10 minute read 22 Jan 2024
Businesspeople making handshakes across line

How real time payments are revolutionizing the payments ecosystem

By Suruj Dutta

EY MENA Payments and Financial Services Digital Leader

Driving financial services innovation to empower communities and businesses. Digital enthusiast and keen public policy observer. Raising a daughter in an uncertain world.

10 minute read 22 Jan 2024

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  • The future of real-time payments is B2B

Real time payments are transforming the payment industry but this shift from cash to digital transactions presents security challenges that need to be addressed.

In brief
  • To prioritize end-users, leveraging the strengths and capabilities of various payment players can be beneficial.
  • B2B use cases have the potential to add value with new instant payment services leading the market.
  • Financial Institutions (FIs) need to reevaluate their capabilities and implement robust security measures to enable successful RTP adoption.

Real time payments (RTP) are the most recent players in the payments ecosystem who have paved the way to more innovative and transparent cross-border payment solutions. To keep up with the demands of the global economy, countries worldwide are investing in RTP capabilities. Several countries are linking their RTP systems through bilateral agreements and growing. By utilizing the strengths and technological knowledge of different players involved in RTP, countries can make better use of financial and technological resources in a transparent way that prioritizes end-users.

Fig 1

RTP systems are live in several countries worldwide. The volume of payments in transactions (2021/22) are shown in the figure.

Expected global RTP market value

US$193b

With an estimated CAGR of 35%, RTP platforms are scaling rapidly

The UAE which recently launched its Aani RTP platform, is in talks with India’s National Payments Infrastructure Limited (NPIL) to leverage technology from the market-leading Unified Payments Interface (UPI) platform. Similarly, Thailand’s PromptPay has established bilateral links with similar systems in countries such as Singapore, Cambodia and Laos. Instant payments will increasingly be the “new normal” and financial service providers will need to offer them to both consumers and corporate clients, to stay relevant in the future.

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Chapter 1

Investing in RTP capabilities to drive digital payments transformation

Driven by the user’s needs, RTP platforms are evolving to attain universal operability through technologically advanced designs.

The broad characteristics of RTP are universal like the near-instantaneous transfer of funds between accounts with immediate availability of the funds for the recipient, clearing and settling in a matter of seconds. These payments are confirmed in real time through a balance update, with the payer’s account reflecting the deduction of funds as soon as the payment is authorized. While settlement times can vary, many RTP systems complete the transaction within seconds, and it is irreversible.

The benefits for users are also similar across RTP systems worldwide:

1. Simplicity

To pay or receive payments, users typically click or swipe on their preferred app, which has been designed with a simple and user-friendly interface for easy mass adoption.

2. Innovation

Users typically use usernames or aliases linked to underlying verified bank account details for transactions, which unlocks innovation and adoption. For example, UPI in India owes much of its success to the underlying infrastructure of Immediate Payment Service (IMPS), and its innovative features, such as the use of UPI IDs instead of bank account numbers and IFSC codes, have made transactions effortless.

Similarly in Brazil, Pix users similarly use their Pix keys for transfers. The integration of bill payment systems, for example, Bharat Bill Payment System (BBPS) in India, has also been instrumental in creating an innovative platform for recurring bill payments. The local RTP ecosystem also means that once a user has signed up, they can easily send or receive money from anyone across the ecosystem, including cross-border transfers where bilateral or multilateral arrangements are in place.

3. Security

Advanced security is one of the key strengths of all RTP systems, with multi-factor authentication, for instance, device and biometric identifiers and one-time passwords (OTP), common across platforms. Users also need to register with the same mobile number that they have registered with the bank. Additionally, the local mandatory Know Your Customer (KYC) process further enhances the security of the platform. However, different approaches to technological and commercial designs of RTP systems are emerging, driven by national needs and local regulatory environments.

4. Architectural design standards

Most RTP platforms have adopted the ISO 20022 messaging standard, which allows for easier integration with SWIFT cross-border messages as they are based on the same standard. The Indian UPI platform and the UK NPA platforms have however chosen the ISO 8583 standard, which will make universal interoperability more difficult to achieve.

Similarly, while all RTP platforms allow users to use aliases instead of full bank details, the addressing schemes vary across a combination of verified phone numbers, email addresses or platform-specific aliases as in the case of Pix in Brazil. Pix also uses a centralized store of aliases and their mapping to verified bank accounts, while other systems (such as UPI in India and InstaPay in Egypt) federate the tokenization of bank account details to the payment service providers (PSP).

5. Commercialization

Brazil has progressed among state backed RTP systems in establishing a simple commercial model where merchants may be charged a fee by the acquiring banks for supporting Pix payments. Person-to-Person (P2P) b transfers between individuals are free on Pix, and are also likely to be free in India, where UPI has a key role in driving financial inclusion among price-sensitive blue-collar consumers. However, in other markets RTP platform operators evaluate charges for P2P transactions because in most markets merchants are acutely sensitive to interchange costs for both card-based and RTP.

6. Potential of B2B use cases

Most RTP systems globally have focused primarily on consumer-focused services, for example., splitting bills, paying for utilities and on public-transport systems, or for distributing social welfare benefits to citizens.

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Chapter 2

Unlocking the potential of various B2B and B2C use cases

Analyzing various B2B or B2C use cases can help corporates derive value and improve their services.

Many of the simpler B2B and Business-to-Person (B2P) use cases, such as providing refunds, are already live on several RTP systems. Additionally, Government-to-Person (G2P) use cases, including paying taxes and motoring fines, are also expected to go live soon.

Fig 2

Evolution of B2C and B2B use cases in RTP systems

The potential value of B2B use cases for corporate users is greater as they can generate added value on three key dimensions with new instant payment services:

1. Improve customer service

The ability to instantly send and receive payments allows businesses to interact with their customers in a different way. This new way of interacting with customers can improve customer service. For example, insurance or reimbursement payments can be settled in real time and thus provide an instant level of service to improve the customer experience. This also allows for just-in-time (JIT) payments, where customers can pay at the last moment with immediate confirmation.

2. Unlock operational efficiencies

Instant payments allow corporate clients in different segments to improve operational efficiencies. Immediate confirmation of payments can expedite direct supplier deliveries or reduce inventories. For example, drop shipping business models, which allow the company to send order and money to the supplier for direct and immediate delivery.

3. Redefine treasury and cash management services

With the provision for anytime settlement, there are no set cut-off time for end of day positions. Corporate customers need to redefine their internal procedures for managing cash positions and forecasting future cash flows to optimally manage financial positions overnight and on weekends and holidays. For example, corporate payments connected to treasury services that allow an intelligent integration, from the beginning of the payment, transaction status inquiry and balance inquiry. Corporates can also move suppliers to RTP, rather than the cumbersome invoice processing, where it aligns with working capital management needs.

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Chapter 3

RTP adoption: how it affects the payment value chain

While RTP platforms offer various benefits, it is time to pivot and address its challenges.

While RTP solves several friction points in payments by providing immediacy and simplicity, it also creates additional challenges and overhead costs for financial institutions and FinTech providing RTP services. RTP creates pressure on margins for transaction services, with a bulk of smaller ticket sizes and capped charges in several markets.

With transaction processing revenues being limited, value in RTP systems is shifting toward value-added service (VAS) overlays that are adjacent to payments. In several RTP markets, such as India, payment players with API-enabled integrated payment platforms are increasingly monetizing adjacent VAS like small loans, invoice financing. Newer players are rapidly moving from RTP to traditional banking services like lending. In India, the share of non-bank payments is forecast to increase to 75% by 2026, along with an 80% share of unsecured digital lending. RTP systems create new operational and technology platform demand for payment processors.

Corporate users expect a much more intuitive and integrated experience, and this requires automated, three-way reconciliation and settlement capabilities enabled by richer messaging, including automated notifications sent to senders and recipients. RTP systems need to be integrated into broader ecosystems and must be available not only for banks but also for finance companies, FinTech and other related companies. The irrevocability of RTP systems creates new financial crime risks like the authorized push payments (APP) fraud in the UK. Therefore, increasing regulatory scrutiny of financial crime risk on RTP systems is inevitable. In countries with RTP, regulators are moving to monitor real time compliance with anti-money laundering (AML), financial action task force (FATF), counter-terrorism financing (CTF) and consumer protection regulations.

In the US, the Financial Crimes Enforcement Network (FinCEN) issued guidance in 2020, emphasizing the need for financial institutions to address AML risks associated with RTP. The guidance highlighted the importance of transaction monitoring, customer due diligence and risk assessments in mitigating these risks. The guidelines recommend various measures, such as enhanced customer due diligence, transaction monitoring and risk assessments, to prevent money laundering and terrorist financing.

In general, regulators are taking a proactive approach to manage the risks associated with RTP and are encouraging financial institutions to implement robust AML and fraud prevention measures.

Fig 3

RTP adoption impacts the end-to-end payments value chain

To successfully adopt RTP, both established financial institutions and FinTech need to re-evaluate their capabilities front-to-back across the payment value chain. Business owners will need to review their catalogue of RTP use cases for value and monetization potential, impact on internal credit and risk policies as well as on capital reserves. Regulatory compliance teams will need to update risk policies and frameworks, including the modalities and requirements for arrangement rules, real time fraud monitoring capabilities, as well as guardrails related to minimum transaction security requirements and service delivery thresholds.

Operations leaders may need to re-tool intraday processes to fully support daily operations, update exception-handling rules, as well as automated fraud detection patterns and processes for managing disputes and refunds. Technology platform owners will need to make difficult prioritization calls on limited change budgets to deliver channels and interfaces upgraded for useability and convenience, revamp online messaging patterns and data structures, strengthen information security and upgrade transaction processing systems to be able to handle two thousand transactions per second (TPS), as is common with at-scale RTP systems in India, Brazil and Singapore.

Summary

Real time payments are gaining momentum and have led to shorter payments lifecycles. The future of payments holds various challenges that need to be addressed in terms of operational efficiencies and better management of transactions. As consumers and corporates are embracing the new normal, payment players need to work toward establishing seamless operations. For this, the payment players can create an integrated infrastructure that enables information security and increases service delivery thresholds. The real question lies in how we can leverage successful RTP adoption to enhance our capabilities across the payment value chain and be part of this smart growth.

About this article

By Suruj Dutta

EY MENA Payments and Financial Services Digital Leader

Driving financial services innovation to empower communities and businesses. Digital enthusiast and keen public policy observer. Raising a daughter in an uncertain world.