Real-time Payments: Benefits and Continued Challenges in 2020

With the challenges being brought by COVID-19, markets are unsure at best and financial institutions are being forced to make big decisions daily to continue to provide service to customers and help to their employees. While this is the current climate, efficiency and speed of payments are still top of mind.

For financial services organizations across the globe, the restructuring of payments to make the process leaner, faster and less complex has been a priority for years. Yet while some countries, including India, who recently received a 5+ rating for its real-time payment system, Australia, Denmark, Poland, Romania, Singapore and Sweden, who received a 4+ rating,^[1] have implemented instant, or real-time payments, others, like the U.S., have been slow to adopt the process. Understanding why it’s happening in some places and not others is as complex as payments themselves. So, why bother? Why real-time payments? Because, according to a recent report from Deloitte, “Real-time payments enable people, businesses, and governments to make payments more quickly with funds immediately available for use.”^[2] Simple, right? Getting there is not so simple.

Demand for faster payments

Let’s first explore why we believe there is global demand for faster payments. Today, consumers expect instant transactions – when we buy goods and services, when we pay bills and get paid. For companies, having instant payments means greater liquidity, which makes it easier to borrow money, make large purchases, and maintain positive status with vendors (all of which are far more important in times of economic uncertainty). Other factors, such as advancements in technology, increase demand for faster payments. APIs, for example, are enabling non-bank, 3^rd-party apps like Zelle, PayPal and Venmo to transact instant payments between parties. The open banking concept and universal desire to eliminate paper checks are also driving innovation and faster payments, as are regulations such as PSD2 in Europe.

For the financial system, the slow speed of non-real-time payment processing basically locks up money, making it unusable by consumers and businesses during processing. This can be a substantial amount of money at any given time (the average daily value of checks being processed in Germany in 2016, for example, was $654M²), especially in places like the U.S. that still write billions of checks per year. Freeing up this money would keep it in circulation – and in use – rather than locked up. In addition, the cost of check processing is significantly higher than real-time electronic payments, at $2.79 and $1.95 per transaction², respectively.

Benefits of real-time payments for financial institutions

Real-time payments and new payment models can:

• Stimulate consumer spending and boost revenue
• Reduce payment costs and enable higher value services to customers
• Engage new customer segments
• Reduce fraud risk
• Improve long-term customer relationships
• Enable innovative new product offerings to increase market share

Of course, banks need to start preparing for real-time payment ubiquity.

Understanding Real-time Payments Today

According to Deloitte, the main aspects of real-time payment systems are:

• Authorization – certification of the payment
• Posting – funds are made immediately available to the transaction
• Settlement – instant settlement of outstanding obligations between financial institutions
• Notification – payee receives the funds and payer receives confirmation of the transaction

All four of these processes must happen instantly in order for a real-time payment to occur. There are multiple initiatives today that are moving the needle toward widespread use. For real-time payments in the U.S., The Clearing House (TCH) Real-time Payments (RTP) system is being used by larger financial institutions to clear and settle payments. Customers of connected institutions can transfer funds to others that are connected to RTP within minutes. Reconciliation occurs several times per day and the system is limited to only those connected to the system.

The U.S. Federal Reserve announced, after much deliberation and input from both politicians and banks of all sizes, that its FedNow^TM Service, an around-the-clock real-time payment and settlement service, will launch in 2023 or 2024. While this may be good for smaller banks, those that invested nearly a billion dollars in RTP may see it as competition, or a hindrance to real-time payments for all.

In Asia, Immediate Payment Service (IMPS) and Unified Payments Interface (UPI) in India, Real-time Retail Payments Platform (RPP) in Malaysia, PromptPay in Thailand, Fast And Secure Transfers (FAST) in Singapore and Faster Payment System (FPS) in Hong Kong are some examples of payment systems that developed under the supervision of the respective monetary authorities.

Wherever they are in the world, in order to utilize real-time payments management software or systems, banks need to prepare their backend systems to integrate with others. For many, this type of modernization falls within current initiatives for digital transformation, and therefore is part of a much larger picture that cannot take place overnight.

“While many successful RTPs solutions have flourished, there remains a critical lack of a uniform comprehensive infrastructure, and alleviating this will require countries to set up their own domestic infrastructure at a significant cost—it can range from €45.54 million to €0.91 billion.”^[3]

So where does this leave us?

Even with economic changes happening daily, we will believe Payments trends of 2019 continue today, with most financial institutions making use of standards such as ISO 20022 to improve continuity and global exchange. Enabling open banking to increase products and services as customers demand them, utilizing APIs to address global payment needs and empower customers – all of these objectives, for now, are still on the docket.

Where does your organization stand on real-time payments? The SEEBURGER financial services team is here to discuss your payments systems and the future of payments in your market.

[1] “54 countries have activated real-time payment systems,” Finextra.com, September 19, 2019.
[2] “Economic Impact of Real-time Payments,” Deloitte, July 2019.
[3] Real-time payments in Asia: An opportunity for the entire financial ecosystem by Rama Sridhar, May 16, 2019