18 June 2015
Reporter: Becky Butcher

The Debate: real-time payments

Photo, from left to right: Elie Lasker of SWIFT, Craig Tillotson of Faster Payments Scheme, Robert Kauffman of Singapore Management University and Darryl Twiggs of SmartStream.

SWIFT, Faster Payments Scheme, Singapore Management University and SmartStream give their take on which processes banks will use to successfully digitise the core of their operations in order to operate in a real-time world.

With a global move to real-time payments, market infrastructure and financial service firms need to re-engineer their systems and processes to keep up pace with customers. Do you think that banks can be dependent on legacy systems and batch processes to successfully digitise the core of their operations in order to operate in a real-time world?”

Elie Lasker, senior market manager, SWIFT: No, in short. Without significant upgrades, it will be challenging for a financial service firm to depend on an existing legacy system to undertake real-time payments.

Historically, the majority of existing legacy payment systems are batch-based—designed for financial service firms to process payment transactions at the end of the day. We observe, however, that most banks have already upgraded parts of their infrastructure, enabling real-time services where both the payer and payee are customers of the bank, so-called ‘on-us’ transfers.

To extend this ‘on-us’ functionality and cater for a true and end-to-end, real-time experience, where the payer and payee are customers of different banks, firms need to build-out this infrastructure to meet the necessary requirements.

Firstly, the new architecture needs: to provide low-latency 24/7/365 services to end customers; allow payments service providers to easily integrate through a simple application program interface framework; support value-added and overlay services; and meet regulatory obligations. Secondly, the new architecture needs to be cost effective, so designed with a lean and open architecture, which promotes technology re-use and the implementation of global business communication standards such as ISO 20022.

Lastly, the new architecture needs to be strong, preferably built with very high levels of security, availability, volume bandwidth and resilience, as well as simultaneously supporting real-time fraud detection.

In our experience, most financial service firms seek to take advantage of newer technology, either buy or build, rather than try to upgrade existing legacy batch-based systems.

Craig Tillotson, CEO, Faster Payments Scheme: We live in a world where ‘sometime soon’ is no longer acceptable, and Faster Payments has been at the vanguard of meeting this customer demand in the UK, ever since being introduced in 2008.

It’s undoubtedly true that more challenger banks and other non-traditional players could benefit from direct access to Faster Payments. Faster Payments Scheme Limited (FPSL) has been working to meet this need through proposals for a new access model that goes beyond the traditional model of direct access and indirect access through a sponsor being the only ways to connect to the service.

The challenges for accessing Faster Payments are best addressed through the introduction of a competitive market in technology vendor-operated aggregation services. Stimulating a market for technology vendors to offer payment service providers (PSPs) a new way to access real-time payments can circumvent the need to indirectly rely on the legacy systems of a sponsor bank.

Bilateral discussions between FPSL and candidate PSPs have revealed clear demand for access to Faster Payments in two broad segments: immediate/real-time, which is addressed by the new access model; and same-day (value-dated) payments, which leaves open the possibility for batch processing where there is a clear business need.

The scheme’s aim is to create a level playing field for any firm that wants to offer immediate or real-time payments.

The proliferation of new payment propositions such as Paym and other digital and mobile payment services increasingly require a ubiquitous real-time experience for customers, irrespective of the manner in which said customer’s PSP accesses Faster Payments.

Now is the time to embark on the next phase of the evolution of real-time in the UK. We believe our proposals on access will help to keep the UK at the centre of the digital and financial technology revolution.

Robert Kauffman, professor of information systems, School of Information Systems, Singapore Management University: No, banks can’t rely on legacy systems and batch processing for much longer. Future money wants to be fast—much faster than today. So banks must respond, but not by just re-engineering current systems. They have to re-architect and re-think core banking systems with their vendors for next-generation financial exchange.

The volume of payments will boom. We should expect more electronic payments as a substitute for cash-based payment transactions, due to mobile phones, digital devices, and new forms of payment with digital money. And there will be an historic rise in low-value, cross-border payments, too. Future money will know no borders.

Replacing traditional infrastructures with new capabilities will enable banks to maintain their relevance as digital financial intermediaries for real-time payment clearing and settlement. It’s a ‘hook up or lose out’ world today, though. And one that involves technology ‘learning by doing’ for banks to maintain their relevance and success.

The losers will be banks that don’t make the technology capital investments for new core banking systems. They won’t be able to create the future-perfect, agile, multi-sided technology platforms that future money will require. This will make it hard for them to participate at all, much less compete effectively.

Future financial exchange will be about real-time payment support. But there will be political and institutional realities along the way. Somebody has to make investments to create public infrastructure for faster payments. If the banks don’t move swiftly, they may be unable to block new tech entrants that disintermediate them.

Darryl Twiggs, executive vice president, product management, SmartStream: Post-financial crisis, the key topic of discussion was liquidity risk and the synchronisation of the payments process at appropriate times throughout the day. In relation to this, the Bank of England instigated a stress scenario analysis, which looked at the consequences of throttling three banks. It discovered that one of them would have gone under if a payment were to be made 20 minutes late.

In today’s messaging environment, there is no time or date stamp to define when a payment is made, so how can a bank expect to know that an agent acting on its behalf has made the payment? Under the eighth Basel Committee on Banking Supervision principle, banks need to actively manage their intra-day liquidity positions and risks to meet payment and settlement obligations on a timely basis, under both normal and stressed conditions. This is changing the way payments are being made, tracked and settled.

As part of their broader strategy, banks have initiated projects to enable them to monitor intra-day liquidity payments; these projects are being delivered by new solutions, such as SmartStream’s TLM Intraday Liquidity Management. In addition, banks are coming to terms with the need to overhaul controls on their payment flows. These are often generated by multiple business systems with no holistic view of outgoing payments. For this reason, SmartStream is seeing the emergence of payment control systems to overcome risk. In real time, any payment, for any business and instrument type, can now be validated against currency positions to ensure the completeness of payments.

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