Batch processing is still current practice of today for Euro payments processing, causing slack in interbank transfers. New payment instruments are required to keep up with modern days’ customer expectations of real-time messaging and other digitalization trends. Globally, instant payment initiatives are already available or are in the process of being developed as a result of a central-bank driven (ie. Singapore, Mexico), industry-driven (ie.UK, Poland, Sweden and Denmark) or joint approach initiative (ie. Australia). European institutions are developing an industry-driven Pan-European Instant Payments scheme to go live by November 2017 . Each country and bank has their own timelines as well as service characteristics. E.g. Dutch banks will participate in this scheme by 2019, with specific norms regarding lead times (5 seconds) and maximum transaction amount (no maximum).
The network for instant payments provides opportunities to execute payments leveraging on new infrastructure from that moment onwards. Instant Payments is not mandatory to financial institutions, like for example PSD2. Therefore, the value of the network is dependent on the adoption rate of all parties, both on the supply (banks, Clearing Houses (CSMs), Payment Service Providers (PSPs), etc.) and demand side (customers, corporates, merchants, etc.). Financial institutions should anticipate on expected evolutions and consequences for their organization in order to plan for the right moment of implementation. Instant Payments has a large impact on payment initiation and processing capabilities in banks. This blog defines the key changes involved within banks’ technical payments landscape.
Looking into the banks’ technical payments landscape, changes are required to components that include core systems, integration/middleware components, channel layers, and gateways. These components will need to accommodate instant payments. For each of this component, this article describes impact required for change.
In bank enterprise architectures, the core payments processing capability is supported by of an integrated platform of payments and accounts administration, extended with tools for sanction screening, transaction monitoring, book keeping and customer lifecycle management. Many core systems are not designed for 24x7 processing due to daily routines or system releases that require the system to be taken offline for some period. An example of such a daily routine is end-of-day reconciliation and feeding of bookkeeping systems. Offline periods were acceptable when customers expected payments to be processed during working hours only.
With the introduction of instant payments, redesign of IT architecture is required. As an alternative of systems without downtime, the bank can leverage on stand-in facilities which support continuous processing during periods when the systems are offline. This solution is common with cards processing and can be extended to SEPA instant Credit Transfer (SCT Inst) payments processing capabilities.
New or enhanced middleware capabilities need to facilitate this real-time messaging according to ISO 20022 format standards. SCT Inst will be existing in parallel to the normal SCT scheme. Banks that offer both schemes should decide with every payment about the respective routing. Routing rules will be based on reachability of the beneficiary bank for instant payments as well as the value of the payment. As an example of this routing, a non-domestic payment. Another difference with the current SCT batch scheme is that acknowledgements and confirmations are relayed back to the originator in case of successful processing.exceeding 15K would be routed as a regular SCT batch payment.
In all cases, expectations regarding processing duration and transaction guarantee should be managed with the customers. Therefore, the channel layer, and the middleware component responsible for routing and formatting should be adapted to this logic.
A gateway hub or messaging/network intelligence that is adapted to instant payments is required next to the processing application layer. It will handle all messages and connectivity from inside to outside the bank, while providing secure network connectivity to CSM, session management, administration, disaster recovery etc. Existing and potentially new CSMs are positioning themselves on the market providing connection to other banks and interoperability with other CSM. In addition, network providers upgrade their architectures to provide connectivity. For example, EBA Clearing services confirmed SIAnet, SWIFT and EBICS as its network providers. In order to connect to the instant payments scheme over these networks, gateway components might need to be upgraded.
Real-time posting of debits and credits needs to be executed at a much higher velocity. In particular, validation of payments (according to internal business rules, sanction screening and transaction monitoring) is more time critical and requires direct feedback. For example, an immediate reject is required in case funds are not available or the originating/beneficiary account is not trusted. Systems should therefore become more reliable with regards to response times. This contrasts with today’s situation where payments processing is allowed to take up to a business day.
System quality requirements require revision based on new transaction volumes and peak loads. Monitoring and exception handling become more critical when service level requirements increase. There are various factors that account for these changes. First, the total amount of transactions will likely increase as future payment models might separate current transactions in more smaller amounts (e.g. daily salary payments, or pay for every product bought at a grocery store). Second, instant payments is likely to result in more transactions being initiated digitally using banks systems, as instant payments is a real substitute for cash with its characteristic of guaranteed delivery and confirmation. Third, time criticality is higher, so the total transaction load cannot be spread over time as the actual initiation moment in time is leading.