Q. What are the considerations when implementing real-time rails that are ready for digital overlay services?
LL: Creating a standardized interface that enables real-time payments reach has been successful in markets such as Thailand, Malaysia, Singapore and India. But it’s not limited to Asia. It’s also happening in Sweden, Denmark and the Netherlands. The regional drivers vary, often the standards are created in combination with a drive to cashlessness and/or a financial inclusion agenda. Although financial inclusion is generally less of a driver in Europe, governments and regulators are stakeholders in the shifting attitude on real-time payments. There is a recognition of the ability of real-time payments to drive new value to economies, and we may see more governments becoming involved in creating the business cases.
CR: Governments also have a role to play in creating trust in the new payment methods. For example, there are fears (fuelled by rumours) that QR codes are insecure, but live examples prove this to be inherently untrue. Singapore deployed a national standard for QR codes, and banks such as DBS verify that the QR code presented to customers meets that standard. They’ve built trust with their customers and work to maintain it by removing weak-links in the payments chain. In an ecommerce environment, it could be a combination of this kind of method alongside a one-time password, to bring together the new payment type with a familiar and trusted security experience.
Q. How and why should banks be involved in the design of those standards?
LL: With any public policy, there’s always consideration for all segments of society it serves. The backlash against cashlessness in some countries (or even cities – Philadelphia banned cashless stores) is centred on the protection of the most economically deprived. But countries such as India have approached the same financial inclusion challenge with a drive to cashlessness.
In cash-based transactions, banks get no share of that transaction. When economies turn towards cashlessness, the value enters the banking system. Complying with regulation is a familiar cost-centre for banks, but they can help drive the agenda around how these public policies are enacted to ensure the services available to the public benefit all parties in the payments chain.
Q. Why do the primary real-time and open payments use cases vary so much globally?
LL: There are two major influencing factors that contribute to the variation in the primary use case for real-time payments by country. It’s partly about the characteristics of the legacy systems: what is being replaced and what is being integrated. The political or public policy aims behind the development of the real-time payments and open banking protocols also impact the use cases that make it to market.
The Indian government prioritized financial inclusion and increased tax revenues via its cashless agenda, hence the hyper-successful launch of the Unified Payments Interface (UPI) for Person-2-Person and SME (small business) real-time payment acceptance. For the UK, the challenge to be overcome was a three-day settlement cycle. Making the leap to real-time payments was a huge business benefit and, as such, the main use case has been in the B2B space, particularly one-off bill payments, with transaction volumes continuing to rise.
In contrast, Sweden and Denmark had highly evolved legacy payment systems where a slight reduction in the time for funds to clear or settle would not be sufficiently better in order to justify the investment. Therefore, we saw the use case centred on the P2P space. The US has focused its real-time payments use case on business originated payments, and Brazil trends toward relatively high value payments. Just because a country starts on the road to real-time from one angle does not limit the future use cases. But prioritizing focused use cases does aid accelerated adoption and ubiquity.
Q. Where will we see the next examples of accelerated adoption for real-time and open payments?
CR: I think it’s clear that there will be a big uptick in real-time payment volumes in the ASEAN region. Malaysia is already making great strides in delivering benefits for the individual consumer and the national economy, and we should expect that influence to expand across the region. I’d also tip Latin America as the banks look to modernize their existing Real-Time Gross Settlement (RTGS) solutions in the next two to three years. These two regions have an interesting combination of interest from corporates and government that is accelerating the rate of change. Unfortunately, it seems like Europe and the US are lacking a clear direction from their regulators and governments. The European Central bank and the European Union seem to be suggesting real-time payments should be a compliance requirement, but haven’t gone as far as to mandate it yet. The Federal Reserve in the US does not have the remit to mandate real-time payments, but it may begin to push harder on the adoption by the banks. Government institutions have a major role to play in how fast real-time payments are adopted in these regions.
LL: South Africa is an interesting one to watch. Its payments modernization plans are focused on financial inclusion, as well as a broader economic enablement. It’s a relatively unique country in terms of the distribution of wealth and its ‘banking gap’: those at the higher end of the economic scale have access to banking services similar to Asia and Europe, but at the lower end of the curve there is a high rate of unbanked citizens. The challenge for all participants in the payments ecosystem will be how they use a real-time payments system in combination with open banking to serve both segments and their associated economies.
I think we will see more countries leveraging existing real-time payments models and standards more effectively, by enabling access via APIs and open banking. This will evolve rapidly over the next three to five years as we reach global domestic ubiquity.