I’m just starting a project on real-time, immediate, faster payments or whatever you call it. It’s basically making a payment that’s either settled within seconds or the data is moved and settlement takes place at a later time, but it looks immediate.
There’s lots of reports out there about immediate payments, with my favourite being from Clear2Pay, now FIS, because it’s produced by my good friend Conny Dorrestijn. A few years ago, she started a faster payment innovation index that ranks different countries’ schemes based on functionality.
In 2016, most countries would struggle to score more than 3, but the UK, Denmark, Switzerland, Singapore and India manage to get a ranking of 4.
Nevertheless, I couldn’t find a clear statement of the pros and cons in the report, so I started looking at the big consulting houses to see what they had to say. In May 2015, McKinsey‘s payments report had an insight into faster payments:
Faster payments: Building a business, not just an infrastructure
To date, most discussions about building a “faster payments” system have focused primarily on speed and “plumbing”. Even more important, however, are the innovative products and services that an enhanced infrastructure will allow financial institutions to bring to market. These new products and services – in both consumer and corporate payments – can create new revenue streams and help banks and other players realise a return on their investment in a modernised payments system.
From McKinsey on Payments
It notes the UK being forced to upgrade their payments infrastructures when the regulator clamped down on three-day processing and demanded same-day. What’s interesting is that McKinsey estimates the cost of the UK Faster Payments Scheme as “between £150m and £200m to build and operate for the initial contract period of seven years (2008-2015), plus up to £50m for banks to connect to the central infrastructure”.
Where’s the ROI?
McKinsey notes that faster payments allow payment product innovations from peer-to-peer payments, mobile payments, e-invoicing and more. Great, but where’s the ROI? Maybe it’s in growing volumes of new services? For example, Forrester forecasts that P2P payments will reach up to $17bn by the end of 2019, from $5bn in 2014, largely driven by accessibility and an attractive user experience that focuses on speed and convenience for domestic transfers and cross-border remittances. Maybe so, but McKinsey proposes that it’s not revenue generation and new product revenue streams that’s the focus, but cost savings and modernisation.
While some existing revenue streams (such as paper-based services) will no doubt be impacted by a modernised system, the digitisation of information, the rise of mobile commerce, and end-users’ rapidly changing expectations all create the opportunity for banks to boost customer engagement, gain a greater share of wallet, and acquire new customers.
New revenue streams will be the primary source of return on investment in a modernised payments infrastructure, but it is worth noting that additional cost savings could be significant if banks seize this opportunity to integrate their payments architecture … McKinsey estimates that banks can reduce their payments-related IT spending by 20 to 30 percent when they integrate their payments architecture.
OK, I can buy that. In fact, the real driver may not be the ROI but just keeping up with customer and regulatory needs. For example, the Deloitte Faster Payments report has a nice little graphic that explains the world of change.
The graphic is explained as follows:
What is driving the growth of real-time payments?
We have witnessed tremendous technological and business model changes over the past decade. From new payment platforms and solutions, to updated regulations addressing payment effectiveness and security, to – maybe most significantly – higher expectations from merchants and consumers.
Technology innovation: Smartphone adoption has reached 70% in developed countries, while in various developing economies feature phones are often replacing wallets and cash. New domestic person-to-person (P2P) payment providers are popping up on a regular basis, due to catalysts like social platforms, digital currencies and near-field communication (NFC) based payments. Rapid technological change is driving rapid change in the industry.
New players and business models: While the traditional financial industry once controlled the world of payments, new startups, spin-offs, and partnerships are introducing new options for the payments sector. In the last few years, numerous new fintech startups have launched with a focus on mobile payments. The focus tends to be on new services, for instance, security with fraud detection and authentication, improved customer experience or making funds available quickly to small businesses when their line of credit is approved. The next step for these organisations may be determining whether real-time payments becomes a core business element and ways to design an operating model to help optimise that service delivery.
Merchants’ expectations: In addition to payment assurance and lower fees for transactions, many small businesses and large retailers alike are looking at real-time payment to enhance their cash flow management, reduce fraud activity and provide incremental value to their customers.
Consumers’ expectations: Due to rapid technological change, many consumers now expect almost everything to be available in real-time – but payments often seemed stuck in the past. The age of instant gratification is here to stay. Paying bills or friends should not be more than a few clicks or touches away, and the same expectations tend to apply to accessing funds as soon as they are available.
Regulatory pressure: Regulators across the globe are leading efforts to accelerate payments. The Federal Reserve Bank and the National Automated Clearing House Association (NACHA) are working on a roadmap and incentives to accelerate real-time payments in the US. Regulations in some developed countries are supporting real-time payments. This can benefit consumers and the government, which can efficiently trace activity and help increase the fluidity of the overall economy.
Globalisation: Generally, consumers and corporations expect the same simple payment and transfer experience regardless of where they are in the world. More efficient payment solutions have already been effectively implemented in various countries and for a large variety of use cases. As the roster of countries adopting real-time payments grows, the pressure on other countries to lay the groundwork and support speedy payments is likely to increase.
Very good, and I’m a lot clearer now that immediate payments is all about creaking old infrastructure that cannot keep up with consumer, merchant and market needs, so has to be renovated voluntarily or by regulatory force. The outcome is increased volumes at lower margins, so not a profitable uplift but a cost overhead reduction.
There are other reports of note out there on this subject, such as Cap Gemini’s paper on US immediate payments developments and Deutsche Bank’s research paper, but back to what I’m up to. In the next month, I’m launching a research programme into the benefits and issues of real-time payments. If you’re interested in participating, please leave your email address as a comment under this blog entry. Your email will remain private – only I will see it – and I’ll make sure to ping you the survey when we launch it in the next few weeks.NOTE: All emails left below will indeed remain private. BankNXT will send correspondence directly to Chris.
– This article is reproduced with kind permission. Some minor changes have been made to reflect BankNXT style considerations. Read more here. Main image: mrmohock, Shutterstock.com