Instant payments: Fast track to opportunities
Payments market infrastructures, are modernising, driven by the combined forces of digital innovation, changing customer expectations, and pressure from regulators.
The regulatory recap
Modernisation provides a platform for innovation
Central banks across the globe are modernising their payments market infrastructures, driven by the combined forces of digital innovation, changing customer expectations, and pressure from regulators.
On the latter, key developments have been around a push for more innovation and competition in retail payments, as evidenced in Europe’s revised Payment Services Directive (PSD 2).1 By encouraging these, regulators hope to drive down the costs of payments for consumers and businesses.
The resulting modernisation is now laying the foundations for innovative payments instruments, such as instant payments (IP).
The Bank for International Settlements defines a fast (or instant) payment as one in which the transmission of a payment message and the availability of ‘final’ funds to the payee occur in real- or near-real time on as close to a 24/7 basis as possible.2
IP opens up opportunities for corporates to create new business models that can improve competitiveness and customer service. For example, insurance companies could offer instant claims pay outs and accept premiums in real time, which can reduce their costs and simplify the customer experience.
Another area of significant potential for IP is ecommerce. Here, IP provides a cheaper alternative to traditional card payments. At a time when consumers and businesses are increasingly adopting online and mobile commerce applications, corporate treasurers need payment instruments that will power their ecommerce activities.
With the rapid unfolding of such opportunities, however, also comes the need for treasurers to be cognisant of the surrounding regulations that are increasingly being formalised.
Scope, scale, and structure
Instant payments schemes developing globally
There are more than 50 instant or real-time payments clearing systems operating or under development around the world.3 Among the trailblazers was the United Kingdom’s Faster Payments, which went live in May 2008 and now processes more than 220 million payments per month.4 Other notable schemes include Sweden’s Swish platform, China’s Internet Banking Payment System (IBPS), Australia’s New Payments Platform, Singapore’s FAST, the United Payments Interface (UPI) in India, Mexico’s SPIE, and PromptPay in Thailand.
In a study5 of six such IP schemes, the European Central Bank found that “instant payments appear to have mainly replaced traditional credit transfers, with growth rates of the latter in many cases declining after the introduction of instant payments”. In addition, the study noted that there are indications that IP replaced person-to-person (P2P) cash transactions, particularly where mobile apps for P2P payments are widely available (such as in Sweden and Denmark). In these cases, the growth rates of all credit transfers (including instant and non-instant) increased after the introduction of IP, suggesting there is more than a simple replacement of traditional credit transfers taking place, according to the study.
Building the blueprint for your organisation
Leveraging the opportunities of instant payments
For corporates, IP is an opportunity to improve not only customer experience, but also cash flow and liquidity management. IP entails that an instant transfer of ownership of funds will enable instant transfer of ownership of goods. For many corporates, the instantaneous nature of such payments will give a competitive advantage, enabling them to launch new products and instant rewards. IP also provides a low-cost alternative to card transactions and a way to eliminate cash.
To effectively employ instant payments, corporate treasurers should:
- Quantify the business benefits. An improved client experience, new revenue streams and competitive advantage are all key long-term benefits. Treasurers can assess cost reduction delivered via IP, comparing the transaction fees versus traditional instruments such as credit cards, and reduction in operational costs.
- Determine the impact on operations. IP will have an impact on processes and how they are managed. For example, by employing IP, treasurers will no longer need to ensure operation of reconciliation teams to match incoming payments. The 24×7 continuous nature of IP will also have an impact on liquidity management as funds will continue to flow outside of the traditional banking hours.
- Consult banking partners. Many treasurers may want to shift to IP but do not always know how to start. Your banking partner will be able to explain what needs to be done and the impact of the relevant regulations across jurisdictions. This will be increasingly important in alignment with broader multi-banking access led by Open Banking, and as payments control falls increasingly in the hands of consumers through initiatives like Request-to-Pay (RTP).
- Deploy supporting technology. To facilitate and optimise 24×7 operations, treasurers must consider implementing technologies such as robotic process automation (RPA) and artificial intelligence (AI). These, along with a single platform to provide global visibility over liquidity will form the basis of operational support for IP.
- Ensure a connection with business partners. Business and treasury departments can no longer rely on traditional models such as cheque collection, ACH and wire transfers. In going digital, treasurers must use digital payment gateways with real-time FX, real-time payments, and real-time liquidity management to keep pace with the requirements of their business partners. Current invoice collection and supplier payments processes will not deliver the treasury support that businesses increasingly require.
- Reimagine the role of the treasurer. Corporates that have embraced IP are seeking treasury professionals among data scientists and software engineers. The move towards real-time treasury will be about innovation combined with strong governance and control.
Building the blueprint for the industry
More than an IT project
The advent of IP schemes marks the beginning of the transition to real-time treasury. IP schemes will deliver funds in real time, giving treasurers real-time control over their cash flows. RPA will play a role here, enabling treasurers to analyse flows and make predictions about liquidity requirements, thus optimising liquidity.
This is an evolving area; banking is still anchored to the old way of doing business in many countries, with differing cut-off times rather than continuous cycles. The more IP volumes there are, the greater the pressure on market infrastructures to move to a continuous cycle.
The idea of 24×7 operation is unlikely to be limited to IP; for instance, in replacing its real-time gross settlement system, the Bank of England has not ruled out continuous operation.6
For treasurers, these changes will have an impact on in-house banks, shared service centres and payments factories. Certain – typically larger – corporates will be able to build real-time payments factories that analyse flows and enable a corporate to dynamically offer discounts to certain suppliers.
Championing change with Standard Chartered
Playing a pivotal part in the transition to real-time treasury
We have extensive experience in supporting clients as they participate in various IP schemes globally. We understand the local nuances of different domestic schemes, such as varying transaction limits and proxies, and regularly talk to treasurers about the opportunities that IP can deliver.
Straight2Bank Pay, our award-winning digital collections gateway for corporate clients, supports clients as they adopt IP. Currently available in China, Hong Kong, India, Malaysia, Singapore, Vietnam, Bangladesh, and Kenya (with plans to expand to other markets in 2021), the proposition simplifies collections from various payment methods including instant and QR-based payments, bank transfers, cards and mobile wallets across online, mobile and in-store interfaces.
IP is opening up new possibilities for businesses that go beyond treasury. Companies with a vision for IP, who realise it creates operational and strategic opportunities, and take an innovative approach will benefit the most. To remain a strategic and forward-thinking part of a company, corporate treasurers must integrate new types of processes and ways of doing business such as instant payments. We aim to help treasurers and their teams to ensure they remain relevant in the IP world.
1 https://www.sc.com/en/regulatory-disclosures/second-payment-services-directive-psd2
2 Bank for International Settlements Committee on Payments and Market Infrastructures Fast payments – Enhancing the speed and availability of retail payments (November 2016) https://www.bis.org/cpmi/publ/d154.pdf
3 FIS: 54 countries have activated real-time payment systems, Finextra (September 2019) https://www.finextra.com/pressarticle/79917/fis-54-countries-have-activated-real-time-payment-systems
4 http://www.fasterpayments.org.uk/our-achievements
5 Are instant payments becoming the new normal? A comparative study, European Central Bank (August 2019) https://www.ecb.europa.eu/pub/pdf/scpops/ecb.op229~4c5ec8f02a.en.pdf
6 https://www.bankofengland.co.uk/payment-and-settlement/rtgs-renewal-programme/functionality-of-the-new-rtgs-service