The financial services industry is undergoing rapid change. Customer demands and expectations change due to technological developments. Customers have gone digital, using tablets and smartphones as a primary means of communication. They want to use these devices for their banking services as well. This trend is well understood throughout the financial services industry. Both existing players and Payment Service Providers (Fintechs) developed services that are fully digitally enabled. PSD2 will further fuel change given that it will enable third parties to get access to bank accounts directly. In previous blogs we have given our view on the changes to expect from PDS2 in the financial service industry. Another important change is the introduction of instant payments.
To live up to the increasing demand of customers for speed and convenience, numerous countries already have instant retail payment systems. Many of these existing systems have been in place for a number of years and are currently being modernized eg. through adopting the ISO20022 standard format or by developing P2P solutions for consumers. Multiple other countries are on the brink of introducing new instant payment systems, including SCT Inst in Europe. The need for such payments is clearly illustrated by the success of domestic (near) instant payments methods like Faster Payments in the UK .
In this blog we will discuss what instant, faster or real time payments are, what banks plan to offer, the impact on a corporate and what is needed to benefit from instant payments as a corporate.
Instant payments allow account-to-account transfers within seconds. Apart from the Faster Payments scheme in the UK, actually processed in minutes and not in seconds, domestic instant payments in Europe are also available in Denmark, Iceland, Finland, Poland, Switzerland and Sweden. Furthermore there is a global trend towards instant payments systems in countries like Singapore, Mexico, Australia, the United States to name just a few. Each of these domestic Instant Payments schemes has its own rules, message formats, currencies and transaction limits. In order to prevent a re-fragmentation of the Single Euro Payments Area the European Central Bank (ECB) pushes banks to provide at least one pan-European instant payment solution. This is addressed by the European Payments Council (EPC) and resulted in the SEPA Instant Credit Transfer (SCT Inst) scheme. This optional scheme is designed for Euro transactions, based on the existing SCT scheme and the ISO 20022 message standard. It offers 24/7/365 availability in an area that will progressively span over 34 countries. It ensures funds are available to the beneficiary within 10 seconds and, at least initially, allows a maximum transaction amount of €15,000. This scheme is live and operational since 21 November 2017.
Table SCT Inst characteristics
Pan-regional Instant Payment Scheme:
What is offered by banks
It is important to realize that, unlike to PSD2, there is no legal framework to offer Instant Payments. This explains different launch dates per country and deviations from the EPC scheme. In the Netherlands for instance, Instant Payments will go live on May 1st, 2019, for unlimited amounts and a maximum processing time of only 5 seconds. The first go live will be limited to direct single payments initiated via mobile and internet banking for the consumer and SME segments. Not every bank will participate from day 1, but the largest banks will. The Dutch banking industry defines the Instant Payment as the ‘new normal’, eventually not only to be used in online channels but all banking channels. Business channels are expected to follow suit.
Quote Javier Santamaria (EPC): “As of the 21st of November 2017 almost 600 payment service providers will offer instant payments, mostly bank in Italy, Austria and Spain.” This service is however limited to transactions between accounts held by these banks.U.K. - Faster Payments (2008)
|U.K. - Faster Payments (2008)|
|China - IBPS (2010)|
|India - IMPS (2010)|
|Poland - Express ELIXIR (2012)|
|Sweden - BiR (2012)|
|Denmark - Nets (2014)|
|Singapore - FAST ((2014)|
|Bahrain - CBB (2015)|
|Sri Lanka - SLIPS (2016)|
|Australia - NPP (Est 2017)|
|Spain - SCTIns (2017)|
|Italy - SCTIns (2017)|
|Finland - SCTIns (2017)|
|Latvia - SCTIns (2017)|
|Belgium - SCTIns (2017)|
|Romania - SCTIns (2017)|
|Netherlands - SCTInst (2019)|
|Unites States - TBD|
Provides offering Instant Payments on the SCT Inst Scheme are published in the 'Register of Participants' on the website of the EPC
|India - IMPS (2010)|
|India - IMPS (2010)|
|India - IMPS (2010)|
Corporates, just as banks, see the increasing need to offer near real time customer experiences. Although Instant Payments initiation will not be available from day 1 for corporates, clients like consumers and SMEs may use Instant Payments to pay corporates. Clients pay (near) real time and this sets the expectations that their order are handled real time as well. Corporates that are used to batch processing will fall behind in their response time to orders made and paid for in real time. As with order handling, clients will expect customer services to be able to see that their payment obligation is fulfilled in near real time.
Corporates will have to discuss with their banking partners how bookings regarding real time transactions are reported to the corporate. This reporting is needed to obtain the necessary input to feed processes within the corporate. The second question is whether the internal processes are able to handle this information and potentially large amounts of individual transactions. The frequency of reconciling instant payments, feeding customer services and order delivery systems have to run in parallel in order to live up to the expectations of consumers.
Instant Payments are available 24/7/365 and are credited to the beneficiary account also 24/7/365. This implies that Euro bank balances will change after the cut-off times that are used by banks at this moment. This raises the question how the banks will handle these transactions in their interest calculations. Will the balance at midnight be taken as basis for interest calculations or is the interest bearing balance defined as the balance at another moment during the day? A shift to midnight is most logical. If the cut off time for interest calculations is shifted to midnight, this will also affect your cash & liquidity management. Balances that come in after a workday should also be included in your cash & liquidity planning and associated end of day actions.
The above illustrates that corporates as well as financial institutions carefully have to investigate in what areas instant payments will affect their operations. This detailed impact analyses is not limited to the impact on reporting channels and reconciliation processes but should include as well time critical non-financial processes. An insurance company for instance will likely end an insurance if the insurance premium is not received on a due date. Ending the insurance just before close of business is no longer possible because instant payments can be made just before midnight. And what if the business day is Friday? Will that result in continuing the insurance until Monday?
The biggest benefit offered by Instant Payments is that the beneficiary has direct access to these funds and the beneficiary is potentially informed thereof. The latter is not a core characteristic of the scheme and therefore needs to be discussed with the bank through which you operate.
Cost savings - As instant payments are made available throughout Europe, Instant Payments can replace other (more expensive) payment methods like credit cards. It may improve the check-out process with newly created payment products.
Increase sales - Instant payments can also contribute to a higher turnover. Most companies will have credit limits in place for their customers. With Instant payments the order cycle and payment coincide and therefore the credit limit can be used more efficiently, either resulting in more sales or lower credit limits and thus reduced risk and capital requirements.
Improved Working Capital – Because of the instant bookings, money is received earlier which improves your working capital. When Instant Payments become available for B2B as well, further improvements are possible by maximizing the payment terms as there will be no delay in the payment process, and synchronizing just-in-time ordering with making the required payments.
Debtor management – if instant payments are used as a payment method upon delivery of the service or good, there is effectively no payment term anymore. This diminishes the need for debtor management and increases efficiencies.