Monetizing Real-Time and Open Payments – A Global View from Leading Banks
Payments experts from Bank of Montreal, Lloyds Bank and Rabobank lead a discussion on #NewPayments use cases.
During Sibos 2018, I was lucky enough to moderate a panel of payments experts from around the globe, including banking leaders representing three key phases of the real-time evolution; early adoption, go-live and ‘wave 2.’ Here, I’d like to share insights from these experts, outlining the challenges and rewards for banks in the new real-time and open payments ecosystem.
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.
How is your organization faring with the challenges of the #NewPayments ecosystem? Our eBooks cover how financial institutions can deliver maximum value out of digital transformation. Click here to download.
Related Blog Posts
Strong Customer Authentication in Australia: Reducing CNP Fraud and Streamlining eCommerce Payments
Minimizing fraud without harming the customer experience can be done – using the right tools
In 2017-18, card-not-present (CNP) fraud cost Australian eCommerce AUD $478 million and accounted for some 85 percent of all fraud on Australian-issued cards1. In 2016, CNP fraud in Europe represented 70% of all card fraud2. Seriously uncomfortable numbers.
2020 Fraud Predictions: What to Expect Across the Globe as Cybercrime Evolves
As we near the end of 2019, our payment experts have begun to take stock of the trends over the last year, and make their predictions for where they see the industry heading in 2020.
I sat down with our own fraud experts, Marc Trepanier, principal fraud consultant for North America, and Giselle Lindley, principal fraud consultant for APAC, to get their thoughts on what we can expect in the year ahead around payments fraud.
Real-Time Payments Hits its Stride in the U.S.
The recent announcement of FedNow in the U.S., the launch of cross-border services like SWIFT gpi, and multiple real-time payment systems including The Clearing House’s (TCH) RTP system and Zelle underline the fact that real-time payments are here to stay. The need to deliver real-time payment services to customers has never been more pressing for banks, credit unions, processors, acquirers and fintechs. However, the U.S. payments ecosystem – and its infrastructure – must keep pace with global markets to remain competitive, and interoperability between real-time payment systems will be key.
Strong Customer Authentication under PSD2: Consumer Education Will Be Crucial to Success
The European Banking Authority (EBA) has finally provided the promised update on SCA supervisory flexibility timelines – with a new hard deadline for migration completion of December 31, 2020. According to the new guidelines, migration plans of PSPs – including the implementation and testing by merchants – should be completed by that date, otherwise all players could face serious penalties for non-compliance.
Deep Dive: Latin American Fintech Market (Part 2)
To support fintechs’ development and create a more inclusive financial system, governments across the Latin American region should adopt different regulations. Some good practices implemented in other countries, like the U.K. or Singapore, could also be adopted in Latin America, such as temporary exemptions on fintech authorizations on behalf of regulating entities, or the creation of temporary regulation sandboxes in which fintechs can operate, evaluate their business models and offer their innovative products in supervised environments.
Women in Payments: “Make Failure Your Fuel”
ACI’s Darcy Locke, new business development principal, was recently appointed Chair of the American Financial Services Association (AFSA), Business Partner Board. During her two-year term, Darcy will preside over the AFSA Business Partner Board meetings, and concurrently serve as a member of the AFSA Board of Directors and Chair of the AFSA Business Partner Task Force.
Deep Dive: Latin American Fintech Market (Part 1)
There is a gap between what financial institutions currently offer versus what today´s customers want in Latin America, and this is where fintechs are earning a reputation for customer-centricity, personalization, quick response and seamless delivery. The relationship between fintechs and traditional financial institutions in Latin America has evolved from competition to collaboration, with the aim of efficiently working together and effectively scaling innovation, while also driving financial inclusion for the underbanked.
From API to AI to I: Banking Tech Gets Personal
Tired feet. Running out of business cards. Countless LinkedIn connections – sound familiar? This time of the year is conference season; the annual SIBOS (SWIFT) and Money20/20 USA gatherings spanning the autumn give attendees plenty of hot topics and talking points. My American colleagues refer to this season as “the fall.” I trust this to be an observation on leaves and fruit rather than a sequitur on the state of the fintech industry. Either way, it’s a good time to harvest, to take stock and to work out what we should be doing with the apparent abundance of innovative produce.
India’s Unified Payments Interface: Breaking the Billion Barrier
September brought about quite a stir in the Indian payments ecosystem, with three years passing since the launch of UPI (Unified Payments Interface), and the realization that UPI is closing in on a significant milestone: one billion transactions per month. In September 2019, UPI clocked 955 million transactions, amounting to 1.61 trillion rupees (INR), demonstrating the extent to which Indian consumers have exuberantly welcomed real-time payments.
The Need for Financial Inclusion in Developing Countries
The payments ecosystem globally is changing – and the idea of financial inclusion is increasingly featuring as part of long-term strategy. At a glance, financial inclusion means that people and businesses have access to important financial products, services and data, such as transactions, credit cards, payments, savings and insurance, and that these are delivered in a sustainable way. The challenge for banks lies in being more inclusive and meeting social needs, while remaining profitable and increasing market share.