From a CFO’s standpoint, the idea of real-time payments seems like a no-brainer, with benefits flowing to all parties in a transaction. But in fact, the adoption of real-time payment services around the world varies widely, with most countries seeing it gain traction largely because of regulatory frameworks – not because of commercial considerations. Indeed, reports show that adoption rates are highest in nations where government regulators have taken an aggressive role.
Rolling out real-time payments is in fact a very complex proposition. Technology has changed the face of payment processes, as consumers and businesses now have a range of electronic options, including credit, debit, or prepaid cards, when it comes to paying for goods or services rendered. While most countries have payment infrastructures that still run effectively, let’s remember that they were built during a time when paper reigned and the Internet and smart, connected devices did not exist. Technology has clearly moved ahead, and paper-based payment systems have lagged behind by not leveraging the ubiquitous use of mobile devices that now enables more efficient payment alternatives.
Countries are now trying to play catch up. A white paper by SWIFT noted:
- 18 countries have active real-time retail payments systems (RT-RPS).
- 12 countries are currently in the processes of exploring, planning, or building them.
- An additional 17 countries are exploring RT-RPS through a pan-Eurozone initiative.
Out of these, the report identified two paths towards adoption.
- In countries where the regulators play a strong advocacy role for real-time payments, the adoption path is rapid. Typically, regulators will play the leading role in the real-time payments initiative, adopt new technology, and encourage the market to migrate through attractive pricing or incentives. For example, to cut back on the use of cash, the central bank in Mexico advertised the use of its RT-RPS system, SPEI (Sistema de Pagos Electronicos Interbancarios), to the general public, motivating the banking community to follow its lead and commit to the initiative.
- In countries where regulators do not strongly advocate for real-time payments and/or the banking community has displayed little interest in adopting RT-RPS, the adoption path is slow. In Poland, for instance, a new commercial entrant (BlueCash) benefited from first-mover advantage over the new RT-RPS (KIR Elixir Express27), as the banks were primarily focused on their own internal operating systems migration. In South Africa and Brazil, the low participation of banks resulted in a slow move towards embracing real-time payments, and in India, the complexity of the Immediate Payment Service (IMPS) was a key barrier.
What real-time payments look like
For countries that have rolled out real-time payments on a wider scale, the benefits cascade across government, retailers and billers, financial institutions, and consumers. Studies have pointed to the fact that in mature markets, introducing a new payment model fosters innovation and competition in the payment services sector. Whether it is in retail, B2B, or inter-bank, the idea of real-time or immediate payments is beginning to gain momentum because of the convenience for all the parties involved. This is the reason why different models and initiatives have sprung up in markets around the world including Sweden, Singapore, Australia, and many more.
The advantages of rolling out real-time payments also have direct consequences for developing economies: systems that support immediate payments can offer improved opportunities to those with limited access to banking facilities. Furthermore, modernizing a country’s payment system can also attract foreign investments, driving economic growth in return.
For governments, they stand to gain from reduced cash and check handling as well as easier management of economic risks. For B2B and B2C companies, with the right system in place, they can also pay employees and suppliers faster, as well as gain access to available funds and rich payments data quickly. Real-time payments also offer more insight and control into what customers are buying, which can ultimately lead to increased sales revenue.
Consumers are likely to gain the most from 24×7 payment services, which ideally, give them immediate access to their available funds and credit and enable them to complete transactions instantaneously. People are connected through their mobile devices all the time and expect the same functionality and services at any time of the day or night. Examples of solid real-time payments systems include the UK’s Faster Payments Service – the largest real-time payment system in the world – and FAST (Fast and Secure Transfers), which is functional in Singapore. Elsewhere, Australia has implemented the New Payments Platform (NPP).
Global drivers: regulatory reforms and mobility
So what are some of the key drivers of the rise of real-time payments? The SWIFT report cited regulatory restructurings and the increasing number of mobile consumers as big factors. Countries such as India and Nigeria have seen an active push for real-time payments to extend basic payment services to people with lesser or no access to banking facilities in order to enhance financial inclusion. For more advanced markets such as Japan and the UK, a primary motive for the governments to advocate the move to real-time payments is to encourage innovation and the competitive spirit in the payment services sector.
At industry conferences such as the NACHA in the United States, real-time payment has been a popular topic as well, which points to the future of the payment services sector. A McKinsey study conducted for the Federal Reserve in the US estimated the costs to the government to implement a system supporting real-time payments will be $4 billion to $7 billion. This estimate excludes the costs for banks and corporations to update their systems to facilitate real-time operations.
In the US though, the move toward real-time payments has seen some initial reluctance by the Federal Reserve Bank, for reasons ranging from security concerns to a lack of legislative will. However, the Federal Reserve did acknowledge in a 2013 public consultation paper that near-real-time payment capability is a beneficial improvement to the payment system that supports economic activity in the United States. As a sign of its commitment, in June this year the Federal Reserve published its roster of a Faster Payments Task Force that will study best practices to achieve real-time payments in the US. The task force wants to identify and evaluate ways for rolling out a secure, ubiquitous, faster payments capability in the United States. The study is scheduled to conclude in December 2016.
According to SWIFT, next-generation payment systems will need immediate and irrevocable access to both payers’ and payees’ accounts, for debiting, crediting, and confirmation of transactions. Round-the-clock service availability is also compulsory.
The widespread use of real-time payment could be revolutionary for the B2B space, as it introduces real-time capabilities for payments with large invoices and also allows for a more transparent view of working and rotating capital for everyday transactions.
From a global perspective, the Asia Pacific region is expected to continue to drive growth. China currently accounts for the largest share of payments revenues (40%), while the region as a whole is expected to make up 56% of the global increase in payments revenues in the next five years. However, despite the bullish outlook for real-time payments in Asia Pacific, the McKinsey report also noted that Western Europe and developed Asia, where growth rates have been negative in recent years, are also expected to deliver a strong comeback in the next few years. This will be partly a response to customers’ increasing use of mobile devices and expectations of instant transactions.
To learn more about real-time payments, read Lessons From The UK’s Move To Faster Payments. Want more insight on how the digital economy is transforming finance? Review the finance content hub, which offers additional research and valuable insights.