Following on from the discussion of payments in the cloud, I was recently asked by Volante Technologies to consider what being a digital bank means for a commercial bank’s payments and treasury services and identified three areas of focus:
- moving payments to the cloud;
- fast-tracking real-time / instant payments adoption; and
- embracing open banking and APIs.
All of that is too much for a single blog post, so here’s the second of three focusing on what real-time payments mean.
Real-time payments have been developing nicely in many countries for over two decades, with the first such system launched in South Korea way back in 2001. Countries that now have real-time payments infrastructures include the UK (2008), China and India (2010) and almost 40 others. Interestingly some countries were quite slow to catch-up, most notably the USA, but The Clearing House launched RTP, the Real-Time Payments, network in November 2017. This was the first new payments system launched in America in the last 40 years, but has been slow to take-off. The Clearing House is owned by 24 of the largest US banks but, as at the end of 2018, only 11 had connected to the network and, while more have signed on in 2019, as of this writing several larger banks remain unconnected or are operating in ‘receive only’ mode.. Those eleven banks may represent half of the deposit base of all US customers but, bearing in mind there are 6,799 FDIC-insured commercial banks in America, and you can see there is still a long way to go.
The question is: where does this go?
Most real-time payments infrastructure is driven by regulatory change (Mexico, Switzerland and the UK), but it is not always the case. Technological innovation and reducing systemic risks are also key drivers for change. However, the strongest driver is to improve the efficiency of the payments system itself. When clearing takes three days or more for domestic payments and weeks for cross-border payments, something is wrong. It needs to be improved, particularly for corporate clients who are often handcuffed by restrictions with working capital due to poor processing of receivables.
According to PWC’s latest report on working capital efficiency, companies could increase capital investments by 55 percent, or $1.3 trillion, if they had better handle on their cashflow. Real-time payments are going to be a critical part of addressing this need, which is why so many countries are moving towards instant payments processing. Real-time payments offer ubiquity, speed of payment, extensive data exchange, real-time messaging, and 24*7*365 availability. With such capabilities, real-time payments can help improve cash flow, operational efficiencies, customer engagement, data transparency and accuracy.
In particular, for corporate clients, real-time payments digitise processes that were previously manual and paper-based, improving liquidity management by moving to einvoicing and ebilling, and so optimising working capital management. Governments are also keen to endorse such moves, as it helps with auditability and tax collections when things are electronic.
Overall, any commercial bank worth its salt should be adopting and embracing real-time processing, and encouraging their clients to move in this direction. Maybe that’s why, according to a survey by Ovum in 2018, 85 percent of banks globally believe that real-time payments are the foundation for future growth and service enhancements.
In fact, a key part of this process will be the eradication of traditional payment types, such as checks and cards, and the harmonisation of global payment types through real-time connectivity between national and regional payments infrastructures. We are already seeing this as the European SEPA project progresses with Instant Payments, now used across 22 Euro and 14 Non-Euro countries, and this will continue as these payment hubs become connected for real-time global payments.
Another key part of the process will be ensuring that real-time payments can be priced competitively compared to established payment types. To this end, the ECB has waived transaction fees on its TIPS instant payments service through 2020. Other networks are taking similarly aggressive approaches to encourage uptake of real-time payments, keeping pricing at or lower than non-RTP equivalents.
It is a trend that cannot be ignored and delivers major benefits for all, so ask if your company is using real-time processing and if your bank is encouraging you to do so. If not, ask the bank why not? After all, everyone else seems to be doing it.
On that last point: to help drive down the cost of real-time payments for the entire financial services community, Volante is offering a full three years of cloud-managed processing for any one real-time / instant payment type – U.S TCH RTP, EU TIPS, or EU RT1, as you like – completely for free. Learn more here: http://volantetech.com/freertp.
Chris M Skinner
Chris Skinner is best known as an independent commentator on the financial markets through his blog, TheFinanser.com, as author of the bestselling book Digital Bank, and Chair of the European networking forum the Financial Services Club. He has been voted one of the most influential people in banking by The Financial Brand (as well as one of the best blogs), a FinTech Titan (Next Bank), one of the Fintech Leaders you need to follow (City AM, Deluxe and Jax Finance), as well as one of the Top 40 most influential people in financial technology by the Wall Street Journal's Financial News. To learn more click here...