The Role of Regulation, Collaboration and Competition in Pushing Forward Payments Modernization
While geographic regions have taken their own approaches to payments modernization, they all face some common challenges – a principal one being adoption of real-time payments, which is central to successful payments modernization projects. I spoke to some of the top minds tackling real-time payments adoption in key markets, including the U.S., Canada and the U.K.
Rachael Tomaney: Let’s start with the U.K., where the Faster Payments scheme has been live since 2008. Simon, was it regulatory intervention that ensured successful adoption?
Simon Brooks, Faster Payments Service Line Manager, Pay.UK: There wasn't a regulatory push as such, but eleven banks came together in the original working group, responding to a government desire to speed up payments. We actually had an RTGS system – CHAPS – that already made payments in one day as opposed to the BACS system that took up to three days for payments to be initiated and funds to be received. Using CHAPS as a starting point, we moved towards real time and in fact went further than what the government had actually asked. This is the system that we still operate today, more than a decade later.
Rachael: The U.S. is another market that doesn’t have a national mandate – Reed, how does the U.S. Faster Payments Council approach the adoption puzzle?
Reed Luhtanen, Executive Director, U.S. Faster Payments Council: In the U.S., there are a lot of innovative companies developing their own solutions in this market-based system, which means a lot of innovation, but also lot of complexity. There’s a need for education and dialog so that potential customers understand the different options, what they can and can't do for them, and how best to build out a strategy that fits their needs. That's the primary role of the U.S. Faster Payments Council.
Rachael: Anne, Canada has taken a different approach again, and has an interesting situation given the successful adoption of Interac e-Transfer. How do you see the adoption of real-time being different than Interac?
Anne Butler, Chief Legal Officer & VP Research and Policy, Payments Canada: When I look at the Interac e-Transfer product, it was truly an innovative product when it came to market in the early 2000s, and it still has deep penetration into the Canadian consumer marketplace. Our real-time payments system, which will go live in summer of 2022, therefore gives us an opportunity to launch with strong adoption – if we get it right. That's really been our focus. Canada doesn't have a regulatory mandate for this, so part of Payments Canada's role is to facilitate innovation in the marketplace.
Rachael: The U.K. and Canada are also in an exciting phase in that you’re also modernizing your real-time systems, bringing ISO 20022 messaging standards into the mix. Simon, I'm curious, what role does interoperability play in this next phase?
Simon: Things are now moving so fast around the world, and I think interoperability is a key question to be answered. At a global level, one of the challenges is how to settle funds on a real-time basis. When to settle, how to settle and – most importantly – where to settle? If a payment from the U.K. to Australia takes three to five seconds, does the time difference mean it is settled tomorrow? If you're talking about settlement across countries, that’s still an open book, but as we move forward, the answers will come. I think the standardization of payments messaging is a really important milestone allowing this to happen.
Ultimately, I think the first payment that is made across borders in real time will be similar to the first message that was sent via wireless across the Atlantic – it’s that important and will represent a massive shift.
Rachael: What’s the Canadian perspective on this, Anne?
Anne: As Simon said, the ISO standard is so important, but the challenge is: can it be implemented in different ways in different countries? It's really important for us to be working with our colleagues internationally to make sure we're implementing that standard in a way that makes possible the interoperability we want. For Payments Canada, we've been thinking about the ISO standard for some time, and it’s an anchor to our real-time payments system.
Rachael: Reed, what’s your thinking about the potential of request to pay, or request for pay as it’s being called in the U.S., and what it means for real-time?
Reed: I think we need to get creative around the use cases that really benefit from request for payment. The one that comes top of mind for us is bill payments. So, how can billers and financial institutions integrate their solutions in a way that ultimately makes the consumer experience better, since that is the customer of both the bank and of the biller? How can request for payment really streamline a process, which today can have multiple-day lags and create uncertainty from the consumer perspective?
Beyond that, I think the ability to have back-and-forth dialog, based on the richer data enabled by the ISO 20022 message specifications, can not only streamline existing business cases, but also make possible new business models where instant small-dollar, small-value transactions are more efficient. It could open up new industry verticals that don't even exist today.
Rachael: Seeing different use cases evolving around the globe is really interesting – including the different ways that request to pay or request for pay is being implemented. With Interac, there's some exciting money request services, and in the U.S. it's a core part of the TCH rails, while in Europe the EBA is adding it as a scheme overlay on RT1. Then the U.K. has a similar approach with an overlay separated from the payments rail. Given the varying approaches, I'm curious what each of you thinks the market needs to maintain interoperability and what we're striving for with these overlay services?
Simon: I think we've developed something different in the U.K., which is not dictated by the payment rails, but is payment-agnostic. We've created a messaging service. So, our request to pay proposition is actually a messaging proposition – like email – with the difference being that we've tried to make it as safe and secure as we possibly can. We see request to pay as just another vehicle to drive payments, and from the U.K. perspective, we've created it to reflect ISO 20022, so I do think it can operate globally.
In designing this system, we spoke to billers and payers and asked, what is it you want? Normally in the payments world, we say, “build it and they will come.” But we wanted to find out what consumers want, what utilities want, what big corporates want and even what the banks and the government want. Over the course of five years, that research led us to the request to pay proposition, delivered in May this year.
Anne: Request to pay, as we're calling it in the Canadian market, is really important for our real-time launch. We’re taking a very practical view, like the U.K., to ensure that we create the messaging needed to foster innovation in the market. We’re thinking about how this approach and rule set will transmit into the other payment systems over time, as we gain experience, get comfortable and move it into other layers of our payments infrastructure. More specifically, bill payment is something that needs to get fixed everywhere, but it certainly is a big pain point in Canada. I think it's a key enabler for that next stage of our evolution.
Reed: I agree, bill payment is a great example – there’s a varied and not necessarily optimal onboarding experience, especially if you think about it from the consumer side, there's a lot of friction that can be solved. It's not about making everybody change if they're happy, it's about providing more options for those who aren't happy, or delivering an enhanced experience by enabling something like request for payment – and coupling that with an instant payments solution.
Rachael: And one final question– what do you believe your role is in driving the adoption of these new payment types and services?
Reed: We're engaged in education; helping folks understand what is out there – what are faster payments, what are instant payments, how can I engage and how can I understand what fits in my strategy? Then facilitating dialog to influence the outcomes and help solve the problems.
Anne: We really need to understand the ecosystem and that’s why Payments Canada engages very heavily with members. We have a mandate to facilitate innovation and that's why education of regulators, policymakers and lawmakers is so important. We must help the government understand the value of faster payments as well.
Simon: Part of our responsibility going forward is to build a new payments platform, but use this as an opportunity to educate, as well as actively research and understand what people want from what we're delivering. Do they want us to change? Do they want overlay services? If they do want overlay services, how do they want them to operate? Previously, we built it and then everyone connected to it. Now we need to go out and listen. The world is getting smaller, too, and we need to learn from one another.
Rachael: Simon, I completely agree that the world is changing and it's also becoming smaller, but it’s certainly clear that when it comes to payments modernization, there's no simple, single path forward. Country, market and the regulatory and competitive dynamics create varied needs and use cases. There are those common threads that continue to tie us together though, especially around collaboration and interoperability, as the conversation starts to shift from domestic to international considerations.
Discover more in our on-demand webinar: How Can You Benefit from Payments Modernization
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