Sponsored As consumers rely less and less on traditional banking and look for the convenience and flexibility that comes with being able to keep in control of their finances from a mobile device, open banking is driving traction in real-time payments technologies that allow instantaneous money transfer.
Whether it’s mobile wallets, online banking, or peer-to-peer payments through PayPal - adoption rates may vary from region to region, but payment infrastructure providers around the world are moving to real-time payment platforms in order to meet consumer expectations, reduce friction, enable innovation and improve fraud detection.
What about the benefits?
In the UK at least, many of us already use real-time payments when we use our online banking faster payments service, so we’ve already experienced its secureness, speed and convenience. But at the moment real-time payments technology in the UK is limited to online banking and isn’t applied to commerce – we don’t use real-time payments when we shop for example. (It’s what Adrian Mountstephens, Equinix head of business development, payments and banking, refers to as version 1.0 in the world of real-time payments.)
At the moment when we pay for goods and services cash can be tied up with credit card settlement processes for weeks on end and only distributed to the end merchant once a month or so. And typically, the smaller the retailer the longer they have to wait for their money. So merchants will see a huge benefit when real-time payments are applied to commerce - Equinix describes it as a game-changer - because of the positive impact on their cash-flow and liquidity. In India, where government and regulators have long recognised the potential of technology to transform banking, the real-time payments platform - called UPI or Unified Payments Interface - is already at this stage (this is version 2.0), and real-time payments capabilities are embedded into checkout processes in ecommerce and standard commerce.
The Indian government has made sure that everyone has an identity, and then encouraged the banks to make sure everyone can open a bank account. The real time payments platform then has enabled people to have much better control over their money. “It means they can manage debt and cash flow better, pay their invoices, pay their utilities, do it all. And they do it all on a phone,” says Mountstephens.
It’s worth noting that India’s real-time payments system was recently praised by Bill Gates for its role in reducing the cost and friction of delivering aid during the Covid-19 pandemic.
Real-time payments can also potentially deliver benefits to the under-banked - people who don’t have access to mainstream financial services - in giving them alternatives to the expensive non-traditional financing like cheque cashers and pawn brokers they may currently rely on. It can be difficult to motivate people to come to work when they work in relatively low paying jobs and they’re only paid once a month or once a fortnight. But if they can be paid more frequently because their employer’s cashflow has vastly improved because of real-time payments, then the impact on things like staff retention can be huge.
“People often can’t live from pay cheque to pay cheque,” says Lance Homer, global head of strategy for electronic payments at Equinix. “People have a natural reward mechanism inside of them that says, ‘I went to work today, I got cash today, I'm happy with my job, I'm going to stay’.”
Resistance and limitations
That’s not to say that these platforms don’t have their challenges. There is resistance from some quarters - particularly from mid-sized banks, according to Mountstephens - because of the impact on interchange fees. These are the transaction fees that a merchant's bank account pays whenever a customer uses a credit or debit card to make a purchase and which cover handling costs, fraud and bad debt costs and the risk involved in approving the payment. With real-time payments there are no interchange fees.
Cross-border payments can be expensive and complex, involving different regulatory jurisdictions, multiple currency and domestic payments systems, and requiring IBAN numbers, Swift codes and the like. As Homer says, real-time payment platforms are national, so someone in India who use real-time payments all the time will need a credit card when they travel.
However, a number of regional initiatives, such the mooted P27 pan-Nordic payment infrastructure for domestic and cross-border payments in the Nordic currencies and the Euro, are working to address this. Says Mountstephens: “We’re at the point now where we're able to link some of these switches, to produce regional switches, regional capabilities. There are huge hurdles around politics and regulations overcome, but the technology is there.”
Fraud and anti-money laundering procedures are more of a challenge with real-time payments. The time delays in batch-processed payments give banks ample time for fraud and compliance checks, whereas with real-time payments these checks need to be completed in milliseconds. Similarly, low latency and high network availability are critical for real-time payments, and less of an issue for batch-processed payments.
“There can be fraud in real-time payments,” says Mountstephens, “like the phishing scams that have been going on for years.” In the UK at least, this has been addressed with confirmation of payee, the name-checking service introduced by a number of UK banks earlier this year. As Homer points out, banks work hard to eradicate fraud, “as a bank’s brand is built on the confidence that you’re safe with them”. SCA, or strong customer authentication, is a requirement of the EU’s PSD2 directive on payment services and comes into force this month. It means that electronic payments are performed with the increased security coming from multi-factor authentication and comes in part from banks requiring more security in open banking payments.
Opportunities for innovation
Currently, there are about 60 real-time payment systems globally, and their adoption of the same messaging standard – ISO20022 – is driving harmonisation and competition. The standard allows details about a transaction to be embedded in messages between payer and payee. It’s particularly relevant for resolving conflict in B2B payments, says Homer: “Fintechs can create a process to inject payment details into a message, making it easier to reconcile transactions and reducing the amount of human overhead needed to reconcile transactions.”
There’s also huge potential in overlay services for consumers - one example would be a consent management tool that allows you to manage payments, and see how your money is moving: “It's opening up the opportunity to create new value in the payment system,” Homer says, “and that revenue that has been lost on interchange for credit card transactions can now be picked up by the banks by partnering up with fintechs to create value for their customers.”
Request to pay, an overlay service that is already widely used in India, was launched in the UK this summer. It’s a messaging service that gives billers the ability to request payment of a bill rather than just sending an invoice. It allows customers to pay in full, pay in part, ask for more time, communicate with the biller, or decline to pay. You may have encountered it when you’ve shopped online - at an online checkout you might have seen a third option “pay directly from your bank account” in addition to options to pay by debit or credit card. Mountstephens has used it: “You see a request to pay from the fintech to your bank, your online banking opens in another browser window, you log on and authorise the payment request, and the merchant gets the money immediately.”
Consumer expectation dictates that real-time payments will become ubiquitous and international. Although implementation of real-time payments and open banking is at different stages around the world - North America lags behind Europe, which in turn is trailing many markets in Asia - the real-time payments ecosystem of the future will involve a global “network of networks” that operates across borders. The likes of Visa, Swift and MasterCard are already positioning themselves to be that network of networks: Visa bought API aggregator Plaid in January, Swift is positioning its global payments initiative (GPI) as the standard for international payments, and MasterCard’s payment systems business Vocalink already holds a strong position in the real-time payment landscape both in the UK and internationally. There are others who could step up, says Homer, citing FIS, Bottomline, even Western Union, among others.
What is certain is that national real-time payment platforms and the network of networks won’t run over the internet – as Mountstephens points out, this is critical infrastructure that needs a completely reliable and secure home. Legacy infrastructure, which has limited network capabilities, isn’t well positioned for a real-time payment platform that demands low latency and is always available in broadening ecosystem.
And this is where Equinix, which already holds the infrastructure of seven national payment operators in payment hubs inside its data centres, has a natural home and a vital role to play. Homer says: “Our payment hub is the infrastructure for surfacing payments for both real-time payments and credit card, cross-border Swift-type payments.”
He adds: “Financial institutions can position their infrastructure in Equinix for quick turn-up of new partners and connections. They can connect to any of our 10,000 customers via our Equinix Fabric. They can also connect to cloud providers and fintechs that sit in the cloud because the cloud providers have their on-ramps inside Equinix.”
Sponsored by Equinix.