7 minute read 10 Sep 2019
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Why real-time payments are the new normal – and how payment providers can adapt

By

EY Global

Multidisciplinary professional services organization

7 minute read 10 Sep 2019

As real-time payment (RTP) schemes expand, providers will need to assess readiness and define a clear strategy for platforms, operations, risk and customer experience.

RTP schemes are expanding fast. This is being driven by customer expectations and experience; competitive pressure from FinTech service providers; mandates and regulatory direction; desire to reduce, and ultimately, replace cash and checks; and globalization and digitization of commerce.

RTP schemes are spreading across the globe

There are currently 40 active schemes globally (up from 25 in 2017), 16 new RTP schemes set to go live within two years and five more payments programs in development.

The rapid growth of these schemes lies in the appeal of key features:

  • Availability – Funds are available to recipients immediately, addressing the cash flow needs of both consumers and corporations.
  • 24x7 – Customers can send and receive money 24 hours a day, seven days a week, representing a big shift away from traditional daily cutoff times and business-day-only processing.
  • Credit push – Funds are moved from the sender to the receiver, instead of the receiver debiting the sender’s account, as is the norm with many existing payment schemes. Credit push gives senders more control and transparency.
  • “Good” funds – In many schemes, once funds are sent, authorized and certified, they cannot be reversed – the receiver has certainty that the funds received can be used immediately.
  • Data and notifications – Modern payments systems deliver easy to access, information-rich transactional details. Most RTP systems provide transparency about the payment to both the sender and receiver, notifying each participant that a payment was sent and received.
  • Request for payment – Debits are generally not supported in RTP. Instead, an invoice in the form of request is submitted and responded to with payment. This provides the ability to address additional commerce use cases, such as purchase orders, and enable straight-through processing of receivables for invoicing.
  • Settlement – Different schemes take different approaches to settlements between financial institutions. But whether schemes employ real-time gross settlement (RTGS) or delayed settlement, settlement times do not impact the availability of funds to the end receiver.
  • International standard messaging – With long term interoperability in mind, systems are being built on common standards, ISO 20022.

Overhauling systems to take advantage of RTP data

Most discussions around the key advantages of RTP center on its speed but this is shortsighted.

While the immediate availability of funds is of obvious benefit to the cash flow of both consumers and corporates, it’s the information that the RTP architecture provides that offers huge innovation opportunities for the payments industry.These opportunities are driving huge change across financial institutions, corporation treasury departments and payment services providers that are all retooling infrastructure, processes, products and channels to securely support the “new normal.”

We expect to see a proliferation of products and services in the consumer and commercial landscape – both domestically and internationally – that will harness the value of both the speed and the data that comes with RTP.

Expanding potential for RTP use cases

RTP use cases began in the consumer space with Person-to-Person (P2P) applications serving as a replacement for cash or check payments among friends and family. These services took off fast, fueling the volume of RTP transactions and raising expectations among both consumers and commercial customers for these types of payments. Customers that have grown accustomed to immediate retail experiences began to ask questions such as, “If I can order and receive a toothbrush within hours, why is it that money, which is inherently digital, is delivered at a slower pace?” Domestic schemes such as Venmo and Zelle in the US, or Swish in Sweden report growing numbers of transactions and users each year.

The success of real-time P2P payments is now influencing the commercial space with both Business-to-Consumer (B2C) and Business-to-Business (B2B) use cases proliferating:

  • B2C: Real-time B2C disbursements innovations are expanding, supporting many changes in the platform economy, and becoming a tool in aiding cash flow for merchants and consumers. Insurance companies, FinTechs and loan providers are embracing real-time disbursements as a way to differentiate in the marketplace and grow their businesses.

RTP is also supporting the gig economy by enabling “payroll by the gig” vs. “paycheck to paycheck” payment cycles. Whether it’s a ride-share service attracting drivers by being able to pay them by the trip, or a technology firm’s ability to attract specialized talent and pay them for hours worked, the request for payment and speed of payment provides the scale to power the changing working environment.

  • B2B: Cash flow, forecasting and cash management needs are the primary drivers behind adoption of RTP schemes in B2B, where both buyers and suppliers can benefit from enhanced data and speed. Buyers can take advantage of supplier terms, making payments “just in time” to maximize savings. Suppliers benefit from immediate funds availability, days sales outstanding (DSO) improvement and efficiencies associated with the straight-through application of receivables though data-rich payment remittance information.

  • Cross border: Efforts are underway to address real-time cross border needs, particularly for P2P uses cases, but many of these are “closed loop” – operating only within one country or with limited users. Connecting national schemes remains an opportunity, and we expect to see connectivity among schemes regionally (within a corridor) and internationally, particularly as regulators begin to weigh in.
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How is the industry addressing the “new normal”?

RTP presents significant opportunities as well as challenges for all stakeholders in the payments process. Adapting requires three key steps:

  1. Investing in modernization and digital: The speed, data, responsiveness and dynamic nature of RTP requires a platform and processing environment that can support 24x7/365 payments, new messaging standards, issue timely notifications and provide transparent data to both internal controls and clients through digital channels. Financial institutions, payment service providers and corporations that are planning to make RTP a critical component of their product offering have made, or are making, strategic investments to replace, update and modernize their platforms, infrastructure and their client channels.
  2. De-risking through authentication and controls: The speed and irrevocability of RTP schemes creates a “digital cash” experience where payments are irrevocable/final and are immediately debited and credited to the sender and receiver. The ability for firms to confidentially authenticate senders is critical. Organizations are deploying a mix of overt controls (e.g., dollar limits or stepped-up authentication) and behind-the-scenes tools (e.g., transaction, channel and customer monitoring with data analytics) to improve their ability to deter fraud and losses. Reducing risk in an RTP world will require critical investment in data sourcing and analytics, biometric authentication, dynamic controls, alerts and notifications.
  3.  Innovation in products and partnerships: Now more than ever, the payments industry is collaborating to deliver new experiences to clients, with RTP providing common ground for financial institutions, FinTechs, payment service providers and corporations to partner on innovation. Ecosystems are coming together to accelerate the pace of innovation. This is expected to proliferate through M&A and deliberate partnerships with a focus on developing use cases that leverage the power of the available data (e.g., buyer/supplier payments, e-invoicing, notifications, alerts) and cash flow benefits.

Where is this headed?

With cash and check still dominant forms of payment in some countries and these RTP payment schemes relatively new, we are currently in the early stages of RTP growth globally.

But as these schemes expand, the “new normal” of real-time, always on, here and now, will have implications on our economies – providing cash flow benefits for every day consumers, small businesses and global companies. New behaviors, spending patterns, and possibly cultural changes will take place as funds and payment data become immediately available. As with any transformation, gaining capabilities required to realize its potential will demand significant strategy definition, readiness planning and preparation related to platforms, operations, risk and customer experience.

This “new normal” of RTP will set the standard for the future of payment services. And while there is uncertainty around exactly how this future will look, it’s clear that financial institutions must continue to invest in modern payments platforms and cloud-based infrastructure to increase the resiliency, security and scalability that will enable their agility to adapt. Upgrading existing offerings, operating models, processes, systems and embracing collaboration with other players in the ecosystem will be critical for success in the changing payment landscape.

This article originally appeared in our #payments newsletter - volume 24.

The primary author for this article is Jennifer Lucas, EY Americas Payments Advisory Leader.

Summary

For today’s consumers, used to having everything now and on demand real-time payments (RTP) are the new normal. The data and speed benefits of RTP are good news for payment providers too, if they invest now in modernizing, controls and innovation.

About this article

By

EY Global

Multidisciplinary professional services organization