The U.K. was one of the first markets to truly push for faster payments with the launch of the Faster Payments Service, an initiative spearheaded by several government agencies and top banks. Several years later, the initiative has made big strides as other markets around the globe look to the U.K. to launch their own faster payments efforts.
But there is still a long ways to go, and in the several years since the Faster Payments initiative first began, it’s also morphed to evolve along with the technology available.
One of the biggest changes since the beginning, explained Tom Hay, head of payments at banking software company Icon Solutions, is that it’s becoming more affordable for small and mid-sized banks to actually join in on the effort.
“In the U.K., when Faster Payments was set up, the large banks all joined as members, and it became perceived as something of a members’ club,” Hay said in an interview with PYMNTS. “Smaller banks found it very difficult to join.”
That was for a number of reasons, he noted, but one was the cost associated with entering the game.
Icon Solutions recently commissioned research to understand that cost burden. A study conducted by Lipis Advisors found that a quarter of the cost associated with implementing faster and real-time payments capabilities for banks is linked directly to testing the technology. Forty percent, meanwhile, goes to the licensing costs of the hardware and software. Then, there are the costs associated with integrating technologies into banks’ existing systems and customizing the solution, and, of course, maintenance of the technology over time.
At the start of the Faster Payments initiative, said Hay, smaller banks had two options if they wanted to participate: They could build their own real-time payments systems internally (hardly a cost-effective choice), or they could implement complex, bulky solutions that were incredibly expensive and gave banks additional capabilities in transacting other than real-time payments that were unnecessary.
Today, according to Icon and Lipis Advisors, FinTech has evolved so that the overall cost of integrating real-time payments solutions has diminished significantly — even for smaller FIs.
“Winding forward 10 years to 2016, the situation’s changed,” Hay stated. “There are new technologies available which enable these kind of instant payment systems to be implemented much more cost-effectively on a technology platform than you could do on a platform 10 years ago. That, I think, is one of the key enablers in allowing the smaller banks to join.”
Having these smaller banks participate, Hay added, is “absolutely vital” for the faster payments initiatives to truly get off the ground and become ubiquitous.
“These banks are often catering for particular, niche requirements not well-serviced by larger banks,” he said, pointing to the recent rise in challenger banks that often emerge as a way to fill in service gaps left by larger FIs. “And they’ve been very unhappy that they’ve not even able to get on board with faster payments, because now faster payments is perceived as not just nice to have, but it is a must-have. If you can’t have faster payments, then you’re not a serious competitor in the banking space.”
Being able to impact more niche areas of the banking system is another way the Faster Payments program has changed in the last several years. And among those niche areas is B2B payments, Hay said.
“Yes, a few years ago, Faster Payments was primarily seen as a consumer service,” he agreed. Naturally, one of the first use cases to come to mind for real-time payments is P2P payments. But as the technology becomes more widespread and as more banks are able to offer it, faster payments is getting picked up by the corporate world, too.
Corporates often want to make disbursements available to payees faster, Hay explained. For instance, loan firms will want to make funds available to a borrower much more quickly than before. Other businesses, those like PayPal, need to make payments available to their merchants more quickly as well. There is also evidence, the executive noted, that corporates are shifting their mindsets when it comes to payroll, looking to pay employees instantly instead of sticking to the batch end-of-the-month or bi-weekly payroll plan they’re used to.
“And I think in terms of liquidity management and cash management, corporate treasurers are starting to see the benefits of being able to make instant payments,” Hay added.
As Faster Payments spreads throughout the U.K. financial system and as it becomes more affordable, the technology is sure to reveal more use cases for corporates and consumers alike. There will also be new challenges ahead, however. Hay pointed to the difficulty banks and FinTech firms can face when it comes to staying ahead of not only the competition but of shifting technology.
“Banks need to be looking forward,” he said. “Payments is a fast-moving part of the market now, and things are changing quite rapidly. They’re not sure what’s coming around the corner — the only thing that’s certain is that there will be changes.”