Rewriting the Rules for a Real-Time Business Case
Regardless of their position on the real-time readiness curve, many players in the payments value chain face the challenge of articulating the business case for real-time payments, which lies in a multi-phased, strategic deployment that goes beyond meeting basic regulatory requirements.
Doug Wilson, CIO at Bank of Montreal (BMO), is head of a current transformational project, driven partly by the regulator, but also by BMO’s desire to be ahead of the competitive curve. “In Canada, we’ve had a real time-like capability since about 2002. It’s very focused on Peer to Peer (P2P) at the moment and has relatively low limits, but it’s got fairly significant volume. As part of an industry modernization agenda that’s being driven by Payments Canada, there is a push for a broader payments modernization agenda.”
“The initial phase of work is to start the process of determining how they can open up the existing Interac e-Transfer service beyond the major banks, to other providers. The really interesting part will be the second phase of the program: the implementation of ISO 20022 and the move to a fully real-time settlement model. And the third phase, assuming all the legislative changes happen, is opening the scheme up to Third Party Providers (TPPs) who can then start to offer some additional overlay services for real-time. I think it’s from the second phase onwards where we’ll start to see more economic benefit being realized, and largely through the increased adoption of that service in the corporate environment.”
Corporate Customers Demand Real-Time Experiences
Corporate customers are playing an important role in driving banks and processors to develop and bring to market value-added real-time payment services.
“When we look at our research around real-time payments, and specifically in the corporate banking sector, it’s become clear that what will make them choose a banking services supplier or, perhaps more importantly stay with one, is real-time visibility of the account,” explains David Bannister, Principal Analyst at Ovum.
“What this tells us is that customer mobility is a key long-term measure of success for a real-time and open payments project. We mustn’t forget that corporate customers are retail users too, and they expect to look at their business balances on their smartphone.”
“I’m certain that real-time payments are going to be successful, because it’s not a ‘push’ product strategy from banks. Our retailers, corporates and consumer representation organizations have asked for it. Corporates in the Netherlands have been quick to create some really innovative use cases for real-time payments,” explains Heimen Schuring, Head of Channel Support and Payment Engines at Rabobank, whose domestic market of the Netherlands goes live with instant payments in 2019. “Those in insurance, especially healthcare, saw instant disbursements of approved claims as the perfect customer experience, which is a competitive differentiator.”
Real-Time is the New Normal
“There are of course use cases where processing a payment in five seconds is not relevant,” continues Schuring. “With scheduled payments like salaries, employees don’t mind what time of day they get their payment as long as it is reliably on the expected day.”
Of course, wages versus salaries is an interesting proof point; for temporary or seasonal workers, those on an hourly rate of any kind (think multi-hyphenate gig-economy types) really do want to be paid more quickly. In fact, for those with no regularity to their personal cash flow, the ability to more quickly access payment for services rendered is critical. Uber already allows drivers in some countries to ‘cash out’ up to five times per day (for a small fee).
“But when we ask what kind of payments are useful when delivered in real-time, you need only look to the demands of the market,” explains Rabobank’s Schuring. “Faster merchant settlement was a clear demand in the Dutch market and this is reflected by the scheme; we have no limits on the payment value to meet these use cases, and domestic instant payments are expected to replace all credit transfers. We are on the brink of the introduction of instant payments as the new normal in the Netherlands.”
The UK celebrated ten years of Faster Payments in 2018, and can be seen as a market where real-time is the norm. But Otto Benz, Payments Technical Services Director, Global Payments, at Lloyds Bank cautions that there is still work to be done.
“To compare and contrast existing and new schemes is quite interesting, because the Canadian journey seems very rational, but the UK implemented very early. When you look at the kind of problems that we still face, perhaps the thing I’d say about the modernization journey that took place in the UK was that it was possibly more chaotic and British by its nature, but driven very much by government and consumer protection pressure,” explains Benz.
Regulation of Real-Time
“What I would say is that the lack of responsiveness from the banking sector to this kind of consumer detriment has created a whole slew of regulatory and political interference in the payment processing,” continues Benz. “The consumer protection element has resulted in additional services such as the account switch service, which necessitated the redirection to ensure that payments would follow through to your new provider, as well as more formal mechanisms to recover payments. Because all banks had to implement this, there was no real competitive outcome by enabling these services.”
“New schemes can learn from the UK experience by stepping up consumer responsiveness and complaints handling and recovery, to potentially avoid that level of regulatory interference. You may think you’ve done it all with a big scheme refresh like the launch of faster payments, launch of NPP in Australia, and now Payments Modernization in Canada. But actually, it just keeps going. There’s more regulatory pressure to change and adjust.”
Accounting for Cultural Costs
What’s clear from the proliferation of real-time schemes and open banking initiatives around the world is that the payments ecosystem is continuing to grow to meet the diverse needs of customers.
“One of the challenges in the UK, as a consequence of adopting faster payments early, is that we now have this enormous number of alternative payment mechanisms that all have their niche, but it is expensive for the bank to support them all,” explains Benz. “And the cost of the payments infrastructure then becomes more and more expensive. Plus, the cultural differences across the world are enormous in terms of who pays and how for banking services and payments. So, the question for us really is how to make money from the investment.”
The Business Case
The business case varies by market, and as we see transaction volumes grow – but trend down in average value – the question “can we make money on a $1 transaction” floats in the air.
BMO’s Wilson explains that the initial investment is necessary to reach the ROI phase; “We’ve had huge investments over the years in POS terminals, contact, contactless, NFC, and all of that functions very well. And you wouldn’t want to throw it all away by any means. I think the real opportunity is really in getting off the card rails, moving to a more efficient real-time rail and the benefit that is going to drive to merchants from an economic perspective – this is what’s going to be the benefit in that face to face retail side.”
Schuring explains that it’s a matter of leveraging scale in a volumes game, “In the Netherlands, we don’t charge per transaction for retail customers. We sell the account with all kinds of benefits around it. And then the customers are willing to pay for it. One day they might make a transfer of $0.01, and of course that’s going to cost us money, but in the bigger picture we still make money out of processing payments.”
Benz agrees that alternative payment methods mean an evolution of business models; “There are lots of alternative pricing models. You can make money on package fees. You can make money on a transaction. You can make money on interest, traditional banking, as opposed to transaction banking. I think to your question, can you make money on a $1 transaction? Yes.”
Surviving and Thriving in the New Payments Ecosystem
It’s clear that the business case lies in seizing the opportunity, and adapting traditional business models, to new customer demands and new challenges.
“Which individual banks will survive depends on how they adapt to this new payments ecosystem,” says Ovum’s Bannister. “There are going to be lots of changes. We’re already seeing cross-border schemes, people are talking about standardization as we did with ISO 20022, about harmonization in different business processes in different ecosystems. We’re going to see that now. And we’ve still got to work out the APIs piece. There’s lots of talk about who should manage standardization focus for APIs around the world, but there are already five standardization operations going on in Europe alone. And nobody knows how many in the States, which haven’t yet surfaced.”
Lessons learned from early schemes and built into the newest platforms show that payments players need a combined real-time and Open API strategy and solution. Flexibility to meet all transaction types, both payments and API calls, is critical in enabling the value-added services required to deliver ROI.
Find out more about Rabobank’s approach to real-time and open payments in our video: Instant and Open Payments for Rapid ROI: How Rabobank Leverages the Agile Combination.
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