Why is Request to Pay (RtP) so great?
In most digital economies, the landscape of payment solutions for a number of use cases such as retail commerce, person to person payments, and corporate e-invoicing has been rapidly evolving over the last few years. As a result, both consumers and merchants can choose from a wide range of payment methods to make and collect payments, respectively.
Requesting a payment in exchange of goods or services has been identified as the central element for the specific needs in the context of Electronic Invoice Presentment and Payment (EIPP) and forms part of the upgrade from the legacy ISO 8583 message format, used for electronic data interchange between financial institutions, to the more modern ISO 20022 standard. Request to Pay has the potential to be a great payment experience for the many stakeholders involved.
Request to Pay (RtP) is a collective term for schemes that trigger payments from bank accounts. Unlike Direct Debits, RtP is a real-time payment and best used for a single or ad hoc payment. A RtP does not require a static upfront mandate from the payer and it is not subject to extended rights of revocation. RtP may also be thought of as an upgrade of Electronic Bill Presentment & Payment (EBPP), enabling the payer to approve and execute the requested payment in real-time. In Europe, the work to establish this new service has been performed by a multi-stakeholder group at the invitation of the Euro Retail Payment Board (ERPB) and under the coordination of the European Payments Council (EPC) for the last couple of years. The EPC’s RtP final rulebook is expected in November 2020, meanwhile, EBA Clearing, the pan-European provider of RtP that operates in compliance with the EPC’s SEPA RtP Scheme started testing on 23 of June 2020. In the UK, RtP has undergone user testing for the last four and a half years and was officially launched on 29 May 2020.
Regulators continue to move towards an open and digital market, whereby merchants are reducing payment friction and the cost of payment acceptance and FinTech companies are building new services on top of national and international real-time banking platforms. Around the world, there is a shift underway as banking systems and processes migrate from batch to real-time processing. RtP can take advantage of this evolving payments ecosystem.
Any country wishing to establish an RtP service has two options, firstly, leverage a Centralised Clearing system, such as the one implemented by the NPCI in India which facilitates connectivity for all the participating banks on a nation-wide basis. The second option uses an Open Banking protocol, whereby each participating bank can be accessed through a common Application Programming Interface (API), as seen in the UK and the rest of Europe - underpinned by the second Payment Services Directive (PSD2), a full harmonisation regulatory Directive.
So why is RtP so great? Most developed economies already have credit and debit cards, electronic wallet payment solutions plus smartphone wallets, and these are continuing to grow from both an acceptance point of view and through the issuance of these payment instruments via the banks and licensed Fintech companies. So why do we need yet another payment option? Could RtP be like the next white elephant on the payment’s scrapheap where it is deemed to be troublesome for consumers to operate or expensive for banks to maintain? Is there a positive return on investment?
On paper, RtP has a number of benefits that could result in mass adoption. Succinctly, RtP could be a great success because it has reach, it’s cheap, and low risk.
Does RtP have reach?
There is no doubt that if any country with a real-time payment infrastructure has the ability to serve every bank account holder in that country, the number of bank account holders in most developed countries will be typically greater than the number of credit cardholders. This gives RtP great reach both in terms of payees and payers. An important key success factor in the launch of any new payment method.
Is RtP cheap?
One UK based PSP is claiming that the adoption of RtP could bring savings of 18 – 36 pence per transaction (about 14 USD cents to 46 USD cents) for a merchant or a corporate accepting payment from consumers or other businesses. Unfortunately, this research was conducted in 2017 by Accenture and comes from a combination of cost factors, including switching from paper to electronic billing, reducing time and effort in chasing late payments and increased reconciliation. If a small merchant accepts online payments via a credit or debit card being charged 1% to 2% on the value of each transaction, then RtP could be a significant saving. The shift from ‘percents’ to ‘cents’ per transaction will be an economic advantage for businesses but the real cost savings are expected to be as a result of receiving their funds quicker. A business will receive their funds from the payer instantly, instead of the delay of a day currently experienced with a credit or debit card. Even a longer delay for certain payment methods and some corporate card brands. This will help merchants when shipping physical goods or an online travel agent booking a hotel room for a customer because they will have received the money and they can commit to the fulfilment part of the process.
RtP is low risk.
RtP is expected not to have as much fraud and chargebacks as currently experienced with payment cards. This is because the consumer authenticates with their bank and approves each payment in real-time via their online banking app on their smartphone or their internet banking website. This is expected to add payment friction at checkout, but will there be more friction compared to a well-implemented Strong Customer Authentication (SCA) strategy? If a consumer has logged into their bank account and then has to go through additional two-factor authentication to release the payment, this could be one or two steps more than, for example, an ApplePay transaction. Merchants want a frictionless checkout and a risk-based approach that enables smooth checkout and minimises abandoned shopping carts.
Does RtP have a future?
Online payments ultimately originate from bank accounts but for more than 20 years consumers had used an intermediary payment instrument to get the funds from the bank to the merchant. What came first – the bank or the payment card? The bank, and RtP will cut the middleman out of the equation in countries where the real-time gross settlement system (RTGS) has the ability to support low-value real-time payments. A bank to bank payment. No payment card needed.
Have a quick look around the world and there have been similar RtP solutions that are considered a ‘success’.
India, for example, has established the Unified Payment Interface (UPI) which is a next-generation payments platform that facilitates the transfer of funds instantly between person-to-person and person-to-merchant. UPI allows both payer and payee-initiated payments. It is centrally operated by National Payments Corporation of India (NPCI) and in many ways was one of the forerunners of the RtP overlay services. As more and more consumers in India are switching to mobile digital payments, in September 2019, UPI clocked-up 955 million transactions, amounting to over 1.61 trillion rupees. This has demonstrated the extent to which Indian consumers have welcomed real-time payments. Much of it has been on a mobile smartphone. Furthermore, Fintech payment service providers in India, including Google Pay, PhonePe, and PayTM, are using the UPI standard.
The iDEAL scheme in the Netherlands has captured over 70% of all e-commerce payments in the country. The UK’s RtP will behave very similarly to the iDEAL solution which could be an indication that merchants and consumers are able to overcome the SCA ‘friction’ involved in the online payment checkout process.
BPAY is extensively used by Australian consumers via their online banking service to pay their household bills. Over 45,000 Australian businesses offer BPAY to their customers to pay bills securely.
PromptPay in Thailand has helped reduce the use of physical banking infrastructure and cash. Since going live in January 2017, PromptPay has contributed to an 83% increase in digital payments in the country between 2016 and 2018, according to Vocalink, the service provider that helped the local Thai banks with its ‘translator’ service for ISO 8583 to ISO 20022 messages. Although PromptPay is a person to person bank transfer and it isn’t yet a true RtP implementation. On the other hand, Swish in Sweden and Vipps in Norway, are person to person bank transfer services and both solutions support RtP. Several use cases are being supported, such as bill payments, mobile commerce, in-store payments, in-app payments, etc. over the Swish and Vipps schemes.
So, what’s the return on investment (RoI) for a merchant or payment service provider to implement RtP?
A friend calculated the return on investment of his gym membership and found that every length of the swimming pool cost him £7 (around 9 USD). This wasn’t because it was an unusually expensive gym, it was because he was too busy to go to the gym! An underutilised facility that had to be cut from my friend’s personal expense budget, simply because the return on investment was not sustainable. Could new RtP services have the same issue?
RtP must have a positive RoI for each stakeholder. Edgar, Dunn & Company (EDC) specialises in helping businesses to understand the economic and commercial benefits of implementing new payment methods. The viability of a new payment method, such as RtP, covers several elements including analysis of projected cash flows, examination of the financing, marketing and management arrangements for each specific solution. An assessment of the historical performance and other benchmarks may be necessary. EDC is a trusted advisor to its clients. EDC believes that behind any winning payment strategy must stand an excellent value proposition. A clear, simple statement of the benefits, both tangible and intangible, that the payment method will provide.
In the case of RtP, one of the fundamental questions to answer is “What would make the customer switch?”. Why would a consumer prefer to use RtP sent from an online sofa shop instead of a credit card? Especially, when it can take 10 weeks for the Sofa to be delivered, during which the sofa company could go out of business. Never underestimate the effort it can take to change consumer behaviour and the protection that consumers have with credit cards.
The content of this article does not reflect the official opinion of Edgar, Dunn & Company. The information and views expressed in this publication belong solely to the author(s).