Faster payments aren’t just a choice anymore, but a growing necessity.
It refers to the real-time or near real-time transmission of funds and a payment message to a receiving party, all occurring throughout a nearly 24/7 timeframe. As more payment recipients experience the benefits, consumers and businesses alike are coming to expect their receivables faster than ever.
In the U.S., commercial payments provider FLEETCOR Technologies recently launched a blockchain-based pilot program with enterprise blockchain solutions firm Ripple and international payments company Cambridge Global Payments to improve international settlements. Meanwhile, cross-border payments provider Transpay recently rolled out a new direct-to-bank deposit service in Australia, New Zealand and South Africa, enabling freelance workers to receive direct deposit payments in their preferred currencies.
The availability of faster payments services provides a key benefit to businesses, merchants and consumers around the world, giving them quicker access to capital and more stable financial footing. The data provided by a faster payments system also offers recipients insights into their payment patterns, allowing them to make smarter, more informed financial decisions.
Faster payments enable a wide range of use cases. In the P2P space, for example, parties can quickly deliver gift money, split a check or pay a babysitter. In the business-to-business (B2B) context, the service can be used to integrate payments or pay invoices. The value of payment volume in these two segments alone could exceed $15 billion by 2025.
The faster payments systems phenomenon has emerged in several worldwide regions in recent years. The following deep dive presents an in-depth examination of the current state of faster payments and how the market is poised for change.
Faster Payments: An Overview
A variety of FinTech players have emerged to offer their services, including person-to-person (P2P) payments platform Venmo, digital payment service PayPal and money transfer service WorldRemit, among others. These companies provide money transfer services for the quick exchange of funds between parties, and their solutions are opening up new innovation opportunities for point-of-sale (POS), electronic invoicing, mobile payments and eCommerce.
These emerging FinTech players have an advantage: Their services do not depend on legacy systems and, as a result, are more flexible when responding to shifting consumer demands for faster payments. As expectations rise, so does the pressure on established banks, FIs and regulatory agencies to ensure their own consumers and clients are able to enjoy the benefits of a faster payments network.
Faster payments can carry risks for banks, however. Upon delivery to recipients, immediate payments are irrevocable and cannot be reversed. While this is beneficial to a payee, his receiving FI could face credit risk if the sending institution does not quickly settle the transaction – although that risk is more manageable for smaller payment sums and lower payment volumes.
U.S. Faster Payments
Establishing a faster payments system has been a priority for the U.S. Federal Reserve. It organized the Faster Payments Task Force in May 2015, which included stakeholders from more than 320 organizations from around the U.S. financial services sector. The group’s mission was to explore opportunities to establish and implement a faster payments system in the country.
The Task Force released two reports in 2017. The first report, released in January, outlined its mission and objectives and offered an assessment of faster payments needs based on input from its members. The second report, released in July, featured recommendations to establish a system that could allow end users to receive faster payments by 2020. The Faster Payments Task Force disbanded in August 2017.
Based on the Task Force’s findings, the Federal Reserve will pursue a three-prong faster payments strategy. It will first support collaborative financial industry efforts to develop and promote a faster payments ecosystem. Second, the Fed will investigate its own settlement services to address gaps in real-time retail payments settlement. Finally, it will explore whether it should take on the role of service provider — beyond providing settlement services — in the faster payments ecosystem.
In addition to the Fed’s ongoing efforts, payment speeds have significantly improved as a result of the Same-Day Automated Clearing House (Same-Day ACH) rollout that began in September 2016. The first phase allowed Same-Day ACH credits to be processed within a day, enabling recipients to get their funds by the end of the day the credit was submitted. Same-Day ACH debits became available in September 2017, allowing transactions such as late bill payments or online POS transactions to be completed on the same day they were received. The third and final phase, rolled out in March 2018, required that Same-Day ACH funds be available to payees on the same day payments were sent.
Another faster payments service is Zelle, a P2P service backed by a network of U.S. banks and managed by credit reporting agency Early Warning Services. The Clearing House (TCH) also launched its real-time payments (RTP) service last year, the first new payment and clearing system in the U.S. in more than 40 years. RTP can transfer funds between bank accounts in just three seconds.
Faster Payments Systems Around the Globe
Several nations and regions have already launched faster payments systems, and others are now taking steps to roll out their own.
The U.K. became one of the first countries to offer a nationwide faster payment system with the launch of its Faster Payments Service (FPS) in 2008. According to FPS data, the service enables payments to be made on a 24/7 basis, is currently available to 52 million checking account holders in the U.K. and boasts participation from 17 banks and building societies (the U.K. equivalent of credit unions). It has been used to send more than 6 billion faster payments since its launch, and almost all U.K. internet and phone-based banking payments are processed on the FPS network.
The FPS network’s launch has allowed other faster payments offerings to emerge and leverage the service. The U.K.’s Payments Council launched mobile P2P service Paym in April 2014, allowing 16 participating U.K. banks’ customers to send and receive money using their mobile phone numbers as verification. Some banks, like HSBC, are allowing business customers to make payments using the Paym service. Zapp, another bank-backed mobile payment service using the FPS infrastructure, emerged in 2015. It can be integrated into U.K. banks’ mobile banking apps to make online and in-store mobile purchases using mobile devices.
Similarly, India launched its Immediate Payment Service (IMPS) in November 2010 to offer real-time, 24/7 interbank electronic funds transfer services to users. Funds can be accessed via mobile devices, online, at ATMs, through text messages and at physical bank branches, The IMPS network currently has participation from 53 commercial banks, 101 cooperative banks and 24 prepaid payment instruments (PPIs). Its goal is to allow bank customers to use their mobile devices to access bank accounts, transmit funds and assist the Indian government with digitizing the nation’s retail payments.
The SEPA Instant Credit Transfer (SCT Inst) scheme launched in Europe in 2017 to allow instant credit transfers across the pan-European region. Funds transferred using the SCT Inst scheme are delivered within 10 seconds, according to the European Payments Council (EPC). The service is currently available in Austria, Estonia, Germany, Italy, Latvia, Lithuania, the Netherlands and Spain.
Meanwhile, Australia rolled out its own New Payments Platform (NPP) faster payments system in February 2018. The system enables instant payments between bank customers and other financial service providers, and can be used to send money to one person or to many recipients. It offers a PayID service that allows customers to link their financial accounts to personal information, such as mobile phone numbers and email addresses. Users can then provide their PayID to businesses or individuals to receive payments.
The NPP was developed by the Reserve Bank of Australia (RBA) through a collaboration with the nation’s “big four” banks: Commonwealth Bank of Australia (CBA), the National Australia Bank (NAB), the Australia and New Zealand Banking Group (ANZ) and Westpac. Together, these FIs represent a 95 percent market share of Australia’s financial services sector.
The Future of Faster Payments
Even more faster payments schemes are on their way. The European Central Bank (ECB) will launch the pan-European ECB TARGET Instant Payments Settlement (TIPS) in 2018, a new faster payments service that aims to offer real-time fund transfers on a 24/7/365 basis.
Other nations — including Belgium, the Democratic Republic of the Congo, Hong Kong, Malaysia, Portugal, Slovenia and Spain — also have plans for their own faster payments systems later this year. Even more, including France, Hungary and the Netherlands, have announced their own national offerings will be live by 2019, and Colombia and Peru are also exploring launching South American faster payments schemes that same year.
Potential issues could emerge as a result of new faster payments services, including whether the systems can communicate with each other. Many financial services players fear it will be challenging for various real-time payment systems to be interoperable, as most schemes require a local settlement account. This could impact a bank’s liquidity, from a treasury perspective, which ultimately defeats the purpose of faster payments services.
As the need for interoperability grows, open APIs may be a potential solution to both ensure funds are transferred quickly and that faster payments systems can live up to their names. By investing in open APIs, FIs can connect to the outside world and explore new potential use cases and innovations on a global scale.
The emergence of faster payments systems may present challenges but, as these systems become more widely available in global markets, consumers and merchants are increasingly going to expect to receive their funds quickly. Institutions that fail to deliver faster payments will risk getting left behind.