In our previous post – ‘What Do We Want? Real-time Payments; When Do We Want It? Now!’ – we delved into the changing landscape of payments clearing and settlement, as real-time payments services are beginning to emerge to transform the prospects of payments as we know it, both in B2C and B2B.
We looked at the recently published report by SWIFT – ‘The Global Adoption of Real-Time Retail Payments Systems’ (RT-RPS) – and found the emerging trend matches the industry’s desire to see ACH payment processes move away from end-of-day (or three times each day, as the NACHA membership has now approved) batch processing, to more frequent settlements, with the ultimate goal being real-time.
Real-time payments for businesses amounts invariably to additional expense in the short-term. The SWIFT report reveals that the UK-based Faster Payment Service – launched in 2008 as the culmination of almost a decade of work to improve the speed of payment processing in the UK – spent an estimated £800 million ($1.2 billion) on the initial investment of the initiative, and the ongoing costs of the system. However, since its inception, 90 million accounts have been made available to accept payments via the Faster Payment Service, and this success is fueling the demand for similar services around the world.
In this follow-up post, we’ll be taking a further look into the SWIFT report to discover the actual adoption rates of real-time payments around the globe on the heels of the UK’s Faster Payments scheme, the key drivers of adoption, and the differences in how the clearing and settlement procedures of real-time processes work across the varying available systems.
There are a couple of perpetuating myths that surround real-time payments systems. Firstly, there’s the one that says RT-RPS are limited to only a few countries, with the UK’s Faster Payment Service and Singapore’s Fast being the most high-profile initiatives in this space. The second is that real-time payments are only a recent innovation.
Let’s debunk these one at a time.
- Real-Time Payments Are Not New
Gareth Lodge, senior payments analyst at Celent and author of the report ‘Real-Time Payments: Dispelling The Myths’ writes, “Our research suggests that the oldest system, Zengin of Japan, is over 40 years old. This means it pre-dates systems such as Swift. The majority of systems (at least their initial incarnations) are over a decade old.”
- Global Adoption Is Prevalent
The image above, sourced from the SWIFT report, shows that to date there are 18 countries with active real-time retail payments systems (RT-RPS), 12 countries that are currently in the processes of exploring, planning or building them, and an additional 17 countries that are exploring RT-RPS through a pan-Eurozone initiative.
The report adds that “Over the past 12 months, the U.S. Federal Reserve Bank, the European Payments Council (EPC), and the European Banking Association (EBA) have all issued formal papers on the subject of real-time payments, each of which has created considerable interest within their respective communities.”
All of these papers highlight the similar desires for the outcome of full integration of real-time payments – namely speed, security, and domestic and cross-border efficiency and collaboration. In addition to this, the SWIFT report calls attention to the following common characteristics across RT-RPS systems:
“Instant funds posting and payment confirmation: Typically, RT-RPS systems provide irrevocability, support real-time posting and re-use of funds, as well as the immediate payment confirmation to both the payer and the payee. Some participants of RT-RPS systems post funds on a beneficiary’s account after successful clearing, while others post after settlement.
Round-the-clock operations: Typically, RT-RPS operate on a full (or very near) 24/7/365 basis, although not all schemes clear payments in real-time, and settlement timing also varies.
Richer data standard – ISO 20022: All of the RT-RPS systems that have been implemented recently, or are being planned, such as Brazil, Poland, Sweden, Singapore, Denmark, Australia, and Japan, use ISO 20022 message standards, which have become de facto in this space. Other countries, for example, South Africa, Switzerland, and China, are planning to adopt ISO 20022.
ISO 20022 is seen as a way to improve payments efficiency and to create a common, level playing field. ISO 20022 messages are structured in such a way that the messages can carry more data fields, can carry ‘richer’ information with the payment such as remittances, and can also support non-Latin characters, important for Asian markets.”
Adoption rates are undoubtedly strongest in nations where regulatory reform has also been strong. The majority of those surveyed by SWIFT (73%) indicated regulatory support was the most important factor when moving to real-time payments. The reasons for support, however, vary from nation to nation.
In established markets, it is the fostering of innovation and competition in the payments services sector that is driving growth. The research by SWIFT indicates that real-time payments are contributing to the acceleration of the growing economy, whereby the cash conversion cycle is made quicker for a business that is paid in real-time, thus generating the working capital it needs to expand with requiring additional and expensive short-term financing.
In developing nations, on the other hand, modernized real-time payments systems are attracting foreign investments, which provide better banking opportunities, which in turn are driving economic growth.
Cost And Collaboration Still An Issue
Transparency, as ever, is the key to success for payments – especially real-time payments. In order for the initiative to move forward successfully all parties from all corners of the globe must work together. Head of Market Infrastructures at SWIFT had the following to say of the white paper: “Real-time is a growing trend led by consumer expectations, supported by regulatory reform. The industry is going to have to come up with ways to enable banks to offer real-time capabilities while keeping costs in check. Collaboration and innovation is going to be key.”
This is no mean feat, for as the emergence of innovative real-time payment services continues to have a transformational effect on payment systems, the case remains that various nations have implemented and are implementing various RT-RPS systems in various ways. As the SWIFT report concludes, “As the cost for the industry is a key barrier for adoption, interoperability and efficiency gains are critical success factors for both financial institutions and regulators for rolling out a RT-RPS system.”
One of the biggest challenges of real-time payments is, of course, moving everything to a 24/7 capability. Most bank systems, as we know, don’t operate like this, preferring the batch-processing approach. Although it is hardly breaking news that such legacy banking systems are very quickly becoming out of date, the move towards real-time payments is proving to be yet another wake up call for banks. Furthermore, the countries that are launching RT-RPS systems need also to ensure that each service aligns with the needs of the consumer and keeps up with the consumer’s ever-evolving behavior.