Should payments be as quick as emails or messaging with smartphone apps? Should funds be transferred instantly from sender to receiver around the clock? Many actors are paying more attention to instant payments and often cooperative initiatives are emerging in different regions of the world.
In Europe, both the industry and public authorities are involved in discussions and projects
Instant Payments – the future retail payments market – an ECB viewpoint
to deliver instant payment solutions in euro at pan-European level. Without pretending to be exhaustive, in this article, first published in the April 2015 edition of the EPC Newsletter, Emanuela Cerrato and Francisco Tur Hartmann of the European Central Bank (ECB) look at instant payments from multiple angles, aiming to set ‘instant’ into the wider context of the future of retail payments.
The authors point out that no solution for instant payments in euro has actually been deployed at Europe-wide level. Work is now progressing towards the goal of at least one such solution, as advocated by the Euro Retail Payments Board (ERPB) – a high-level entity chaired by the ECB and bringing together the supply and the demand side of the industry to address strategic questions concerned with retail payments. The aim is to take a European perspective from the beginning and act before new ‘silo’ solutions emerge which would renew, for innovations, the fragmentation overcome in SEPA, in particular for credit transfers and direct debits.
A ‘history’ of instant payments
There has been much debate in the payments industry and among public authorities on the case for ‘faster’, now ‘instant’ payments. Users expect a seamless payment experience, public authorities foster efficiency, providers strive to maintain profitability while meeting customers’ expectations and regulatory requirements.
Against this background, in a modern always-online society, the speed and availability of electronic retail payment services is bound to increase, ideally reproducing the immediate finality of cash, 24/7/365. While a ‘hybrid’ scenario is the likely outcome, where it will be possible to make payments at different speeds, ‘instant’ is anticipated to become the new norm: in a future not so far away, we may just be speaking of payments and slow payments, where payments are instant by default.
The evolution underway seems to support such a conclusion. Current initiatives to speed up the payment process have first developed at local level, especially in the absence of well-established payment infrastructures or where the service offerings available fell short of ensuring compliance with regulation.
Most often, such initiatives have intended to meet consumers’ expectations that making a payment should be as easy as making a phone call, sending an email or messaging via a smartphone app. Thus a number of solutions have emerged or are being developed internationally – but without an apparent need for cross-border use – in Australia, Brazil, Canada, Chile, China, Costa Rica, India, Japan, Korea, Mexico, Singapore, South Africa, and Switzerland.
A paper on the strategies for payment system improvement, published by the Federal Reserve in January 2015, amplified the global attention to the topic.
In the European Union (EU), the Payment Services Directive (PSD)1 shortened the time to execute a payment to one day. Further acceleration was seen outside the euro area: the UK Faster Payments Service (FSP) has been growing in volume until almost reaching one billion annual transactions in 2014 and has provided a benchmark for the launch of similar services in Sweden, Poland and, at the end of 2014, in Denmark.
Still, no solution for instant payments in euro has actually been deployed at Europe-wide level. Work is now progressing towards the goal of at least one such solution, as advocated by the Euro Retail Payments Board (ERPB) – a high-level entity chaired by the European Central Bank (ECB) and bringing together the supply and the demand side of the industry to address strategic questions concerned with retail payments.
In December 2014 the ERPB provided a definition of instant payments and called the industry to assess relevant issues and present them at its next meeting in June 2015. The aim is to take a European perspective from the beginning and act before new ‘silo’ solutions emerge which would renew, for innovations, the fragmentation overcome in the Single Euro Payments Area (SEPA), in particular for credit transfers and direct debits.
Instant payments at the core can be defined as electronic retail payment solutions, available 24/7/365, resulting in the beneficiary receiving funds – and being able to re-use them – in a matter of seconds of payment initiation. In SEPA such solutions should be available irrespective of the residency of the sender, the receiver and the providers they choose.
A pan-European solution should thus be open to any payment service provider in the EU. It could materialise in one solution cooperatively developed on the market or in multiple solutions competitively developed on the market, but mutually interoperable. Such a pan-European solution is expected to make use of the harmonised instruments already available (credit transfers, direct debits, payment cards) and replicate their Europe-wide reachability, only with a much faster transfer of funds.
To that end, instant clearing is an essential requirement. Instant payment solutions can be described as comprising a scheme layer (i.e. rules and standards that allow an immediate transfer of funds based on existing payment instruments), supported by clearing and settlement layers.
The ERPB meeting ensured that action started on the scheme layer, where the European Payments Council is expected to play a pivotal role. To involve the industry more broadly and especially to ensure the essential requirement of instant clearing, the ECB held a meeting on clearing arrangements for instant payments on 4 March 2015. The meeting showed market players’ willingness to contribute to deliver instant payments in euro with Europe-wide reach. Links between infrastructures could facilitate this achievement, as also shown by the study on the “Interoperability of Immediate Payment Systems” released by the European Automated Clearing House Association (EACHA) in January. However, until a common scheme becomes available, it will be difficult to make progress on the clearing layer.
In tune with the call from the ERPB and with the take-outs of the meeting on clearing arrangements for instant payments, cooperative market initiatives have been launched by banking communities and infrastructures.
Central banks are involved in this cooperative effort. Beyond acting as catalysts for payment system improvement and fostering the involvement of all relevant stakeholders in the debate, the Eurosystem2 is open to considering possible enhancements of the settlement services it provides, in response to the requirements that may be expressed by the market.
Motivation to use and to provide instant payments
Users simply expect instant payments to become available: they are an obvious add-on to person-to-person instant messaging and to the opportunity offered by e-commerce to purchase goods over the internet at night or on a holiday. Nevertheless, a recurrent question in different fora is whether there is a genuine case for instant payments, or are they just the whim of a minority of users sustained by the regulators. It is therefore still worthwhile exploring the (sometimes underestimated) reasons why users would ask for instant payments and providers enter this incipient market segment.
Instant payments are habitually associated with person-to-person payments, but – as has been the case with the UK FSP service – there is scope for many more use cases: from government payments to customer-to-business, business-to-customer and business-to-business transactions.
Various offerings may develop, depending on the use cases. For person-to-person payments of small amounts, the ‘basic’ requirement of the immediate availability of funds to the recipient would usually be accompanied by the immediate debiting of the sender. A credit component may be added especially for business-to-business payments – save the immediate availability of funds to the recipient, which would allow the latter to manage liquidity more efficiently. The potential of existing account-based services (e.g. low cost and convenience of credit transfers, credit lines connected to payment accounts and cards) could be utilised to develop instant payment solutions that meet the needs of different users.
In general, instant payments may have a positive overall impact on the economy, allowing consumers and businesses to immediately exchange monetary value. In addition, instant payments – irrespective of the underlying payment instrument – may be initiated upon receipt of an e-invoice or an e-bill: this would smoothen the cash flow and the process of payment reconciliation end-to-end, thus making the business cycle faster and more efficient.
Small and medium-sized enterprises (SMEs) in particular could take advantage of the combination of e-invoicing and instant payments: a slow payment reduces the opportunity offered by e-invoicing for SMEs to optimise their working capital management and minimise their need for external financing. An example may be that of a construction company receiving an e-invoice and paying for materials while the workers are already at the seller’s collecting them. Here, of course, it may be argued that the payment does not need to be instant, but if it were it would facilitate the seller’s cash flow and working capital management. In fact, if the payment process is slow, some of the benefits of e-invoicing would be lost.
Turning to the providers’ perspective, there are concrete motivations to offer instant payments, which particularly apply to banks as the ‘traditional’ payment service providers. Instant payments can be leveraged in side-businesses, especially loans in the context of micro-finance.
It has already been argued that instant payments may be relevant to promote the financial inclusion of the unbanked or underbanked, and offer for instance a convenient way to pay workers at the end of a variable number of working hours – and this applies similarly to employees for whom variable and one-off rewards are core.
Payments can also be seen as the first step to enrol the unbanked or underbanked in a wider array of financial activities. Loans are often a natural next step and an enabler for personal growth to the advantage of society in the longer term. Even if not necessarily profitable for banks from the start, instant payments and related businesses can thus be anticipated to become so, as customers come to be better-off and need more financial services.
Furthermore, creating and strengthening a relationship with retail customers may attract deposits, i.e. a convenient and stable source of funding, all the more valuable in times of distress. Beyond cross-selling and customer consolidation, other considerations should encourage banks to offer instant payments: if they do enter this market segment, they could leverage the infrastructure and trust that they have established over time; if they do not, they would risk being disintermediated by innovative new entrants.
The above bears witness to how, coupled with additional services, instant payments may become increasingly attractive from banks’ perspectives as well. Such payments can be leveraged to maximise the value offered to users in general, including – significantly – SMEs, the unbanked and the underbanked. This is undeniably relevant in Europe, where the economy is to a considerable extent reliant on SMEs and tens of millions of consumers over the age of 15 still do not have a payment account.
Prospects for global instant payments
The trend towards instant payments and the related benefits are common to a number of regions of the world. At the same time, global retail payments between such regions are often inefficient and costly, but they are predicted to increase substantially, along with the growth in international trade and flows of migrant populations. Progress on instant payments may contribute to improve global cross-border payments, thanks to the technological advances that make geographical borders less and less relevant.
Such technological advances may represent an opportunity for incumbents in the European payments market to expand to innovative products and to new geographical markets, but could also be a threat: if the banking industry fails to grasp this opportunity, will users look elsewhere?
Banks may find themselves losing out to innovative players from outside Europe – and from outside the traditional banking industry – that may take the chance to enter unserved segments of the European market. Phenomena such as the emergence of virtual currency schemes may themselves be interpreted as answers to gaps in the retail payments system in terms of speed and reach.
Whether Facebook, Google, Apple, Alipay, Bitcoin or Ripple will redesign the way we make payments remains to be seen. In any case, the ECB is conscious of the gaps and attentive to the innovations in the field of retail payments, and will continue actively participating in the European and global fora where such issues are addressed.
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