Laying the foundations for real-time payment infrastructure
Having explored the demand drivers for real-time payment systems, we now outline some of the key principles for the successful deployment of national infrastructure.
Before we focus on the principles of infrastructure deployment it is necessary to define what real-time payment means and distinguish between real-time payment and near real-time payment.
The former is defined as transactions in which the funds are transferred between ecosystem participants’ store of value account immediately, with instant confirmation of their availability. Service level agreements usually define 30 seconds as the maximum period within which the funds should be available to the customer. Movement of funds should be irrevocable and settled immediately between participant institutions.
Near real-time payment or faster payment provides confirmation to both payee and payer that the funds are available when the transaction is completed. This transfer can happen within seconds and is irrevocable, although funds settlement can be deferred in some cases.
We have identified a number of features that are critical to successfully building a next generation real-time payment scheme, the first of which is regulatory oversight.
With the emergence of new payment players, financial services are no longer the domain of traditional banks. Fintechs, telcos and payment services providers want to be part of national interoperable payment systems but may find it hard to be accepted for membership.
In this scenario regulators play a vital role in ensuring true interoperability by allowing all the payment players in a country to be included. Barriers to entry can be overcome if regulators ensure that every participant has direct access to the system and its use cases without restrictions.
Ensuring a healthy mix of competition and collaboration among participant institutions is also important. To ensure that no single participant dominates the market or monopolises the payment system, basic services should be either free or provided at a fixed cost.
Revenue generating features can be services offered by participants using basic use cases to build innovative services, also known as overlay services.
One of the main goals of a real-time payment system is to encourage financial inclusion. Consumer adoption of digital payments is primarily driven by the affordability of the service.
A recent study by the European Payments Council noted that in countries where there is no charge for basic services such as person-to-person transfers, the adoption rate of instant payments is significantly higher. Therefore, one of the key contributors to a successful central instant payment scheme is to launch it as a not-for-profit organisation in the initial stages.
Putting in place a national instant payment scheme is a disruptive process which can create push back from existing participants. The new system could make current business models obsolete, but might also introduce more interesting use cases and business opportunities for all players.
When participants play a central role in defining the governance framework and rules of the payment scheme it may achieve faster acceptance.
Push-based funds transfer from one individual account to another is the most basic use case of a real-time payment system. It gives control to the person making the payment with full certainty of clearing and settlement and since payments are irrevocable the cost of payment processing is kept low.
In a traditional national switch set-up, settlement of funds follows a T+1 model where transactions are settled on the next working day between payee and the payer institute.
An all-inclusive real-time payment system offers full interoperability and a level playing field for all participants to interact and transfer funds between each other’s customers. However, some participants may not hold a funding account in a central bank for settlement. For such participants there are settlement agents responsible for settling their funds in the central bank.
In order to minimise the risk of default, the real-time payment system should ideally support real-time settlement whereby funds are immediately settled between participant institutes once they are moved from the payer to the payee account. The risk of liquidity default can also be mitigated by running multiple settlement cycles over a business day, although this may introduce some additional overheads.
Real-time instant payment also introduces the possibility of instant fraud. Fraudsters can use the open and interoperable framework of the real-time payment system to steal funds stored in user accounts and the possibility of fraud increases in line with customer adoption.
A real-time payment system that can monitor transactions on-the-fly is the best protection against instant fraud events. Such mechanisms build confidence in the system by ensuring that transactions and funds are protected at all times.
In the final blog in this series we will explain why ISO20022 is a must-have standard for real-time payment systems.