While 2017 is widely recognised as the year real-time payments took a qualitative leap forward, 2018 is predicted to be one of transformative change, as innovative services built on top of the new rails come to market. Joy Macknight reports.

Faster payments

The global shift to instant payments was given a boost in the final months of 2017 when the US, Europe and Australia went live with real-time infrastructures. In mid-November, the Clearing House (TCH) launched its Real-time Payments (RTP) system, the first new payment rail in the US for more than 40 years.

A week later, the European Payments Council (EPC) launched the Single Euro Payment Area (SEPA) Instant Credit Transfer scheme (SCT Inst), which has the potential to reach 34 European countries. On the same day, EBA Clearing launched its instant payment system, RT1, to process the new instrument.

In the same month, Australia’s New Payments Platform (NPP) soft launched, piloting fund transfers between employees at several participating financial institutions, before publicly launching in February 2018.

These add to the growing number of immediate payment systems that have been rolled out over the past decade, including initiatives in China, India and Singapore, to name just a few.

Changing the game

While the definition of ‘real-time’ may differ between jurisdictions, with many projects distinguishing between clearing and final settlement, the new systems have several things in common. First, they are all predicated on 24/7/365 availability, which has meant a significant technical and process upgrade across the industry. This has resulted in a gradual increase in adoption, as banks bring their complex legacy systems up to speed.

Second, all are adhering to the ISO 20022 messaging format, which allows much more data to travel with the transaction and is considered a game-changer by many. “A faster payment is a useful thing, but on its own it is not transformative,” says Andrew Hewitt, director of payment and data solutions at financial services technology company FIS. “Corporate treasurers, for example, would like more information to solve the difficulties around reconciling a payment with an invoice. That is quite transformative.” The ISO standard also increases interoperability between systems, whether domestic or potentially cross-border.

Third, they are committed to promoting overlay services, which are additional services offered by banks or third-party providers (TPPs) leveraging the real-time infrastructure. These are viewed as the competitive components sitting on top of the utility layer. Whether baked into the design from the outset or incorporated later, they are part of a widespread focus on developing value-add services to meet specific customer needs.

“There has been a shift from viewing this as just a faster automated clearing house transaction to seeing it as a fundamentally different type of payment, which allows banks to position it as a new rail and tool set,” says Gareth Lodge, senior analyst at research firm Celent and author of the March 2018 report, A Real-time Hub for a Real-time Everything Future. “That is where overlay services come in and why they are only starting to take off now. Banks are starting to realise that [real-time rails] can be used to build services in, around or out from,” he adds.

Last, many new systems are marrying real-time payments with open banking initiatives, using open application programming interfaces (APIs). Mr Lodge believes that these go hand in hand in creating the future payments landscape. “While they are separate initiatives, the real power is when they come together because they amplify each other,” he explains.

The Australian architecture

Since NPP’s public launch on February 13, more than 60 banks, building societies and credit unions have been rolling out real-time data-enhanced payment services. NPP takes just 15 seconds to clear, settle and post payments, offering line-by-line settlement against central bank funds. The platform roll-out is still in its early stages and is currently seeing transaction volumes of more than 200,000 per day, according to CEO Adrian Lovney.

From the outset, NPP Australia embedded the concept of overlay services into its ‘open access’ architecture, built by Swift, which allows entities to leverage the platform’s functionality in different ways. Many will use Osko by BPAY, the first overlay service to go live. Osko is a faster payment service built on NPP’s addressing service PayID, which uses a registered unique identifier, such as phone, e-mail or business number, and the Reserve Bank of Australia’s Fast Settlement Service.

Banks are starting to realise that [real-time rails] can be used to build services in, around or out from

Gareth Lodge

“We expect the Osko service to be used by a range of businesses and corporates for person-to-person [P2P], person-to-business [P2B] and business-to-person transactions, particularly as more services roll out in the year ahead,” says Mr Lovney. “Osko went live with a relatively basic fast transfer with 280 characters of text including emojis, which are proving popular. The second and third services will be a simple payment with an invoice or receipt and a request to pay, with or without a document.”

The focus is much more on data and business integration possibilities, rather than the speed of the payment, according to Mr Lovney. “Obviously, speed is valuable, as is the continual availability and the absence of a cut-off time, but data is the real value add and provides an opportunity to integrate into companies’ back offices,” he says.

Mr Lovney believes that overlay services will most likely be developed in industry verticals, where organisations could work together to streamline costly business processes or provide better customer experience. “There is discussion around wealth management, insurance, e-invoicing, payroll and capital markets, particularly given the ISO 20022 format standards,” he says. He points to a Commonwealth Bank of Australia white paper on the use of the NPP in the superannuation industry as an example of the type of thought leadership that banks are producing around overlays.

RTP in the US

TCH launched RTP on November 13 with six member banks: BNY Mellon, Citi, JPMorgan, PNC, SunTrust and US Bank. A seventh bank, BB&T, has since gone live. “The banks account for a sizeable market share but the real ramp-up is just starting,” says Steve Ledford, senior vice-president of products and strategy at TCH. He reports that several more banks will be online by mid-2018, including the first non-TCH members, and 25 to 30 financial institutions plan to be directly connected by the end of 2018.

Bank of America is one of about 20 TCH member banks that plan to go live in 2018, according to Mark Monaco, head of enterprise payments at the bank. “We are in development now and expect to be able to receive RTP payments in the fourth quarter [of 2018],” he says.

Financial institutions will also be able to indirectly connect through TCH’s partnerships. “Our strategy is direct connections to financial institutions that have the size and technological ability, as well as engage with smaller financial institutions through partners or aggregators, to reach our goal of having ubiquitous reach by 2020,” says Mr Ledford, in line with the deadline set by the Federal Reserve’s Faster Payments Task Force. “This is our strategy for both value-added services as well as extending our reach in the market.”

A faster payment is a useful thing, but on its own it is not transformative

Andrew Hewitt

RTP has additional non-payment capabilities that complement the core payment service, such as request for payment, payment confirmation and request for additional information. “Consumers can pay bills and immediately receive confirmation. Billers can send a request for payment and the customer can click a button to complete the payment. RTP allows payments to match the way humans behave,” says Mr Ledford. “It is also beneficial for small and medium-sized enterprises that are tied to a tight cash flow. They can pay immediately when they have funds and also get paid more quickly.”

BNY Mellon, which, with US Bank, originated the first payment over RTP on November 13, plans to deliver the request-for-payment service by mid-2018. Karen Braithwaite, head of global product management for treasury services at BNY Mellon, believes this service will be vital in supporting e-invoicing and e-billing. “For example, a restaurant supplier can send their bill into the restaurant with enriched data. Then the restaurant accountant can validate and send an immediate payment based on the request for payment. You don’t have that data on current and more traditional payment rails,” she says.

The idea of overlay services was not included in RTP’s design, but TCH encourages their development. “RTP has a full set of messages with good capabilities, including request for payment and confirmation messages, plus three different ways to deliver invoice or remittance data,” says Mr Ledford. “Banks and TPPs are open to develop new products based on those messages.”

While there is much discussion at TCH around product overlays, use cases and enhancements, Mr Monaco believes that even more discussion is happening within each individual institution wanting to use the capability to solve customer needs, such as daily payroll and just-in-time payments to suppliers or agents. Likewise, Ms Braithwaite is confident that commercial overlay solutions will be developed based on use cases seen today. “Hopefully we will see use cases we never dreamed of in the future,” she says.

Real-time across Europe

In the run-up to the 10th anniversary of SEPA Credit Transfer, the EPC launched the real-time SCT Inst. The scheme enables the transfer of up to €15,000 in less than 10 seconds. As of January 16, more than 1000 payment service providers (PSPs) from 12 countries have adhered to SEPA Inst, including BPCE, a major French co-operative banking group. According to a recent poll by the EPC, 68% of participants think the SCT Inst scheme will reach critical mass by 2020, while 32% believe it will take longer.

The level of PSP acceptance is quite good, according to EPC chairman Javier Santamaría. “[One thousand] is about a quarter of the PSP universe in Europe,” he says. “By the end of the year, we expect to reach 50% of the market, i.e. more than 2000 PSPs. I would consider that to be a success after just one year. That is why we feel confident, but we are still conscious that time is needed for PSPs to adopt this instrument and users to make full use of its potential.” The EPC plans to review the SCT Inst’s maximum limit in November 2018.

Linked to the SCT Inst launch, EBA Clearing’s pan-European platform RT1 went live with 17 banks from eight countries. On February 21, the platform hit the 500,000-transaction mark, with a total value of €300m, handling more than 10,000 real-time euro payments per day. EBA Clearing reports that more than 95% of the transactions are processed in less than three seconds.

Italian payment services provider SIA designed the RT1 platform, in full compliance with the EPC requirements, and has taken full responsibility for implementing and running the system. On top of that, SIA has created innovative tools to help banks get on board and start sending and receiving instant payments. “We are playing a major role in introducing the service on the continent and supporting banks’ adoption,” says CEO Massimo Arrighetti, who recently announced plans to step down from his role in mid-June.

The company launched SIA EasyWay, a digital platform that allows banks and other PSPs to manage the instant payments available on RT1, in addition to other SEPA payment and collection instruments. “A bank connected through our turnkey service has to make very little effort in terms of time and resources,” says Mr Arrighetti, reporting that several banks have gone from scratch to full service in less than four months.

Despite Europe being at the beginning of developing overlay services, Mr Arrighetti expects hundreds to emerge. SIA, for example, launched its P2P and P2B mobile payment service Jiffy to transfer money in real time, which now claims 5 million users and 130 subscribing banks in Italy. Shortly it will also be available for public administration and e-commerce payments via the app.

A bank connected through our turnkey service has to make very little effort in terms of time and resources

Massimo Arrighetti

Like Ms Braithwaite, Mr Santamaría believes TPPs will develop new ideas that cannot be imagined today. “Competition in the market will be good for both TPPs and PSPs because they will develop new ideas and services. This is good for consumers in the end because they will enjoy a broader choice at probably a lower price,” he says.

The end of 2018 will see two additional launches. In November, the European Central Bank plans to launch Target Instant Payment Settlement (TIPS), a platform to process real-time payments in central bank money. In February, the ECB ran the #TIPSapp challenge to develop an original mobile app for initiating and processing instant payments, which SIA, among others, participated in.

Also in November, Swift plans to launch SwiftNet Instant messaging service, which will allow instant payments to be made in euros across Europe through both RT1 and TIPS.

UK Faster Payments revamp

Some of the original real-time payment systems are being renovated. For example, after a decade in operation, the UK’s Faster Payments scheme is undergoing modernisation, including the move to ISO 20022 messaging format. The Payments Strategy Forum (PSF), initiated by the Payment Systems Regulator, developed a blueprint for a New Payments Architecture (NPA) for retail interbank payment systems and then handed it over to the New Payment System Operator (NPSO) at the end of 2017.

On May 1, the NPSO took over operational responsibility for Bacs, which is the scheme for bulk, file-based credit transfers and direct debits, and Faster Payments, with the Cheque & Credit Clearing Company and UK Payments Administration expected to follow shortly. As part of its remit, the NPSO will accredit overlay service providers.

CEO Paul Horlock says that the NPSO aims to stimulate opportunities in overlay services and ensure that services existing today, such as direct debits and standing orders, can exist as overlays in the future. “[The NPSO] is only about procuring the core clearing and settlement layer that sits underneath,” he says. “In the PSP layer of the architecture, it’s about services becoming more open and competitive in the market.” The NPSO’s job is to make the standards, rules, connectivity and collaboration easier to access, so players can create more opportunities.

Under the NPSO, new players will be encouraged to join the schemes directly, in line with Transferwise’s recent announcement. “Our aim is to make the accessibility to the ecosystem easier,” says Mr Horlock. “By moving to one standard across what currently are three standards, it will be easier for both the incumbent and newer institutions to join.”

New services such as confirmation of payee, which is an affirmation that the payee is who they say they are, and request to pay are expected to be the first overlays to launch. “Confirmation of payee is not so much a commercial overlay but one that starts to use the data opportunities enabled by the API ecosystem in a way that provides more security in real-time payments,” says Mr Horlock.

“Request to pay, which was referred to in the PSF blueprint document, is where we think the commercial development of overlay services will start,” he adds. The service will give consumers more real-time control and flexibility in the way they pay bills.

The NPSO is working closely with the UK’s Open Banking Implementation Entity. “The open API ecosystem is a core thread that runs through the NPA, and the directory is going to be a crucial part in making sure the NPA works going forward,” says Mr Horlock.

He stresses that the NPA is not a monolithic infrastructure, but the conceptual architecture. “Our job is in delivering the clearing and settlement layer, while the market’s job is then leveraging that and building new services and new ecosystems that sit above the infrastructure,” he says. “We are going to facilitate and instigate the market, particularly around confirmation of payee and request to pay as initial overlays, and by putting standards, capability and opportunity out there, we want the market to come up with the next steps.”

In line with open banking

According to one of the recommendations in analyst Ovum’s 2018 Global Payments Insight Survey: Retail Banking report, banks should view real-time payments and open banking initiatives as true opportunities for service enhancement and transformation. “Those banks that view RTP and open banking as isolated initiatives or, worse still, a compliance requirement, risk being left behind in the future,” the report says.

This advice is not lost on the banks associated with Australia’s NPP. Mr Lovney reports that two local banks are close to releasing API stacks for the NPP, as well as other payment channels. The NPP scheme plans to publish an API framework, which will provide a set of minimum mandatory components and some optional components, within the next few months. “There is a lot of appetite from access seekers and providers for some consistency around APIs,” says Mr Lovney.

The Australian government’s report on open banking points to the role the NPP could play in enabling the ecosystem. “Particularly combined with our work on API frameworks, payment initiation messages will play a significant role in opening up access to the NPP to support products and services delivered by a range of organisations, while still enabling a level of authorisation and control by the underlying account holder,” says Mr Lovney.

In the US, banks are already offering commercial customers the ability to use APIs to initiate and receive RTP transactions, including payments and request for payments, according to Mr Ledford at TCH. “In fact, we believe that this could be the predominant way that Fortune 1000 companies interact with the RTP,” he says. “Already companies are using APIs to link their payables and receivables systems through their bank to the RTP platform.”

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