Real time payments (RTP) are on the verge of becoming a ubiquitous method of swapping money for goods, but despite some claiming take-up of the initiative has already reached critical mass, there are still substantial obstacles that must be overcome before RTP can claim to be a universal option. Michael Turner reports.
“Banks are much more on the ball with real-time payments than they were a year ago,” says Elie Lasker, senior market manager at Swift.
The benefits of getting RTP in place are myriad, especially in the e-commerce sector. An RTP solution will allow consumers to bypass third parties like PayPal and buy items straight through their bank accounts – a seemingly small improvement on the current system, but payments bankers are resolute that customers will see the product as invaluable.
A full RTP solution will also end the need for a buyer to input card data at the point of sale.
“You have to think about what products will use real-time payments,” says Lasker. “Peer-to-peer payments will be the initial use case, yet likely more used by banks as a ‘test case’ of RTP prior to ramping up other RTP products, such as in the B2B space.”
Once peer-to-peer RTP has been shown to work, corporate treasurers are likely to take notice of the product, with payments against delivery a potential beneficiary in the trade finance sector.
“The sooner you get the payment, the sooner you can release the goods,” explains Lasker.
How this might work in practice for trade finance remains to be seen. If it was implemented fully into the trade payment flow, RTP would effectively negate the need for traditional trade finance products such as a letter of credit, as the funds would clear in the seller’s account immediately – which might be a trusting step too far for all but those trading partners with the most cast-iron business relationships.
However, there is the opportunity for funds held in escrow to be released to the seller immediately once a bill of lading has been presented, which could dramatically speed up the process of the exporter being paid.
Business-to-business take up of RTP will also allow faster settlement of invoice payments between trading partners, also including remittance information alongside the payments, according to a research note from Deloitte, titled Real-time payments are changing the reality of payments. This would be a particularly attractive proposition for small and medium-sized enterprises, which are particularly susceptible to cashflow struggles.
Eliminating cashflow problems, or at least making future cashflow clearer, could also prove crucial in SMEs obtaining bank financing.
“In traditional debt finance,” says the Organisation for Economic Co-operation and Development (OECD) in a white paper, “[the] extension of… credit is primarily based on the overall creditworthiness of the firm and the lender considers the expected future cashflow of the firm as the primary source of repayment.”
Working capital and liquidity can also potentially be improved by the use of RTP, as the ability to instantly pay your bank – rather than wait three days for BACS payments or be constrained to before 2pm on a working day for CHAPS same-day transfers – means that treasurers have more flexibility over their money pools.
“It aids business-to-business because you can manage your liquidity,” says Ireti Ogbu, Emea head of payments and receivables at Citigroup. “As a treasurer, it means you do not have to provide liquidity until it is absolutely necessary, and this can optimise your working capital.”
However, not everyone is as bullish on what RTP implementation means for corporates – at least in the near term – mainly because it will take a change of mindset to get many companies on board, as businesses still like to manage their cashflow through invoices. This, by definition, gives the recipient a non-instantaneous timeframe to pay the bill.
“In the business-to-business market,” says Natalie Willems-Rosman, head of payables and receivables, Emea at Bank of America Merrill Lynch (BofAML), “payments are still happening in batches and it will take more time in that market for new payment methods to be adopted.”
Giving banks a push
Different factors are encouraging banks to look closer at RTP, according to Juliette Kennel, head of market infrastructures at Swift.
“There are two reasons RTP is not being pushed down the agenda at banks,” says Kennel. “One is customer demand, for example, people would like to use their smartphones and other applications to make real-time payments, and two is the strong regulatory support and push for RTP.”
The European Central Bank (ECB) has been a major player in getting RTP moving forwards. The bank has said that it wants an RTP solution to be in place in the eurozone by 2017.
“The ECB has been closely following this initiative, and has asked for some quite concrete plans from existing infrastructures,” says Kennel. “So we will know more in the coming months.”
The ECB says it wants an RTP solution to be developed at the pan-European level. It concedes that if an RTP solution is developed on the national level, it should become interoperable “at least with solutions based on the same payment instrument”.
Commercial bankers are in agreement with the ECB on the importance of domestic initiatives being able to interact with similar systems across Europe.
Willems-Rosman at BofAML explains: “It comes down to how real-time payments will work across Europe. How will domestic schemes feed into a pan-European scheme? It is certainly important to have interoperability between schemes.”
Meanwhile, the Single Euro Payments Area (SEPA) is a European Union initiative looking to make RTP a reality for EU countries, including those outside of the eurozone, members of the European Free Trade Association, plus Andorra, Monaco and San Marino.
SEPA is run through the not-for-profit trade body European Payments Council, which is linked to the ECB. The European Payments Council has said that instant payments in the SEPA region will be its main focus in the coming years.
“There is a lot of drive for innovation in the payments landscape,” says Willems-Rosman. “The journey of instant payments has definitely started, but whether it can be completed in the 2017 timeframe, and whether banks can up-tier their technology that fast, is the challenge.”
Some regions are closer to implementing full 24/7 RTP all-year round than others, with the UK a particular hotspot through its Faster Payments system, a banking initiative that has been in place since 2007.
“It’s beginning to pick up, especially in the UK where RTP payments have grown by 22% in the last five years,” says Ogbu at Citigroup. “It has reached critical mass, though it still has the opportunity to be even more successful.”
This will likely happen via the second Payment Services Directive, an initiative spearheaded by the European Commission. The EC presented its PSD2 in June to the EU member states, which now have two years to implement the recommendations – the most eye-catching of which is the framework for non-bank technology vendors to create RTP solutions by broadening the definition of “payment institution”. This potentially lets tech companies bypass banks in this growing market.
“The requirements for the payment institutions should reflect the fact that payment institutions engage in more specialised and limited activities, thus generating risks that are narrower and easier to monitor and control than those that arise across the broader spectrum of activities of credit institutions [banks],” says the European Parliament in the legislation summary for PSD2.
This will create a headache for banks, as technology appears to be one of the main stumbling blocks for them in implementing their own RTP solutions. The tech needed for RTP to work is expensive and time-consuming for banks to implement.
“Very specific technology redesign is required to enable your systems for real-time service requirements,” says Willems-Rosman at BofAML.
One way banks might choose to save money is to upgrade their technology to enable RTP as part of a wider upgrade of their back-office systems, say some bankers. But Willems-Rosman disagrees.
“It’s not something you can just tie onto an existing upgrade,” she notes. “It’s a big investment so those engaged on this journey are very serious about real-time payments.”
Another issue that banks face is how to process the transactions, which will likely require a cross-border database. This will run into huge legal and regulatory issues, as lawmakers are unlikely to feel comfortable giving the green light to the mandatory storing of financial data offshore.
And that’s not all. There are other major problems, at least for banks’ corporate clients. The cost of using RTP for larger sums of money is prohibitive: in the UK, Faster Payments is limited to £250,000, for example – while cross-currency RTP seems like a long way off.
“One of the factors limiting Faster Payments is structural: it costs too much in some countries,” says Ogbu at Citigroup. “Another could be that it is mainly domestic. Globalisation is the trend and you would expect to make cross-border payments.”
This is where many payments bankers are looking to the EU for guidance, as the shared-currency zone is the simplest region to implement cross-border RTP without the hassle of having a foreign exchange mechanism in place.
But even within the eurozone, there are still a variety of domestic laws that must be adhered to, as well as domestic regulatory restrictions on the RTP platforms themselves.
One example of this is the maximum amount that can be used across borders using RTP, with the Swedish system allowing users to pay as much as they want, while UK customers are limited.
The Netherlands is ahead on its RTP journey, according to bankers, who say that the country’s small size and relatively few banks compared to other regions has helped. Dutch banks have a plan in place to have complete domestic RTP – with payment landing in the creditor’s account within five seconds – by 2019.
Meanwhile, Spain and Australia’s banks are also pushing ahead with RTP availability. Australia’s New Payments Platform, which is infrastructure for low-value payments similar to the UK’s Faster Payments, is past the first few stages of development.
Major markets left behind
Hong Kong is also beginning to make waves with RTP plans, though there has not been much in the way of concrete progress yet. For now, banks and businesses must use the Clearing House Automated Teller System, which is similar to the UK’s CHAPS.
“The momentum is continuing to grow, but it continues to be largely a domestic affair,” says Kennel at Swift. “The exception is Europe, which is starting to implement a cross-border programme. But I expect all countries will get there at some point.”
The US is the biggest market that has not yet begun making real strides in implementing RTP, and it is easy to see why. There are 6,051 banks in the US insured by the Federal Deposit Insurance Corporation, according to the FDIC.
Even though the major banks – BofAML, Citigroup, Goldman Sachs, Morgan Stanley, JP Morgan and Wells Fargo – make up the vast bulk of transactions in the country, a true RTP system requires all, or at least a very large majority, of domestic banks to agree on a universal payment system.
However, the US Federal Reserve said last year that it wanted to create a task force for RTP, and then begin identifying approaches for implementing faster payments.
Other US regulators are busy working on ways to digitise financial procedures – which is a step in the direction of putting an RTP system in place.
The Federal Reserve Bank of Minneapolis has been banging the drum for shifting from paper to electronic business practices. The bank said in June this year that e-invoicing could lead to savings of more than US$100bn in processing costs for US businesses.
“E-invoicing provides the opportunity for a business to expand into other areas of the financial supply chain, including workflow automation, working capital improvements such as early payment discount programmes and trade financing and reduction of payment risk and late fees,” the Reserve Bank of Minneapolis says in a white paper. “Related to the latter, as e-invoicing stimulates adoption of electronic B2B payments, additional savings may be gained.”
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