Bringing payments infrastructure up to speed is key for maximising the opportunities from a real-time payments world
Over the past 12 months there has been an increase in countries implementing real-time payment systems. Having the correct, up-to-date, infrastructure and technology in place is key to utilising the opportunities in this space. Real-time enables payments to be settled almost instantaneously and can offer enhanced visibility into payments. Asset Servicing Times finds that this can be by enabling better cash management and by helping businesses better manage day-to-day operations by improving liquidity. With the US and EU set to mark their four-year anniversaries for real-time payments and SEPA Instant Credit Transfer scheme (SCT Inst) respectively, the popularity of these programmes is reflected in the fact that global real-time payments transactions increased by 41 per cent in 2020 compared to the previous year.
Industry participants have noticed significant acceleration of digitalisation throughout the pandemic, as financial institutions have had to turn themselves into remote organisations with a focus on straight-through processing for a wider range of consumer and business payments.
Carlo Palmers, head of market infrastructures, SWIFT, the global provider of secure financial messaging services, says: “The biggest trend in payments is the shift towards instant settlement and 24x7 operation.”
“This is rapidly becoming the norm in some domestic markets, where use of physical cash is increasingly rare. And we’re seeing movement toward real-time in cross-border payments as well.”
Accelerating to real-time
Real-time payment systems provide multiple benefits. Srinivas Chintakrinda, senior director, product management, Volante, explains: “Not only will they give consumers and businesses much more choice in the way they make payments, they will also speed up the transfer of money to ultimately help support the type of instant, 24x7 commerce necessary in a post-pandemic world.”
SWIFT observes that many countries are developing real-time payment instant schemes in response to customer expectations for the same seamless, real-time experience for payments that is taken for granted in the digital economy, whether watching a film on demand or ordering goods with one click.
“Many of the existing domestic schemes are also broadening their scope now to process transactions from abroad. The benefits are many, particularly for businesses, which benefit from immediate availability of funds with low transaction cost,” says Palmers.
Meanwhile, Ainsley Ward, vice president of payments solutions, CGI, highlights that there is inherent value in being able to keep hold of your cash until the very last moment. He adds that real-time systems allow businesses to work their capital more effectively and manage cash flow more efficiently.
Andrew Bateman, executive vice president, buy-side solutions at FIS, says: “The on-demand nature of real-time could mean a chance for forecasting processes or daily cash processes, and they would need the ability to adapt and respond to changes in balances throughout the day.”
There is a lot of work being done on integration and Bateman believes this is where there’s an opportunity to be disruptive, with many providers focused on application programming interfaces (APIs) and streamlining connectivity. Once you get that right, according to Bateman, it makes everything else easier. Technology is enabling the acceleration of real-time payment and market participants have seen a rapid increase in the number of corporate treasuries embarking on digitisation projects supporting the digital end-user experience. Getting payments and infrastructure ready and up-to-speed seems critical to be best positioned to maximise the opportunities from a real-time payments world.
“We have a number of insurance customers looking at using real-time payments through our payment factory solution. In this case, a policy holder making a lower-value claim could be assessed and settled in real time,” comments Bateman.
For example, last year FIS completed a project with an insurance company wanting to settle real-time claims for its business in Asia. FIS used the local instant payment network to initiate a real-time payment into the client’s account.
Another example is the collaboration with SWIFT and the financial industry. Palmers says: “The world is changing fast and developments such as artificial intelIigence (AI), machine learning and digital currencies are all set to have a major impact on financial services. SWIFT is playing a role in assessing emerging technologies.”
The group is currently working with the global financial community to harness these for innovative solutions that can solve industry challenges, operate at scale in payments and transform the services that the SWIFT community offers its customers.
The ability of APIs, for example, to communicate and sync data between multiple parties in real-time makes the technology critical to the digital transformation of financial services.
Additionally, banks are moving their payments processing structure to the cloud. CGI, for example, has been at the forefront of cloud-based payments for a few years. CGI put its first bank live on a dual-cloud Azure and AWS solution in 2019 and has seen growing demand that accelerated with the onset of the pandemic.
Not only do banks get flexibility in deployment through the cloud, they are able to reduce infrastructure costs through resource elasticity and gain significant advantages from automated patching services and self-healing technology.
Inherently deploying payment processing to the cloud increases resiliency and helps to deliver high availability without the need to own major data centres in numerous locations.
Challenges
The advantages of real-time payment do not come without drawbacks. While utilising the cloud for a payment processing structure can be beneficial, this requires enhanced technology that is designed to leverage cloud capabilities and not everybody has the right technology in place just yet.
Interfacing with a legacy mainframe can be difficult technically; moving to the new ways of working with cloud can be challenging for teams that have been working with the same systems for more than 30 years.
Palmers comments: “Many banks’ payments processing applications operate on older generations of technology, and are embedded in complex integrations with the rest of the bank.”
“They often still work well, and they are risky and costly to change, so despite the advantages of cloud many banks are yet to fully embrace it for all payments.”
And it’s not just the behind the scenes considerations — such as ensuring the correct technology for the cloud is in the right place — cybercrime is a major challenge in this area too.
Volante’s Chintakrinda explains: “Any time that a new way to move money is invented, there will inevitably be fraudsters and bad actors attempting to use those mechanisms to serve their interests.”
While the risk is lowered because real-time payments systems have been specifically designed to prevent some of the more common types of fraud, there is a technological risk for banks if they do not properly plan for the transition to real-time payments. For instance, when SEPA launched, many banks in Europe decided to start with payment receipt but when it came to sending payments they found they could not meet the 24x7 immediate clearing service level agreements of instant payments. As a result, they had to redo their technology approach.
Chintakrinda suggests this is a mistake that could have been avoided by testing send and receive at the same time, even if both were not rolled out immediately to their customers. This is particularly important with November 2021 looming as a deadline for participating in TARGET Instant Payment Settlement (TIPS).
SWIFT is currently exploring how machine learning could help identify fraudulent payment instructions. It is also examining AI-based anomaly intrusion detection systems that could learn and model users’ normal behaviour patterns on the SWIFT network over time and alert the system administrator when anomalous behaviour is detected. There are many other opportunities for AI to help streamline processes and reduce risk, as well as dramatically improve the customer experience.
SWIFT is building an in-house machine learning sandbox environment that will provide a highly secure hub where the group can train and evolve machine learning models under the strictest data privacy conditions.
“This provides important opportunities for the development of advanced technologies that can improve automation and compliance processing and provide insights into customer behaviour,” says Palmers.
Regulation is another area that poses challenges. The industry needs support from regulators when it comes to real-time payments. Experts say this is the case in Europe. While the protections that Payment Services Derivative (PSD2) and General Data Protection Regulation (GDPR) have placed can seem a little onerous for banks to manage, ultimately they are creating a low-cost, secure and fair payments market that works for all. Outside of the EU, however, things are a little murkier.
In Canada there is large demand from the corporate sector to create access models similar to those in Europe, yet little regulatory movement as parliamentarians continue to deprioritise and stall legislation.
According to Ward, this is driving the adoption of parallel systems and the splintering of a market that needs standardisation and centralisation to achieve economies of scale.
In the US, where regulators had initially taken a hands-off, market-driven approach, pressure applied by lobbyists has resulted in the creation of FedNow and acceleration of the programme.
“Ultimately, as banks bear the cost of both creation and deprecation due to real-time payments they will often push banks against introduction, but ultimately if they were to seize the opportunity it could be massively beneficial for them and their clients. Proper regulation makes sure that this happens, rather than waiting for seasoned bankers to do the right thing,” Ward comments.
The future of payments is certainly digital. Real-time payments provide plenty of opportunities, but having the right technology in place is crucial. Cloud makes it much easier to facilitate real-time payments, as do the increased digitalisation of straight through 24x7 payments. For banks, it will be important to modernise their technology if they want to move quickly in these areas and compete with more agile fintechs.
