20 August 2015
Explaining instant payments in eight questions
Various initiatives are taking place in Europe to implement instant payments. For example, the UK, Denmark and Sweden are in the forefront of these developments and Dutch banks have agreed to set the target for instant payments on 2019. Within the next four years they have to build an infrastructure that enables payments to be credited within five seconds. The press release stated: “It will not be long before transactions can be processed in real time and 24/7, including during weekends and on holidays.” Instant payments are the next big thing in the industry, but what is it exactly about?
Equens is actively participating in the development in this area and the company is contributing in various European forums on this topic. Equens will share more info in due course, but for now we would like to introduce the topic of Instant Payments on the blog, because it is a relatively new topic. These eight questions explain what instant payments are and what needs to be done to make it possible.
1. What are instant payments?
The ECB defines instant payments as electronic retail payment solutions available 24/7/365 and resulting in the immediate or close to immediate interbank clearing of the transaction and crediting of the payee’s account (within seconds of payment initiation), irrespective of the underlying payment instrument used (credit transfer, direct debit or payment card) and of the underlying clearing and settlement arrangements that make this possible.
2. Why are these instant payments in the upraise?
People are getting used to real time service and expect the same from payments. “Europeans expect to be able to complete any purchase at any time of the day or night, irrespective of the channel or the device they use. Consumers have grown accustomed to an omni-channel approach that provides a seamless shopping experience where there are no transactional hurdles or constraints”, writes Pierre-Antoine Vacheron in the EPC newsletter.
3. What are the developments on instant payments?
Real-time payments are nothing new; around twenty countries are already experimenting. The Dutch project on instant payments is just one example in this field. According to Finextra ‘Singapore and Australia are among the countries following a lead taken by the UK in building a faster payments system, while the US is gradually inching towards upgrading its own antiquated infrastructure’.
4. Who is leading the field in Europe?
The European Central Bank and the European Retail Payments Board (ERPB) are driving the development of the framework for a real-time payment system. They have the experience thanks to the introduction of SEPA. That is necessary because ‘introducing instant payments into the corporate financial value chain requires the same degree of attention that was applied to the successful harmonisation of a variety of national credit transfer and direct debit transactions to common SEPA standards’.
5. What will change for banks with the introduction of instant payments?
Ralf Ohlhausen on PPRO: “Instant payments require immediate reconciliation, something which will require extensive modernisation of the banks’ IT systems, as well as the linked gateways and control systems which validate transaction data, would be affected. In addition, all other players in the market would have to invest to make this happen.”
6. Who are profiting from the instant payments?
One major group for whom instant payments should prove advantageous are the retailers. Retailers leveraging these services receive instant payment guarantees and their accounts are credited just a day or two later. According to Paul Alfing in the EPC newsletter: “real-time payments can largely be satisfied by rapid confirmation of payment, rather than the actual real-time transfer of funds. If confirmation can be received and guaranteed, even for transactions made at night, at weekends and during public holidays, merchants will see a reduction in the internal administrative burden of the reconciliation process. Instant crediting of payment should be the ultimate goal, as it would provide merchants with the same instant flexibility and seamless shopping experience that their customers currently enjoy.”
For customers there’s an advantage as well, because it allows funds to be accessed immediately.
7. Are instant payments the same for consumers and corporates?
Massimo Battistella thinks that there is a difference between instant payments for consumers and corporates. In the EPC newsletter: ” Instant payments differ between consumers and corporates due to the amount of information that must be processed. Individuals are able to receive confirmation nearly immediately about the transfer of funds at point of purchase, or in a peer-to-peer context, in an efficient and effective process. A similar situation is true for banks. For a bank, information and money (that is the payments) are one and the same, confirmation of money, either going out or coming in, is a unified data point that is straightforward to process. The distinguishing factor for corporates is the treatment of information which accompanies payments both received and paid. Corporate accounting systems, at present, require confirmation of payment (via banks) and communication of the associated information for the reconciliation added by the payer with any sale or invoice/bill.”
8. What are the first steps to be taken?
According to Anthony Richter in the EPC newsletter: “The EPC report stresses that the expectation of both payers and payees must be the starting point to build the future landscape for instant payments and thus should drive the debate within the ERPB. The first action undertaken should be to understand what payers and payees actually expect from instant payments. The defined needs of the payer and the payee will determine the concrete features of any instant payments solution. Such input will also determine the clearing and settlement structure needs as well as the overall implementation and annual recurring operating costs.”
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