I spoke to Barry Kislingbury and Domenico Scaffidi from our Faster Payments Solution Consulting team for a market-wide view on the impact of real-time, and for tips on how to turn real-time into a real revenue driver, fast.
Rachel Hunt: Instant payments have proven to be a success in several countries around the world, for a number of years now, so why does the PSD2 requirement for real-time have the industry in a flap?
Barry Kislingbury: Well that’s the first issue right there; banks need to stop thinking about ‘meeting PSD2 requirements’ and start thinking about how they can improve customer experience and drive new revenues with immediate payments.
Domenico Scaffidi: I completely agree, the driver for faster payments is the customer demanding a better experience, and the regulation is a consequence of that. Fast alone isn’t fast enough, it has to be real-time.
When we say fast, are we just talking payments?
BK: Absolutely not, instant payments cannot be addressed as a stand-alone issue. When you understand that fast is about the end-to-end customer experience, you understand that you need to be accelerating your business processes as well as your payments processing. Being fast encompasses time-to-market; being a fast follower isn’t enough. As the payments ecosystem becomes more open, and new players enter the market, you need to be first to launch new services if you want to maintain customer loyalty.
DS: When we look at fast payments in the context of the Hierarchy of Payment Needs, we see that instant payments is the layer, but the fast services you offer to your clients is the value add. To deliver this, the organizational model of the bank and its mindset must evolve. This is a challenge, because it’s always harder to change a legacy process or system than it is to create from scratch.
BK: Banks need to consider how they will compete as these new payment providers (PSPs), which are small, smart, and agile enter the market. Banks think they can’t be agile, but if they can be unified that’s a massive step in the right direction. Breaking down the silos between business and IT starts you on the path to what we coin the New Payments Ecosystem. In order to apply a more agile model to your business, you need a technology partner that understands the business of payments and can help bridge that gap between business and technology.
Why is it so important to include the business and technology teams in the planning for instant payments?
DS: Because it’s the end user who is driving the move to real-time. To meet their expectations, it’s important to work with the team that understands the customer best, and that’s the business. Engage with the business and you can look at the value-added services of instant payments as part of the main implementation, rather than as a retrofit. The business won’t automatically understand the opportunity from a new revenue standpoint; they will likely see real-time as nothing more than a new technology, so you need to educate them.
BK: By engaging with the business at the beginning of the process it reinforces a customer centric approach; you create and deliver services they want immediately, and the business uses the insight gained from the increased transaction volumes and additional data to better segment the customer base – and tailor next-generation services to their needs. This isn’t just about consumer payments either; immediate payments offer the chance to tailor services to SME customers – a previously underserved sector of the market. 50% of SMEs globally would like their banking provider to offer more services that meet their unique needs, and 43% say that real-time payments would be essential to the success of their business.
Successful segmentation is tied back to speed to market, in that you have to enable easy testing of new services against those audience segments. It’s about having a ‘fail fast,’ agile mentality.
You mentioned increased transactions and richer data. Why does this go hand-in-hand with immediate payments?
BK: A cashless economy and the rise of micro-transactions will be driven by the improved customer experience of instant payments, but then these same trends will become the drivers of instant payments. There’s a huge play to be made in reducing the cost of cash. Not all banks are aware of the indirect cost of physical money, but consider your insurance premiums, physical protection, forgery costs, ATM-associated expenses and it all adds up. When you add this to the chance to grow revenue by capturing new markets, the business case is undeniable.
DS: You have to consider that as you digitize, and accelerate your payments processes, you have to prepare all of your business processes to cope with real-time. Because the driver for instant payments is customer experience, if the other processes in the payments chain (such as fraud) slow down the authorization, then you risk losing the customer’s confidence. This is especially the case in a POS environment.
BK: You have to prepare your foundations for real-time, so that layering on these value-added services doesn’t break the bank. Real-time fraud is one consideration, but scalability is also crucial when we look at the predicted increase in transaction volumes as a result of real-time payments. The kinds of non-financial transactions (NFT) expected from TPPPs as a result of the Open API requirement in PSD2 will also be real-time, and will increase pressure on your systems. But real-time standards enable you to monetize these NFTs. ISO 20022 is the new messaging format for instant payments, and it can carry any kind of message data – far more than traditional payments. Data enriched payments services, such as e-bill, are where your new services should be concentrated.
Once a payments player builds its business case, what more should it need to think about?
DS: The complexity of moving money in real-time. Many instant payments use cases have concentrated on P2P, but when the whole banking ecosystem becomes real-time, you have to consider liquidity. As transaction volumes increase, so will the challenge for treasurers as they look to keep liquidity under control every second of the day. With immediate payments there is no longer any concept of ‘normal’ business hours; the working day is 24/7/365 for the payment systems. If you don’t prepare your liquidity systems to settle payments in real-time, immediate payments transaction requests will be declined. This destroys the customer experience and undermines the whole business case.
BK: A holistic view of liquidity is a vital part of the chain for the success of an instant payments project. It cannot be viewed as separate to the transactions themselves.
So how can banks and processors ensure they are successful in the world of instant payments?
DS: You have to understand that the opportunity to generate revenue from instant payments is there. If you don’t take advantage of this short window of opportunity before the new entrants are granted access to the open ecosystem, then they certainly will.
BK: It’s about understanding the recipe for FAST success: Fast everything, Alignment internally, Services and segmentation, and Transactions plus treasury. Fast everything means considering your instant payments processes across the board; fraud, authorization and settlement all come into play from day one. Alignment internally is critical if you are going to develop an accurate business case for immediate payments. Services must be layered as value-adds tailored to a well-segmented customer niche. And lastly, don’t forget it’s transactions plus treasury; liquidity is not a separate issue when it comes to real-time payments.
Follow these steps and you are on your way to growing market share and taking advantage of the unprecedented opportunities that immediate payments offer.