How Italian Banks and Processors Can Capitalize on Digital Transformation
The European payments landscape is in an era of significant change thanks to PSD2 and other macro factors, but there is more than one way to deliver real-time and open payments to meet PSD2 requirements and its technical standards. Banks and processors must manage this alongside their own set of domestic challenges and opportunities.
Italy’s payments ecosystem has already made strides toward enabling real-time payments (RTP), with a major Italian financial institution as a founding member of the EBA Clearing’s RT1 solution. However, we’ve yet to see Italian banks connect to the other Pan-European service, TARGET Instant Payment Settlement (TIPS) from the European Central Bank. This is expected to evolve as Italy is cognizant of the need for maximum reachability with all payment services. Nearly 65 percent of Italy’s booming export trade is within Europe, so an investment in both Pan-European solutions would be prudent.
Understanding the corporate and consumer use case
The challenge with any new payment type is to achieve the necessary volumes to meet the business case. Ensuring maximum reachability is one piece of the puzzle, the other is understanding the use cases. Italy’s current RTP volume is from the RT1 solution, and most of these payments are domestic, Person-to-Person (P2P) transactions. But the industry is still working to meet the needs of its corporate customers. Expect the RTP volumes to increase very significantly when these new real-time payments services come to market.
When we consider Italy’s specific payment nuances, it’s necessary to consider the importance of third-party processors in the ecosystem. Processors could be the key to unlocking the value of RTP for the Italian market. The payment processor business model is perhaps even more reliant upon transaction volumes than banking counterparts, meaning currently there appears to be a ‘chicken and egg’ scenario where processors seek consensus from customers on their requirements, but the banks cannot yet commit to volumes. However, every global market that is live with RTP combined with digital overlay services has seen huge transaction growth, including the creation of new kinds of transactions and the shift of cash and checks to digital payment types. It’s a huge potential revenue opportunity for processors in Italy to drive the move to RTP forward and bring their banking customers on the journey.
The Italian market has other unique characteristics that help shape the business case for these new services. It’s one of the few markets where consumer real-time payments have a fee attached, which is helping to underwrite the initial volumes in this space. If banks and processors have already implemented a robust instant payments solution, they should be ready to overlay these new corporate services on RTP. However, the question is whether their current technical implementation is designed to scale to the kinds of volumes we see in the UK, where Faster Payments is well established. Secondly, to enable the corporate use cases, organizations will also need API connectivity, management and strong orchestration capabilities to ensure that real-time payments can be seamlessly mapped into services that touch other key systems, such as ERP and treasury management without increasing complexity in the bank’s internal systems or for the corporate customers.
The high levels of adoption for Italy’s P2P service, Jiffy, also shape the potential use cases for RTP. Jiffy is the second largest P2P digital payment service in Europe, with 4.2 million users. Much like Canada’s Interac eTransfer service, it’s alias-based, and the mobile phone-enabled transfers feel real-time to the consumer, although initially the service was based on SEPA batch. Customers already accustomed to seamless Jiffy payments are well primed to adopt other kinds of digital payments offered via banks’ corporate customers, such as RTP in eCommerce checkout scenarios or for bill payment when combined with overlay experiences such as Request for Payment.
The role of open banking in real-time
Existing service improvements on the corporate side also pave the way for rapid adoption of new, integrated real-time and open payment services. SWIFT gpi feels like RTP for a lot of corporates. The benefit of the new SWIFT message is the real-time data and payment visibility, although the reality is that not all participants in a correspondent banking chain have made their systems real-time ready yet, so this real-time data is not consistently available. Exposing and consuming the necessary information for SWIFT gpi requires an API-enabled payments solution, particularly if you want to feed that information back out into online banking channels. Corporate customers are looking to be able to self-serve more easily as part of their own digital transformation projects, so making real-time status information available regarding payments, including cross-border, is critical to meeting this requirement.
When it comes to APIs, and particularly their role in open banking, Italy’s Consorzio CBI has applied its experience in regulation and market guidance to spearheading the creation of a common framework for open banking. This is a great stride ahead for the CBI Globe initiative, and the opportunity to integrate the new open banking services built around the framework with real-time payments is now. Italy’s payment conditions mean its financial institutions are well placed to capitalize on the explosive growth that is sure to come. To accelerate the arrival of value-added real-time payment services, the market needs a first mover, after which we will see a domino effect. Given the balance of influence in the Italian payments value chain, it will be interesting to see how the processors leverage the power they hold. In an ecosystem where processors are not considered a utility, they should be the driving force in creating new value-added services that facilitate new revenue streams and higher overall transaction volumes. Let’s hope the overall industry does not stay ‘alla finestra.’
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