Instant Payments: The Longer View
by Shirish Wadivkar, Managing Director, Head, Payables, Receivables & Flow FX, Transaction Banking, Standard Chartered Bank
One of the features of our digital lives today is that we live them in ‘real time’. From downloading media content to booking holidays, breaking news or making video calls to friends and family, our digital experience is instantaneous. The next step in the development of an efficient digital economy, and to extend the real time experience to businesses and the wider financial supply chain, is to accelerate the payments process that underpins consumer, business and government transactions. A crucial means of addressing this is the development of immediate, or instant payment schemes. Already mainstream in some countries, instant payments will play an increasingly important role in facilitating international commerce and supporting the business models of the future.
Taking root in domestic markets
The concept of ‘real time’ or immediate payments is not new. Japan’s Zengin scheme has been in operation for more than 40 years, while Faster Payments and FAST are now well-established in countries such as UK and Singapore respectively, and a number of others. According to SWIFT’s recent white paper, The Global Adoption of Real-time Retail Payments Systems (RT-RPS), immediate payment schemes are live in 18 countries, 12 are planned or in development, and a further 17 are exploring ways to introduce instant payments. In Cap Gemini’s World Payments Report 2016, the introduction of immediate payment systems in many markets is seen as one of the most important regulatory initiatives that will have an impact on the global payments business.
Instant payment schemes have a number of characteristics. They usually operate 24/7, with an end-to-end payment process, from payer to payee, of one minute or less. Payments are confirmed or rejected immediately, allowing payment instructions to be corrected and retransmitted promptly and without loss of value or time. Successful payments are final and irrevocable, so they cannot be recalled after transmission. From an inter-bank perspective, participants periodically settle transactions on a net basis once payments have been made, either intra-day or end-of-day.
Extending the value proposition
These characteristics are attractive to both consumers and businesses but there are various issues that limit the value of instant payment schemes at present, particularly for businesses. Immediate payments are only available for domestic payments, and in a limited number of markets, which hampers corporations’ efforts to standardise payments regionally or globally, and there is a threshold on the value of payments.
This is changing, with a variety of initiatives under way involving banks and infrastructure providers to deliver immediate payments to benefit businesses as well as consumers, including multinational corporations with cross-border payment requirements. For example, the European Automated Clearing House Association (EACHA) is encouraging members to connect on a bilateral exchange to achieve instant cross-border payments, rather than creating a new scheme, therefore effectively linking multiple domestic instant payment schemes to create a regional infrastructure. There are also discussions under way to deliver pan-European euro instant payments via EBA Clearing.
At a global level, the most compelling proposition so far is SWIFT’s Global Payments Innovation Initiative (GPII), announced at the end of 2015 and comprising 45 leading banks so far. Standard Chartered is a founding member of this initiative, which aims to leverage the SWIFT network to deliver immediate cross-border payments with a new rulebook providing the opportunity for smart collaboration across the banking community.
The corporate advantage
The first phase of the GPII will focus on business-to-business payments, marking a huge shift in payments and supply chain efficiency for multinational corporations. Instant, cross-border payments change the financial supply chain dramatically. GPII is supported by a clear service level for end-to-end payment processing: corporations, and their suppliers, will receive value in near real-time, without the current constraints of settlement periods and cut-off times. By enabling ‘just-in-time’ payments, treasurers and finance managers can improve days payable outstanding (DPO) whilst improving supplier relationships by avoiding late payment. Companies can control working capital and intra-day liquidity more precisely by triggering outgoing payments based on incoming flows. Furthermore, international trade transactions are accelerated, eliminating credit issues and avoiding expensive delays.