The right time for real-time payment

There are a number of factors that influence the introduction of real-time payment systems, from recognition of revenue opportunities by banks and fintechs to the need to make financial services accessible to all.

Payment system providers face ever-increasing demand from end users for a simpler, hassle-free payment experience and the ability to send and receive funds immediately.

Over the last decade, new payment players such as fintechs and aggregators have pushed wide scale interoperability, compelling regulators to issue new payment directives where everyone in the financial ecosystem participates as an equal in terms of accessing the use cases offered via a payment system.

As a result of these developments, national payment systems have reached a tipping point in the adoption of instant real-time payments and the establishment of inclusive, interoperable payment ecosystems.

Move to modernisation

More than 70 countries now have their own national real-time payment infrastructure and continue to improve their systems as they experience a hike in volume or look to deploy new use cases.

The pace of migration from a card and ATM/POS switch to a real-time, fully interoperable payment system is gathering momentum in the Middle East, Africa and Latin America, where there is desire to offer innovative services along with the need to enable financial inclusion among the underbanked population.

However, national payment systems and regulators in some countries have experienced low uptake of services even after the establishment of a national interoperable switch platform for card transactions. Hence the need for a more affordable real-time instant payment system that offers a relevant and varied set of use cases has become more urgent around the world.

The Covid-19 pandemic has further increased interest in real-time payments as governments, financial institutions, businesses and consumers demand access to funds on the spot. But beyond speed, when a market reaches an acceptable volume of transactions the focus turns towards providing differentiated services that offer ease of use to the end user.

The types of payment use cases offered at a national level are very much dependent on the country’s adoption of digital payments, consumer preferences and regulatory environment. In the developed economies of Europe and Asia Pacific, demand for new use cases is pushed from consumers and businesses looking for easier, faster and more convenient ways to make payments.

An inclusive approach

With the entry of new payment players into a market, financial services are no longer the domain of traditional banks. Financial services innovation is now being spearheaded by fintechs, telcos and payment services providers. The result is a strong demand by these new players to be part of national interoperable payment systems.

In the face of intense competition from traditional banks, new entrants may find it hard to be accepted as a member of a national payment system. In this scenario the role of government regulators is paramount to ensure true interoperability by allowing all the payment players in a country to participate.

Barriers to entry can be overcome if regulators ensure that every participant (no matter how big or small) has direct access to the payment system and its use cases with no restrictions.

Ideally, revenue generating features should be services offered by participants that use the basic use cases to build innovative services, also known as overlay services. Hence competition can be on new rather than basic services, ensuring that the cost of consuming basic payment services remains within reach for the general public.

Finance for all

One of the main goals of a real-time payment system is to encourage financial inclusion and make payment affordable for all segments of society. For the end user the reason to adopt digital modes of payment can vary from the convenience factor to the cost of doing a transaction.

We have seen that consumer adoption of digital payment is primarily driven by how affordable the service is. If the cost of making digital payments is equal to or less than the cost of using cash then the adoption of digital payment is usually very swift.

A recent study by the European Payments Council identified that in countries where there are no charges for basic services such as person-to-person transfers, the adoption rate of instant payments (SCT Inst) is significantly higher than in countries where there are charges.

If the central payment scheme is a profit-making enterprise it is not possible to offer basic services at an affordable rate that would compel a consumer to stop using cash payments and adopt digital modes of payment.

In our next blog we will explore some of the key principles for a successful real-time payment national infrastructure.