The Race to Real-Time Payments in Europe
Instant payments have quickly morphed into the new norm, and as individual European nations forge a real-time, digital-first payments environment, they raise the bar for all financial institutions conducting business in the Eurozone. It’s no longer a question of “what’s the business case?” but a matter of how instant payments players can take advantage of the opportunities now being created.
European Banking Experts Weigh in On Instant Payments Clearing and Settlement Options
At a recent gathering of European payments leaders in Germany, it was established that instant payments are essential to banks’ business success, and without it, banks would struggle to compete in an increasingly digital world.
“If you don’t fully engage with instant payments, then your competitors are going to take your business,” said Joe Beltrán, director of business development at STET. The French- and Belgian-based pan-European instant payments service provider launched its payments service in 2017, and has since brought on 48 million accounts and 1.7 million merchants in that short time.
As financial services players consider their options for instant payments, reachability will be key. The European Central Bank has clearly stated that complete pan-European reach is the goal of its real-time settlement solution (TIPS), offering access to any TARGET and TARGET2 scheme bank members, as well as indirect access models for instructing and reachable parties.
“The business case for banks is to stay in business!” explained Helmut Wacket, head of division at the European Central Bank. Instant payments enable banks to do just that by competing with new players entering the ecosystem, such as FinTechs, as well as traditional players offering new services. As Beltran states, “Traditional banks need to compete with challenger banks.”
Even among well established banks, there is a need to keep pace with the competitive curve, and that includes both instant payments and the new real-time experiences that ride on the real-time rails. “Be a service provider for your customers, not just an account provider,” Wacket emphasized.
Another major player in the European market, the European Banking Association (EBA), which has a strong track record in processing pan-European payments with its ACH and same-day settlement services, has achieved significant growth since the launch of its real-time settlement solution (RT1) in 2017. The span of RT1 is already increasing with more than 2,000 PSPs (payment service providers) currently reachable. “RT1 is pan-European by design,” said Erwin Kulk, head of service development management at EBA Clearing. It’s also the result of a continual feedback loop from members, who have helped shape the service into a market-focused proposition. This collaborative approach extends to helping design overlay services with broad reach, which will drive the adoption of real-time payments.
EBA announced its Request to Pay (R2P) Task Force with the aim of developing a pan-European R2P solution focused on delivering value for the payer and payee. This value is in the overlay services that create certainty and transparency in payments, particularly around bill payment and reconciliation. It seems that the EBA feels the need for more than just speed.
Real-Time Challenges for European Payments Players
For individual countries that are yet to implement a domestic real-time scheme, the temptation can be to pretend that instant payments are a future challenge. But as Beltrán put it, “There is an inevitability to instant payments.” Modern life has evolved, and with it, customer expectations. German and French consumers may not yet have experienced domestic real-time payments, but they are active participants in the digital ecosystem, which is predicated on real-time information. It is naïve to think that banks can provide market-leading customer experience without taking advantage of all the rich-data opportunities afforded by real-time payments.
But the question remains: which clearing and settlement mechanism (CSM) should banks connect to? Wacket suggests that banks should ask themselves how they want to contribute and leverage instant payments. It’s true that each CSM offers a unique set of benefits, and when we reflect on the reachability factor, the answer is clear – ultimately, banks need to be connected to multiple schemes and CSMs, whether directly or indirectly.
For a bank just getting started with instant payments, connecting to every pan-European CSM and domestic scheme from day one is not feasible. What banks need is a quick way to get up and running with instant payments – beginning with a pan-European scheme even if there is not yet a domestic option – in a way that maximizes current and future reach. A tactical move now, with a clear long-term strategy, will go a long way towards avoiding creating technical debt or adding complexity to the business.
Reducing complexity is closely linked to liquidity management, a critical piece of the real-time puzzle. Each CSM has benefits for banks, so it’s a question of how it aligns to the bank’s business model. The EBA has operated a Deferred Net Settlement model for EURO1/STEP1 payments, or individual RTGS payments. The addition of TIPS with real-time settlement is a new model.
By comparison, the ECB has a global approach to liquidity management, which is currently a differentiator for TIPS. If a bank already has accounts at the ECB for other CSMs, they may find they need to hold lower deposits in each one. Moving liquidity between accounts against fluid business requirements may be easier if they are all at the same bank under the Central Liquidity Management (CLM) system linking together ECB’s real-time gross settlement (T2), securities settlement (T2S) and EBA’s TIPS.
But don’t forget, all these CSMs have ways to connect with each other, so your first connection does not need to be your only one. That inter-CSM connectivity may in fact be via a third party; ACI Worldwide, for example, provides connectivity for STET to both the EBA and ECB. The solution bridges the gap between the different CSMs to provide ease of connectivity to the banks that are connecting to STET. Banks can start with a single gateway to the CSM that meets their immediate needs and customer demands, and grow their connectivity and services with the business.
Any solution that connects a bank to its first instant payments CSM needs to be able to incorporate connections to additional schemes and CSMs to support the launch of new instant payments and provide a pathway to maximum reachability. It must also scale to the transaction volumes that will arise because of instant payments, especially as we enter “wave 2” of the real-time evolution and create new open API-enabled services that ride the real-time rails. Since its launch, U.K. Faster Payments has experienced 10 percent year-on-year growth, but is predicting a rise to 25 percent as a result of open banking. Banks across Europe need to be prepared to capitalize on this opportunity.
The German Opportunity
When U.K. Faster Payments launched, the assumption was that real-time payments would eat into RTGS and ACH. In fact, real-time payments have impacted cash and cheque volumes the most.
More than €250 billion, one-fifth of the eurozone's cash supply, is circulating in Germany. But 2017 was the first year that cash didn’t make up the majority of transactions in Germany. Combined with high smartphone penetration, internet usage, prevalent eCommerce shopping and a vibrant FinTech start-up scene, the country is uniquely placed to experience an unrivaled speed of adoption. There’s a misconception that because credit card usage has been historically low in Germany that real-time payments will struggle to gain traction. This couldn’t be further from the truth. 58 percent of German and 75 percent of French small businesses said they would switch banks if they weren’t offered real-time or the benefit of real-time payments.
Why have German consumers held onto their cash? As they would say, “geld stinkt nicht” (money doesn’t stink), and it allows the consumer to maintain a strong control over their finances. Consider the success of the Geldüberweisung account-to-account system and GeldKarte prepaid card: essentially, the primary driver for German cash usage is the real-time balance. Real-time payments offer the consumer the chance to have a single real-time balance in their current account, which reflects all their transactions. Currently, they use multiple payment types for bill paying and purchases at point of sale, alongside cash. With ubiquitous real-time payments comes the opportunity to consolidate their financial activity and improve their financial controls, as well as lighten their load. On average, Germans carry nearly twice as much cash as those in France and Holland. German customers, like their counterparts across Europe, will demand real-time payments. Da liegt der Hund begraben (that’s the heart of the matter).
Discover the use cases for real-time banks in the new whitepaper from Lipis Advisors and ACI Worldwide: Get More From Real-Time
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