As businesses worldwide strive to streamline and modernize their payments systems, with an eye on speed, the questions remain: Just what is “real time” and what are the challenges that must be addressed?
A white paper just released by NACHA (The Electronic Payments Association) notes that even as payments professionals grapple with bringing systems up to date, real time, the association says, “can mean many different things, with vastly different implications for users” of systems.
Broadly defined, real-time payments, as defined by the Payments Innovation Alliance, can be thought of as “immediate, irrevocable, interbank account to account” fund flows that message all users immediately through either financial institutions or third parties. Fund availability is immediately confirmed, as are credits. In addition, banking information on both the part of sellers and buyers are kept private, and transactions can be done 24 hours a day, seven days a week.
In terms of nuts and bolts, according to NACHA, there are three components to a real-time system, spanning authorization, posting and settlement. The first two elements must be done in real time, but that is not necessarily so for settlement. For settlement, NACHA explains that most real-time payments systems currently utilize deferred net settlement methods.
A “gross settlement” platform, wherein each transaction gets settled in real time, but on an individual basis, can have high costs for banks especially with concerns to liquidity. Deferred net settlement activity can be slated to run several times a day, thus alleviating liquidity concerns, while security is guaranteed through a number of factors such as collateralization.
In reference to the end users themselves, the most important issues in real-time settlement center on immediate notice of a transactions completion or rejection, and the assurance that funds are available immediately for use.
NACHA says that best practices for real-time payments center on credit, or push, transactions, chiefly because they offer relatively better security against would-be hackers and fraud attempts. Only a few systems globally, according to the white paper, offer real-time requests for debits, which in turn have to be authorized by the payer.
Data standards are also important, according to NACHA, perhaps not surprisingly, as message and information flow are critical and must be consistent across all parties, and the organization recommends that the ISO 20022 message standard be more widely adopted for real-time payments.
For security purposes, one option is to adopt a limit on individual transactions, with additional layers of safety coming from centralized databases (such as seen in Europe), or even use of mobile phone numbers, according to the white paper.
When it comes to the United States, real-time payment systems must have 24 hours a day, seven days a week availability, with authorization of payments (or rejection) complete within seconds. The aforementioned ISO 20022 standards and credit transfers are key attributes of an effective payment system, too – and such protocols have impact across all stakeholders, from P2P to B2B and B2C players.
The benefits of real-time payments are tangible across all those stakeholders and the ISO 20022 standard allows for ACH, wire transfer payments, all in real time, and all in international functionality. Especially for consumers, the benefits come through better financial control and budgeting as payment status remains assured. And added security, through proxy databases that bring account details to a proxy name or numbers (but not concrete identities), means that bank account details are not shared. The key is greater convenience and security for the consumer, says NACHA.
For the financial institutions adopting effective real-time payment systems, the value add to end customers translates customer “stickiness” and new revenue opportunities.
But no new technology initiative is without its challenges, notes NACHA. There's an ever present need to educate consumers and businesses alike about the benefits of new systems, which also may carry costs tied to IT system and other platform overhauls. In some cases, businesses will have to convert or change their internal systems to accept ISO 2002 and may have to spend money to hire additional staff to handle new systems put in place. There’s also an impetus to place higher transaction limits than might have been seen previously in order to support B2B payments that may be relatively larger in scope (and there is always the backup of “traditional rails” to support payments that may exceed even those revamped limits).
As with any payments system, communication and ease of use remain key selling points, and NACHA states that acknowledgement be made across payment senders and receivers that funds have left accounts and been applied to others. Ease of use is paramount for consumers, and real-time payments should have confirmations for peace of mind.
In the end, says NACHA, technology is changing the way consumers and businesses and their financial intermediaries interact, and real-time payments, says the organization, become “a necessity and not a luxury.”