Central infrastructures (CI) have a critical role to play within this environment, and therefore need to be resilient, scalable and trustworthy. The effort to modernize these infrastructures is a significant challenge, which is further complicated by the fact that they must adjust to this new environment in real time.
I had the opportunity to gain insights into this subject with Rodolphe Meyer, Director of Marketing and Development at STET, and George Evers, SVP of Customer Solutions Group at Mastercard New Payment Platforms. We discussed the critical needs that central infrastructures must address when building the foundations of a real-time world, including the need for a robust regulatory framework, interoperability and adopting an iterative approach.
The need for a strong regulatory framework
One of the major drivers that helps guide CI development is a strong regulatory framework. However, there is some fear that companies might invest and not comply with recommendations or initiatives, for example, if it’s not mandatory. What do you think companies should do to be aligned with the regulator?
George: I think complying with the regulator is the starting point; meeting the requirements but also thinking about innovation and modernizing the payments system to add more to it than the regulator is asking for. The regulator sets the minimum for what needs to happen in the payments system, but banks do have a choice to modernize their payment systems and build other products and services.
Rodolphe: That’s the issue right now in Europe. In 2014, the European Central Bank decided to create a new scheme with an aggressive timeline and we accomplished this challenge in less than two years. At the start, it was an optional scheme and now we have pressure from the ECB to make this scheme mandatory. It’s also a way to ramp up for the launch of instant payments in Europe.
Interoperability and modernization as key factors
Differentiation is one of the biggest challenges for any financial institution. It is how they choose to modernize their payments infrastructure and how they prepare for the digital world that will help them to distinguish themselves and remain competitive. How do you think real-time payments play in these discussions?
Rodolphe: I think real-time payments are key for any bank looking to modernize. There are some challenges that banks have to overcome when moving from a batch system to a real-time system. On the clearing and settlement side, and on the payments side, banks are not used to doing real-time payments 24×7, but they should have this in place. They need a system that is always able to update without stopping the system.
George: As mentioned, one of the major drivers for modernization is usually due to a regulatory change, so it can be that the regulator pushes to move towards real-time and delivers the benefits to consumers and businesses in real time. Interoperability is important here—everyone should be ready either to receive or make those payments and to modernize at the same time.
Flexible, innovative and iterative approach
When talking about the digital world, I think open banking is key to bringing future innovations to the payments industry. Once countries have successfully created the real-time schemes and participants have connected, what kinds of services do you think we’ll see?
Rodolphe: I think there are many new services we may offer to clients. We already talked a lot about request to pay and providing fraud scoring, because those using instant payments really want a secure payment to avoid any fraud. I would also say confirmation of payee; I think every user wants to have this functionality.
George: We know we can innovate and build new propositions, products and services. The more capabilities you have in the platform, the more differentiation the banks can provide. The propositions around request to pay can be very powerful. We also see some interesting innovation in terms of product development. Instant loan fulfillment process is a different type of innovation in a completely different product line.
In short, for a central infrastructure to be successful, we have to make sure it’s aligned to the initiatives in the market (mostly regulatory driven), generate interoperability and have a flexible approach that allows them to adapt to the environment and market demands.
Learn more about the responsibilities of central infrastructures by listening our full webinar: Building the Foundation of a Real-Time World: The Task for Central Infrastructures