Deniss: Cards have existed since the sixties and are the most popular means of non-cash payment. In most developed economies, card payments outstrip cash; even in cash-heavy Germany, notes and coins account for just four in ten transactions, while more advanced markets such as the Nordics show cash use as low as three percent. Although consumers may think their payments are already instant since they are quickly accepted at point of sale (POS), card payments come with certain risks and limitations – chiefly, that they were not created for a digital world and online shopping, and that they are proving increasingly susceptible to fraud, especially in the mobile channel.
Until now, consumers have been relatively happy with card payments. However, a range of technical advances means new solutions are emerging that respond to some of the difficulties with cards. These include the instant availability of funds for sellers, enabling non-cash account-to-account payments between two persons or businesses and adopting the same transaction model for physical and online consumer-to-business transactions.
Edgars: In general, the continuing decline in cash use is a main driver of instant payments. As user adoption of non-cash solutions grows, so pressure rises on central banks and payment providers to offer more convenient and cheaper alternatives, including new payment methods.
Looked at from a different perspective, instant payments will speed up the decline of cash, boost digitalization in financial services and facilitate financial inclusion among the unbanked. Although it’s widely assumed that everyone in developed economies is banked, work from the World Economic Forum estimates up to 20% of US citizens are either unbanked or underbanked. Instant payments will encourage these populations to access payments through their smartphones.
“Instant payments help to decrease the use of cash, boost digitalization in financial services and facilitate financial inclusion.”
Like any other payment method, instant payments address particular customer needs and follow certain trends. People want to have alternatives to cash for peer-to-peer (P2P) payments, bill splitting, sending payment requests, or asking friends for payment without causing offence. To date, it’s not been possible to deliver these services via card at an affordable price.
Seen as a value-added service, instant payments can make in-person consumer payments more convenient by employing QR codes and contactless NFC for payment initiation. They can also improve the customer experience in e-commerce by eliminating the invoices issued for online payments in many markets. Instant payment during online checkout means fewer data entry fields, reduced friction and a shorter customer journey. In some circumstances, it’s enough to enter a mobile phone number and receive a request to pay from the merchant, which is much more intuitive for the user.
Deniss: From a policy and oversight perspective, central bankers tend to highlight the potential of instant payments and call for banks to act. As the concept becomes more mature, central bank rhetoric is growing harsher: Brazil central bank chief predicts death of credit cards (finextra.com)
Such harsh rhetoric can be explained by the growing risk of fraud in card transactions, especially online. According to FICO, just four European markets saw card fraud volumes decrease in 2021, with some markets such as the Netherlands (18%) and Portugal (15%) witnessing significant increases. At the same time, the opportunities offered by instant payments to reduce the overall burden of fees on merchants, consumers and banks and speed up flows of money in the economy make them attractive.
“There’s a clear opportunity for central banks to deliver systemic infrastructure that enables instant payments.”
Typically, central banks operate central payment infrastructures, real-time gross settlement systems and clearing and settlement mechanisms. As such, there’s a clear opportunity for central banks to deliver new systemic infrastructure that enables banks to offer instant payment-based services to their customers. While some central banks develop and launch instant payment systems and even proxy and request-to-pay engines to support the further uptake of instant payments, others consider development to be market-driven. Examples of a market-driven approach include players such as PayPal and Venmo in the US, while successful public/ private partnerships in Europe include P27, Swish (Sweden) and the UK’s Faster Payments scheme.
In our experience, active participation by the central bank (either as provider or by giving a regulatory “nudge”) boosts the implementation of instant payments and is an important success factor. Moreover, seeing a central bank take ownership of instant payments makes implementation straightforward for banks and strengthens the autonomy of national payment systems as well. It also enhances state control of that system and helps central banks to implement comprehensive risk and contingency policies.
“Seeing a central bank take ownership of instant payments makes implementation straightforward for banks and strengthens the autonomy of national payment systems.”
Looking to the future, central bank digital currencies (CBDCs) are currently being trialled or researched by 90% of the world’s central banks. Part of the attraction of national digital currencies is the capacity for instant transaction and settlement. Introducing instant payment systems now makes sense as a “bridge” to any future CBDC, since central banks could link the CBDC’s blockchain to instant payment rails as well as their front-end infrastructure.
Edgars: Central banks do not always maintain their national payments switch. Dedicated processing entities exist in markets around the world — from Russia and Kenya to Egypt and Denmark — that take advantage of higher transaction volumes and shared data efficiency to help banks overcome gaps in their service provision, providing a unified solution that operates 24/7, has global reach and can be differentiated under a single brand. For example, Russia’s national processing entity handles domestic card schemes such as MIR and Zolotaya Korona as well as processing for foreign systems such as Visa, Mastercard and JCB, significantly reducing cost and time inputs for banks.
Typically, processors do not engage with consumers and may lack experience and confidence in the potential of instant payments, as well as finding it expensive to implement their own products. This is where a trusted vendor can serve not only as a back-end infrastructure provider, but also as a strategic partner in the development of a winning strategy and implementation roadmap.
We see a high degree of interest from commercial banks in several markets. Most commonly they take a more passive approach, although in general instant payments can benefit commercial banks by enabling their new product offerings and strengthening their competitiveness. Instant payments can also help banks and regulators get valuable insights from customer and payment data. At a time when competition in retail banking is rising fast, drawing relevant insights out of real-time transaction data adds hugely in areas of bank performance such as product development, portfolio management and marketing.
Instant Payments: Fast Facts
Source: RBM Research/ Payments Cards and Mobile
One of the main challenges for commercial banking is a need to transform their operations to be ready for a 24/7, online and physical environment. At present, banks are still employing overnight or “transaction plus two” settlement systems, with even further lags in cross-border transactions. For many, the switch to instant payments will require fundamental transformation and substantial investment, and their development strategy may have significant gaps in terms of cost recovery and income lines. It’s for these reasons that we believe banks — and central banking authorities — should be working with trusted partners that have deep experience in implementing instant payment schemes, rather than consulting firms that offer strategic advice and not implementation.
Deniss: There are huge differences in markets depending on available payment methods on the market and payment habits. The public expects that any modern payment instrument will be widely accepted online and for physical person-to-person payments, and expect it to be contactless and instant. These expectations should come as no surprise, especially since the rise of fintechs. Naturally, consumers also expect these basic services to be offered at no cost or at a very low fee.
Tech-savvy users are looking for more advanced and customizable services, deeper integration and the combination of multiple payment methods alongside strong security measures. Examples include the option to pay now or later via Buy-Now-Pay-Later (BNPL), split bills and send money to friends instantly — all through the same app or platform.
The unbanked population represents quite a different use case. Here, the expectation is that a payment instrument should be easy to use without advanced tech skills, and that it should be simple and user-friendly. Typically, countries with high unbanked population levels require the possibility of offline functionality without internet connectivity. Unbanked populations are even more sensitive to the cost of a service than regular consumers; however, experience suggests the combination of short-term borrowing opportunities with instant payment functionalities can be a winning strategy both for banks, in terms of building consumer relationships, and for consumers, who will increase their use of an instant payments app if it includes other functions.
Edgars: Merchants, in turn, will only adopt instant payments if they see high demand from customers. This is one of the key drivers for merchant acceptance of a new payment method, alongside availability of that method from their acquiring partner. Naturally, it is not only about demand since the right balance would require affordable fees around the same level as current payment methods. In terms of transaction and settlement speed, instant payments are very attractive for merchants since they make cashflow management easier. Merchants understand that instant payments carry the possibility of immediate settlement, which could be promoted as a significant advantage.
“The speed of transaction and settlement make instant payments very attractive for merchants as they make cashflow management easier.”
In addition to the benefits listed above, there could be plenty of bonuses if the merchant has a reliable acquirer. Instant payments are easy to receive using QR codes or NFC contactless payments. Good integration with a merchant’s day-to-day business activities, including the integration of accounting tools, cash back, bonus points and marketing activities in connection with the introduction of a new payment service, can help to make instant payments more attractive, especially for the micro-merchant segment. Research from PCM claims the number of merchants adopting electronic payments is set to grow 30% over the next five years as cash use continues to decline after Covid. As electronic payments continue to grow, security and safety assurances for both merchants and their customers will remain particularly important features. As most instant payment schemes feature bank-level security protocols such as biometric ID and two-factor authentication, instant payments are well-placed to feature strongly in such a future.
The Maldives consists of more than a thousand islands strewn across the Indian Ocean. Tietoevry is helping to transform the payments landscape in the Maldives to enable simple, fast and secure payments. Maldivians will be able to make and receive payments instantly irrespective of which island they live on or the bank they use thanks to Tietoevry’s new system, which will also introduce Request to Pay (R2P) services alongside instant payments.
The core of this new Maldivian payments infrastructure will be a state-of-the-art open API-based Unified Payments Gateway (UPG) comprising an account-based, real-time payments system augmented with a smart address system. All banks in the Maldives will be directly linked to the system. It supports seamless integrated solutions that combine the payment process and provide convenient value-added solutions around payments. The UPG is also intended as an enabler for the future adoption of open banking in the Maldives, given that it shares API architectures with all banks in the archipelago.
The Maldives UPG features an innovative approach that enables customers to view and manage multiple bank accounts through a single interface, consolidating various banking features including seamless fund routing and merchant payments. Thanks to the support of the Maldives Monetary Authority, the Maldives will soon have a fully-fledged open banking framework enabling payment innovation. Each participating bank will have its own portal that will serve as a sandbox and make integration simpler for that bank.
How about this? To help bridge the implementation gap and ensure a smooth and rapid transition to modern mobile payment solutions, Tietoevry also plans to provide a white-label payments application in the future phases of the project. This application can then be utilized by any bank, ensuring all inhabitants have access to instant payments from the same date.
Tietoevry creates purposeful technology that reinvents the world for good. We are a leading technology company with a strong Nordic heritage and global capabilities. Based on our core values of openness, trust and diversity, we work with our customers to develop digital futures where businesses, societies, and humanity thrive.
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