The development of real time payments schemes, both in and outside Europe, has raised concerns of fragmentation to Europe’s payments landscape. Seeing off the challenge will protect the harmony established by SEPA and bring greater speed and efficiency, says UniCredit’s Thomas Dolenga
The shift towards faster payments created by the digital revolution and straight-through processing is set to gather pace as interest mounts in the latest development: instant payments. These bring the potential for faster and more efficient processes, yet standardisation and convenience will be essential in realising such benefits while maintaining a harmonised landscape.
The concept of processing and confirming payments within seconds of authorisation has already taken off, with a number of schemes taking shape around the world. Mexico and Singapore are both already operating real time payments systems, while Denmark and Sweden are running similar operations in Europe.
While the prospect of instant payments promises to bring greater speed and efficiency to payments processes, it also brings the risk of fragmentation if countries are left to develop systems independently. This is a risk that Europe must take seriously – with the Single Euro Payments Area (SEPA) only recently having brought harmony to the continent’s payments landscape.
Given the momentum already behind the concept, the need for a standardised European system for instant payments is clear. This was the rationale behind the European Central Bank’s 2014 white paper, which calls for real time euro payments available at all hours of the day, every day of the year.
This is an essential goal, but it will require a great deal of work – with the inherent difficulties of implementing new technology complicated by the need to coordinate efforts across Europe.
For banks, the main difficulty stems from the need to book transactions in real time. While payments are currently booked en masse at the end of each working day, instant payments will require this process to be carried out separately for each individual transaction – and within seconds of the buyer authorising the payment.
What’s more, the requirement for 24-hour, year-round coverage means that banks must also find a solution for providing this enhanced service on weekends and other non-working days, when they will have only limited resources at their disposal.
Banks are already working on a number of solutions for this. One proposal suggests that banks could adjust the relevant account balances as normal, but wait until the next business day to carry out the inter-bank settlement underpinning the transaction.
This approach enables banks to circumvent the problem of limited resources on non-working days, but it also exposes them to settlement risk. There are hopes, however, that this side-effect can be mitigated through the use of central bank funds.
Beyond these execution difficulties, a further challenge comes from the need to ensure a smooth and easy transition from previous payments processes. This will be a crucial element in driving adoption – and convenience, for both businesses and individuals, must be the guiding principle.
To this end, banks are looking to introduce instant payments through an easy-to-use application that can be integrated directly into companies’ existing payments setups – eliminating the need to invest in new hardware or infrastructure and simplifying the transaction process for buyers.
Indeed, increased convenience is at the heart of instant payments’ value. Take the e-commerce industry, for example. Online vendors can derive a number of benefits from the fact that instant payments eliminate the time gap between customer authorisation and bank confirmation of a payment.
With immediate confirmation, sellers are no longer exposed to the settlement risk arising during this window. This not only makes e-commerce companies more financially secure, it also enables them to begin preparing and shipping goods as soon as a customer authorises a payment – resulting in drastic reductions in delivery times.
Instant payments also lay the groundwork for improving payments from businesses to individuals.
For example, with instant payments, businesses can make real time salary payments to staff on short-term contracts, or offer customers almost instant refunds on faulty or unwanted products. Advances such as these will help companies build greater trust and loyalty among clients and employees alike.
Such incentives are already driving strong adoption rates in countries such as Sweden and Denmark, and we can expect similarly strong uptake for a wider, pan-European, system. Initially, however, adoption will likely be gradual.
In part, this is due to the need to change existing payments habits. At first, instant payments will only be available in the SEPA Credit Transfer (SCT) format, yet in some countries – Germany, for example – the majority of payments are made via SEPA Direct Debit (SDD). Uptake for instant payments is therefore initially likely to be limited to urgent transactions in these countries, but we can expect it to pick up speed as habits change.
What’s more, instant payments will also be subject to an upper limit for transaction size when they are first made available – ruling out the possibility of making larger payments in real time and further contributing to the likelihood of slow initial uptake.
Yet we can expect adoption to gain momentum after a while. The upper limit on instant payments is due to be in force for at least the first year, but it could be raised as soon as November 2018 – embracing a much greater share of the payments market and encouraging increased adoption.
Furthermore, an easy transition and simple user interface will help encourage many to change their habits in favour of the instant SCT, while it’s likely that a further solution for instant SDDs will be implemented at a later date – providing a strong incentive for those who still prefer to transact via direct debit.
Certainly, there’s considerable appetite for real time payments – as demonstrated by the success of existing systems in Europe and around the world. In the long term, we can expect adoption to be comprehensive – helping maintain harmony in Europe, while ushering in greater speed and efficiency.
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