A Brave New and FASTER World in Payments
In a real-time world where people can download movies or order books for their tablets in a few seconds, when overnight delivery may even be shifting to same-day fulfillment, payments that take several days to arrive are not keeping pace with consumer or business demands. Companies that can make a delivery overnight and track it each step of the way are not satisfied with payments that disappear into the ether for an indeterminate number of days before arriving at their destination.
Coupled with the delay in payment processing there is the issue of transparency of the status of payments. It is not easy for customers to know where their payments are held-up.
Around the world, more than 30 countries have moved or are moving to real-time payment systems. The U.S. is at last replacing its ACH system, the process began in 1974 and real-time payment systems are expected to begin operations in late 2016.
A report by McKinsey for the Federal Reserve, it was estimated that a real-time payments network would save the U.S. $10 to $40 billion through improved efficiencies. The drawback is that the savings will be enjoyed by companies and consumers while the costs of moving to real-time will largely fall on banks, who also stand to lose some of their income from wires and from float, although that is less of a concern with interest rates hovering near zero.
Bankers. The Culprit?
The Clearing House, made up of 24 of the nation’s largest banks, is leading the largest effort by working with VocaLink, the company that designed the UK’s Faster Payments platform and the more FAST system in Singapore built on the ISO 20022 standard. TCH member banks hold more than half of all deposits in the U.S. TCH, said it will take the VocaLink platform and add features including request for payment, certain payment confirmation messages and the ability to carry remittance information.
Implementation of real time payments will result in a complete paradigm shift in the payment processing business flows. The current monolithic traditional payment processing systems which are geared towards large batch processing, will have to be completely overhauled. Also these current systems are not geared to meet with the stringent requirements of payment confirmations within seconds of receiving the message from the Clearing House.
The U.S. has lagged in moving to real-time payments. 20 to 30 countries, depending on who is counting, already have real-time systems implemented and working. The UK launched its Faster Payments in 2008 under a mandate from the regulators, with nine banks and one building society. Banking in the U.S. is far more of a challenge with more than 5,300 commercial banks and 6,000 credit unions, although the numbers have declined over the years through mergers and acquisitions.
With no authorization to require faster payments and little likelihood that Congress would ever pass it, the Federal Reserve has taken on the role of catalyst, preparing reports, holding meetings and acting as an agent of change to encourage the industry to move. It has formed a Faster Payments Task Force with 320 members and a 19-member steering committee which reached agreement on 36 criteria of what stakeholders, from finance, technology firms and merchants, want from faster payments. The Fed is asking for solutions and engaged McKinsey to help evaluate these.
Enter ISO 20022
Because the U.S. is aiming for a payments system with ubiquitous reach to all bank accounts in the country, but will have several different payments providers standards, rules and governance will play a very important role.
One goal is improved interoperability with other countries’ systems to make cross-border payments simpler and cheaper. TCH is working with an international group on developing standards; all new systems will operate on ISO 20022 and the UK, which used an older ISO 8583 standard in order to launch quickly, will upgrade to ISO 20022, although it looks as if the U.S., for a time at least, will have the more advanced platform.
For individuals, real-time payments will mean they can make last minute utility payments online or by mobile phone to avoid service cutoffs without traveling to the utility office or using an expensive service.
Who will pay for the real-time payments isn’t clear. In the UK, banks have no charge for it, passing up the revenue out of concern for consumer complaints. Some analysts have said they made a mistake, but once the payments are free, they have little chance of beginning to charge.
In the U.S., Bank of America and U.S. Bank are offering next day and immediate payments, but only to customers of the two banks with clearXchange. U.S. Bank charges $6.95 for an instant payment and $2.95 for next-day, prices that Gareth Lodge, an analyst at Celent, said are too high and could generate more revenue if set lower, perhaps at 99 cents. The bank has said the fees are subject to review.
Taking the big view
Banks, technology vendors and analysts say that real-time payments will change business in ways that are difficult to know at this stage.
Within a bank, the immediate beneficiaries are accounts receivables, cash management, and reconciliation which will see payments travel with data so it will be easier to understand what the payment is for and to arrange modifications for damaged items or shipment errors.
Accenture offered an example of how real-time payments could change the way business operates. A high-end audio-video retailer could operate an elaborate showroom with no inventory. When a customer makes a purchase and pays with Faster Payments, the retailer orders the items for same-day or next-day delivery, again paying in real time. The store eliminates its storage, inventory and the need for working capital to finance it, so the retailer can offer better prices and a wider variety in the showroom. Instead of ordering 12 times a year, the retailer places orders as it sells, leading to hundreds of smaller payments through the network.
Someone buying a new or used car could make a payment without carrying cash or writing a check and drive off with the vehicle.
In Singapore, OCBC Bank has added a new feature to its mobile app that allows customers to send money to their friends through Facebook, email and text messages without disclosing their account information.
David Yates, CEO of VocaLink, said payments should be embedded in the business transaction; someone wants to bill you and you can pay instantly. In Singapore, the VocaLink system provides real-time debit, so a business can pull a payment from a customer’s account without issuing a paper invoice or resorting to a credit card.
Companies could pay for work as it is performed, directly into an employee’s account, and individuals can also pay plumbers and other trades people immediately.
P2P payments are already possible in the U.S. through Square, Dwolla and Venmo, a unit of PayPal which processed $1 billion in January alone.
“Just over half the users are 18-24 and half the payments relate to food and drink sharing!” For an amusing commentary on how attitudes toward sharing information differ by age, see The Venmo Line.
Payments will also increasingly be embedded in purchases, especially services.
Uber, for instance, has changed the way of paying for a car ride, and the experience for both riders and drivers that have rippled through. Drivers can control their own schedules, going on and off duty with a tap on their mobile phones. The service has expanded to ride sharing, picking up riders along a route determined by demand, and it improves safety for drivers who don’t need to carry cash.
How to beat fintech competition
Real-time payments will shift the competitive landscape and banks will face competition from fintechs and others, perhaps including social media companies, e-commerce giants like Amazon, and mobile operators for deep customer engagement.
“Banks have a choice,” says Accenture. “Either they can become central to their customers’ everyday purchasing activities or they can stay on the periphery by acting merely as transactional utilities handling financing and fund transfers. According to Accenture research, a third of banks’ revenues can be in jeopardy if they continue offering limited digital services to customers.”
Banks are aware of the threat, a PWC study found that payments industry “respondents believe they could lose up to 28 percent of their market share, while bankers estimate they are likely to lose 24 percent. All sectors of financial services believed at least one-fifth of their business was at risk by 2020.”
Banks have the business to lose, and as one analyst firm noted, banks do not change easily.
We hear you …
So how can Volante Technologies help you to easily change and embrace Faster Payments?
Consider these important points:
Most organizations fear the cost of change and, more specifically, the possible costs of implementing a new strategic, Real Time Payments System particularly when Banks are not certain about charging any fee to the customers. The ever evolving and complex world of digital payments processing requires a very high level of dynamism and flexibility. Therefore, the control and management of implementation costs as well as ongoing maintenance is determined by the speed and ease of implementing change. Volante’s VolPay implementations are quick and cost effective as it follows the model driven methodology where changes are managed through configuration and not through coding thus saving total cost of ownership and time taken for implementation.
- Coexistence with the existing payment system
In the ideal world implementing a new Payment Hub which can combine both traditional batch and the new real time systems will be the perfect solution. But replacing the old legacy systems which have been running for a long time is not an easy task. VolPay offers the flexibility of integrating both real time and batch payment systems. Customers can keep their old systems for the existing processes and the VolPay faster payments solution can be run leveraging the current systems allowing ample time for the bank to plan the complete migration.
- Built in Support for ISO 20022
VolPay has in built ISO 20022 standard format as the normalized data format for payment processing. VolPay provides complete support for the upgrades and changes in the ISO 20022 Message structure as the changes take place. The unique architecture of the VolPay solution makes the adoption of any changes or new versions of ISO 20022 very rapid without impacting the existing processes. Time and money saved in managing the upgrades offers enormous benefits that banks cannot ignore.
- Pre-Built Transformations
More than 85 international and domestic message standards plugins and in excess of 250 bidirectional and customizable message transformations to and from ISO 20022 including SWIFT MT, Fedwire, BACS, SAP, CGI-MP, CHIPS, BAI2, ICF, BECS, CA005 and various other formats are available to quickly enable the faster payment system. VolPay can leverage any standard or proprietary messages that are used by the current system and enrich, validate and transform them to the required Faster Payments messages.
- Proven technology you can trust
Volante’s VolPay core components are time proven and scalable technology already in production use at more than 80 diverse financial institutions and corporate enterprises around the globe including some of the largest financial institutions and corporate enterprises in the world.