional credit policies mandated by card networks. A high amount of these cases would make card payments and issuance unprofitable for any company.
Having a set of risk controls helps reduce the likelihood of payment fraud from unauthorized transactions. A dispute framework needs to be in place to govern what party is liable. An enhanced decisioning model should be a part of all instant payment requests — to validate account owner and transaction. The cost of these additional controls then needs to be accounted for in commercial fee structures to ensure that programs are a WIN-WIN.
The good news is that numerous companies in the compliance & operations sector offer supportive services that enhance risk rules & policies. Know Your Customer (KYC), Strong Customer Authentication (SCA), bank account login links, and alternative data analysis can greatly reduce the amount of fraud attempts and losses. The learnings from fraudsters abusing card programs can be beneficial to newly launched account-to-account (A2A) platforms.
WHAT’s IN IT FOR LEGACY NETWORK PROVIDERS?
Minimizing costs when it comes to reconciliation and payment returns.
Financial institutions must review, validate, settle, and ledger all transaction requests. Poor operating processes can lead to claims for missing or incorrectly posted payments, an increase in service requests, and losses if funds can’t be recovered. A robust option through instant payments can greatly reduce the workload of payment ops in banks and the reserve for losses.
This is especially beneficial to banks that offer payment processing and treasury management services as a core product. Business customers that rely on bulk transfers and invoicing through their trusted banking relationship gain a better overall program. Having ISO20022 in place also means that these clients can quickly identify payment details, which makes their end-of-month bookkeeping processes that much simpler.
Card networks will still have a place for the majority of purchase & bill payment requests, but instant payments offers a chance for them to better serve businesses that would typically make paper check, electronic, and/or wire payments monthly. Companies with retail, merchant, or marketplace activities can now find a one-stop-solution through their existing credit card processor offering instant payments.
THE FUTURE STATE OF PAYMENTS
Instant payments (in some form) is expected to be available (region by region) by 2030 based on the above trends and overall pace of technology.
The future state won’t stop there. Billers will be looking for a way to request payments from payers — this can come through messaging platforms (such as email, Slack, WhatsApp, SMS). These requests could then be fulfilled on the spot, without going off-platform. The current version requires the payer to login or upload info through a separate site first.
The possibility of an ‘Apple Pay’ single-button option isn’t far off. In this path, the payer has options to pay in full or on installment plan structure (similar to Buy-Now-Pay-Later).
Payment details match those of the invoice. Billers & payers are pre-verified by the processor. The minimal risk (based on better controls, security) keeps transaction costs low.
One of the key use cases for cryptocurrency promised to bridge the gap of instant, low-cost payments on a global scale. Stablecoins or utility tokens would hold the same value across countries and be available on decentralized blockchain networks, 24/7. Unfortunately, the cryptocurrency sector has subsided in the past year based on regulatory pressure on banks (that provide buy/sell capabilities between fiat & crypto).
The best chance for a global, instant payment rail in the next decade will still be through cryptocurrency.
A unified, all-country system would take years to construct and even longer for all members to come into agreement. Blockchain networks are a strong validation that the necessary infrastructure already exists. With proper controls and policies in place, banks across the globe can incorporate this new path into their traditional structures quickly to modernize payments for their clients.
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