The European Central Bank (ECB) published an important vision document in 2014. This vision invited the supply side of the market to help achieve an open and competitive market for instant payments at a pan-European level through a reinforced co-operative approach among established and new Payment Service Providers (PSPs). This article looks at the development of instant payments and examines what does this all mean for merchants. It asks whether this vision of the future, whereby the clearing and settlement of funds will be instant, i.e. in real-time, can meet the immediate payment needs of today's consumers and merchants?
Why Are Payments Like Trains?
In rail transportation, the track gauge is the space between the two rails of a railway track. Like trains, payments run on rails. However, there are two main types of payment rails, card payments and bank payments.
Most consumers are familiar with card payments that run on the Visa, Mastercard, American Express, or Diners or any other card payment network rails. There are different rules and regulations for these card networks. Just like different countries may have different track gauges for their railways.
Bank payments will run on a funds transfer system or an Automated Clearing House (ACH) set of rails. The ACH is the set of rails that define the electronic network for the Clearing and Settlement of financial payment transactions which are sent to each other. In some countries, particularly in Europe, a payment system or 'funds transfer system' is referred to as a 'Clearing and Settlement Mechanism' (CSM). The role of a Clearing & Settlement infrastructure is to ensure the secure and efficient exchange of payment transactions between the participants in the ecosystem.
Two Payment Rails, Multiple Implementations, Different Speeds
Electronic payments are inherently digital. Unlike railways. Anything that is digital will evolve and new standards can advance the payment ecosystem to support more sophisticated use cases, products and value add services. Innovation will be inevitable. The regulators will also want to encourage innovation, interoperability, open networks, and competitive advantage on a national or on a regional level. Payment standardisation and innovation continue to be key focus areas for regulators and important for end-users in terms of security and service quality. The need for speed for both consumers and businesses will drive the requirements for instant payments. Today, consumers expect and currently perceive instant or near real-time payments at a point of sale in a shop, online or on their smartphone when they make a card payment. This is the norm for a card payment running on rails of the card network. However, the reality is that the funds are transferred several hours or even a day or two later. After the issuing bank authorises the card transaction by sending an authorisation code to the merchant (in real-time), the settlement stage of the process begins. This is usually called batch processing because several transactions (or a batch of transactions) are settled all at one time.
The Clearing and Settlement Mechanism (CSM) in many funds transfer systems, or Automated Clearing Houses (ACHs) around the world, are not real-time. They operate in batches, whereby the clearing and settlement of the funds happen overnight or several times during a banking day. In some countries, the banking day ends at 3pm. However, this is where the disconnect exists, commerce is 24-7, consumers will shop and businesses operate around the clock, across geographic time zones and borders, using different currencies. The ubiquity of the internet has contributed to raising expectations of end-users when it comes to the functionality of their payment solutions.
Globally, there are various Instant Payments (or real-time payments) initiatives already in place, and many more being implemented. Japan was the first country in the world to implement real-time payments in 1973. In 1987 Switzerland was the first country in the European region to implement real-time payments. Other notable examples, include Turkey, Singapore, South Korea, Nigeria, Sweden, and Poland. Since Switzerland, over the last 30 years around 15 different countries have migrated to real-time Clearing and Settlement Mechanisms. The UK’s Faster Payments Service was launched in 2008 and it is a near real-time system enabling internet and phone payments to be made 24 hours a day, seven days a week. Real-time payment systems that have been launched in different countries have different operating hours. Some operate 24-7, some do not, many only operate during business hours. However, it is acknowledged that there a gradual move away from batch clearing and settlement mechanisms towards a real-time CSM.
For business to business payments there has been a constant and frustrating disconnect between business processes and payment processes. This has meant that there is an unnecessary operational overhead to address the reconciliation problems. Sending out an invoice and receiving payment in several weeks later will make reconciliation harder and has cash flow implications for all sizes of business, big and small. When your payment process operates in real-time with your business processes, reconciliation is much easier.
Today it normally takes one business day for a payment to reach the beneficiary. With instant payments, this will happen in real-time, 24 hours a day, 365 days a year. The funds will be available immediately for use by the recipient. This will be a positive change for consumers, businesses, merchants and governments.
What Is Instant, Real-time And Immediate?
The following definition is crucial and it comes from the Euro Retail Payments Board (ERPB). It is certainly worth a careful read. They have defined instant payments as:
"electronic retail payment solutions available 24/7/365 and resulting in the immediate or close-to-immediate interbank clearing of the transaction and crediting of the payee’s account with confirmation to the payer (within seconds of payment initiation). This is irrespective of the underlying payment instrument used, (credit transfer, direct debit or payment card) and of the underlying arrangements for clearing (whether bilateral interbank clearing or clearing via centralised infrastructures) and settlement (e.g. with guarantees or in real-time) that make this possible."
This definition is certainly worth another read as it is at the heart of the ERPB and the ECB’s mandate to promote the smooth operation of payment systems.
There are specific characteristics within this definition of instant payments that are worth further consideration.
Firstly, the use of ‘retail’ payment solutions, these are all payments between individuals, companies, and governments. This encompasses all electronic payments made by consumers at a merchant.
Secondly, the payment instrument used, whether they are credit transfer, direct debit or payment cards, effectively brings together the bank transfer and card rails mentioned at the start of this article.
Thirdly, and most importantly, it states the clearing and settlement of the funds are immediate or at least close-to-immediate. This is very interesting and defines the building blocks that will encourage new business opportunities through value-added product offerings for consumers, corporates and merchants. Innovative payment solutions and potentially new overlay services are on the horizon because the underlying payment processing will be real-time. Call it instant or call it immediate. The genie is out of the bottle. Expectations are high and we have already started to see new overlay services, for example, Paym and Zapp in the UK, or Swish in Scandinavia. These new overlay services will build on the real-time payment infrastructures, such as the UK’s Faster Payments Service. More are expected and more about Zapp later in this article.
What Does Instant Payment Mean For A Merchant?
There is a long list of stakeholders and a variety of interested parties, including NACHA (the National Automated Clearing House Association) whose focus is North America, and in Europe there is EACHA (the European Automated Clearing House Association), the EPC (European Payments Council), the EBA (Euro Banking Association) or the other EBA (the European Banking Authority), the European Central Bank (ECB) and its Euro Retail Payments Board (ERPB), and so on. It is heaven for an acronym collector. Let’s not forget SWIFT or ISO and others. However, the efforts of all these industry bodies does not even appear on the radar of a merchant. In fact, most merchants don’t even know what some of these associations do, how they could affect them or have any vested interest in their activities. Merchants rarely have any unified representation in these different associations or have much influence. If you read through the mountain of publications and presentations they very rarely use the word ‘merchant’ or ‘retailer’. It is as if they are talking a different language.
Edgar, Dunn & Company recently completed its 5 annual retailer survey. These surveys have been vital for us to better understand the retailer’s future requirements from their payment needs. In this year’s survey, we asked leading Omnichannel retailers across Europe what changes in the customer experience will have the greatest impact on the retail industry over the next 2 to 3 years. ‘Immediate Payments’ was the second highest result followed by ‘seamless cross-channel integration’ which was the top result. This is very interesting considering that immediate payments have not necessarily made it into the retailer’s toolkit for payment acceptance. Bank transfers are commonly accepted online, but in the physical store, the retailer still does not have a proven solution.
Will this all change with ‘SCT Inst’? couple of years ago ERPB invited the European Payments Council (EPC) to develop a pan-European instant payment scheme. The scheme will be based on the EPC’s current SEPA credit transfer (SCT) scheme and will be called SCT Inst or sometimes written as S. Don’t be fooled by the unimaginative name of the scheme, SCT Inst goes live on 21 November 2017, for payment transactions in Euros.
Payment Service Providers are already preparing commercial solutions whereby merchants will be able to take advantage of the new SCT Inst payment scheme. By using immediate payments rather than traditional card payments, merchants will not only receive their funds faster, but the processing fees are expected to be less than a card payment. Both online retailers, as well as traditional bricks and mortar retailers, could benefit from these features.
Will We See Instant Payments At The Point Of Sale?
If payments are inherently digital, then an Instant payment online will be relatively simple to implement. However, there are some unanswered questions. One crucial question with an irrevocable and immediate payment is repudiation. The merchant may be assured that the money is paid before shipping the goods, however, what happens if the merchant fails to provide the goods to the consumer because of unforeseen circumstances, such as lack of product availability, a bankruptcy or even merchant fraud? What is the process of redress for the consumer to claim their funds to be returned because of non-delivery? If you buy an airline ticket, for example, using a credit card and if the airline fails to fly you to where you want to go, the consumer can chargeback the transaction and their funds are immediately refunded. A SCT Inst has no repudiation procedures for the consumer. Today, a SCT has R-transactions (reject, return, recall) but these will need much more functionality for an SCT Inst transaction. AML (Anti-Money Laundering), CTF (Counter Terrorism Financing), and fraud checks are other areas that require greater clarity for PSPs to be able to implement workable solutions for merchants and consumers.
We are moving towards ubiquity of real-time, 24/7 payments infrastructure, such as the Faster Payments system in the UK. The question is whether retailers would want to accept consumer payments using these new payment mechanisms as an alternative to card-based payments. Where there is instant gratification of the goods or services, for example, grocery shopping, downloading a movie, or playing an online gaming. In all these use cases the consumer instantly receives the goods and services, there is instant gratification, there is no doubt in the fulfilment. Refunds will be rare and where a refund is requested the merchant will typically resolve these because they want to preserve customer satisfaction. If the merchant receives their funds faster and the transaction processing costs are less than a card transaction, then an instant payment will give the merchant a positive return on investment.
At the point of sale card payments have had a head start, by at least seven years in the case of contactless. Contactless payments have been gradually gaining traction and mass market adoption. Frictionless payment is sometimes an overused term, but a frictionless payment at the point of sale is one that is as simple and as easy for the consumer to make the payment. As simple and easy as it is online. One-click checkout, for example, online is simple. If merchants can achieve the same simplicity in the store at the point of sale, then payment equivalence online and offline will have been reached. We can see this today with contactless card payments and transactions using the smartphone wallet solutions from Apple Pay, Samsung Pay and Android Pay.
Anything that confuses the consumer, puts up barriers or provides a more complex in-store customer experience than what is happening today will be a complete non-starter. Zapp, in the UK, the ‘Pay by Bank App’, again one of those unimaginative product names, has been unsuccessfully launched due to repeated project delays and cost overruns. However, Barclays, was the first UK bank to use the Pay by Bank app and they called it Pingit. It’s a great product and simple to use for person to person payments and making payments online to a utility company. Very few retailers have embraced Pingit for their online sales channel. I know a tradesman that uses Pingit and Paym (a very similar product) and he loves it because he said so often his customers rarely have cash to pay for the work completed. To be able to accept payment from the consumer’s internet banking app on their smartphone using a mobile phone number of the tradesman is very simple and instant. There is no need to enter a sort code and bank account number or an IBAN of the tradesman. And, it is cheaper than accepting a credit card which can cost him as much as 2.75% of the value of the transaction.
Like Pay by Bank App, iDEAL is the payment method that makes it possible for consumers to make direct online payments in the Netherlands via the online payment systems of the largest Dutch banks. iDEAL payments have won major ground in the online payment sector in recent years. There are now over thousands of online merchants in the Netherlands which offer iDEAL as a method of payment. Over 54% of the consumers purchasing products and services online preferred paying via iDEAL. So why couldn’t Pay by Bank App follow the iDEAL and be adopted by thousands of online merchants? It could be a question of timing. Perhaps the lower cost of accepting payment cards, thanks to recent interchange reductions, has reduced the merchant demand for accepting instant payments via a Pay by Bank App. The merchant’s ROI for investing in the acceptance of a Pay by Bank App at the POS (or even online) may not be as positive as it would have been.
In Australia, the National Payments Platform (NPP) promises much the same benefits as SCT Inst. Payment verification for merchants and consumers would be within 15 seconds instead of SCT Inst’s 10 seconds. NPP is only for payments within Australia, whereas SCT Inst would support cross-border payments. On the other hand, there are overlay services being developed for the NPP system. BPAY, a bill payment scheme, owned by Australia’s four major banks, will be the first to offer overlay services when NPP goes live in July 2017. It will be called the Initial Convenience Service (ICS) and it will allow consumers to easily send payments in real-time to someone’s mobile phone number or email address and include additional data with the payment. Could ICS facilitate a bank transfer to become a feasible payment option for buying goods and services including POS transaction and e-commerce? The expectation in Australia, like the UK, it will be more likely to happen online, for an e-commerce transaction use case. The POS represents a road barrier for immediate payment solutions such as Pay by Bank App in the UK, SCT Inst in Europe and ISC with the NPP in Australia. Why? It comes down to the customer experience design. It is likely to be clumsier than a contactless payment. Talk with merchants and payment service providers and it is apparent that there is very little evidence of a clear and consistent interface at the POS for instant payments, unlike a contactless payment as promoted by the international card networks and smartphone wallets.
Is The Future Of Instant Payments As Fast And As Cheap As Merchants Want?
Digitalisation of payments has always empowered consumers with convenience and choice. The expectations of end-users are high and instant payments already exists today or just about to become a reality. The age of faster, versatile and data-rich payments is upon us.
Millions of dollars, pounds and Euros around the world are being invested in 2 century payment platforms upon which overlay services and greater payment innovation will be possible. Faster and cheaper payments are already available in certain countries. They will become ubiquitous. Interbank payments and business to business payments are expected to be the first wave of users of instant payment solutions. The second wave will be merchants and consumers. However, this second wave will be split by channel, and therefore, it will be disjointed and could be potentially confusing for consumers. Merchants are striving for an Omnichannel customer experience but instant payments are likely to be first implemented for the online and mobile sales channel but the point of sale, bricks and mortar, acceptance of instant payments is at least 3 to 5 years away. Instant Payments at the POS needs to overcome some technological and customer experience design challenges. Let's not forget the German ELV (Elektronisches Lastschriftverfahren), a direct debit payment method which can trace its history back to the 1950s. ELV in Germany may be close-to-immediate at the POS. However, the goal at the POS is to enrich the consumer interaction, boost conversion, increase spending levels and support different form factors. Retailers that can successfully achieve all this using instant payments could have a competitive advantage, unfortunately, if the customer doesn’t like it - they will not use it.