The transaction banking environment is complex and constantly changing, writes Michael Imeson. Much of what is happening, such as the growth in real-time payments systems, is for the greater good. But there are dangers lurking in all areas of payments – wholesale, commercial and retail – especially in cyberspace.

Every year at the European Banking Association’s annual conference payments professionals from all over Europe gather to discuss the main trends and concerns in their industry. 

At the 'EBAday' in Amsterdam in May, 900 delegates debated the key issues, including real-time payments, Basel III and the challenges of intraday liquidity, cyber crime and the security of payments, Single Euro Payments Area 2, trends in global cash clearing, the role of payment disrupters and cryptocurrencies.

Catching on fast

Only about a dozen countries currently have real-time payments (RTP) systems, also known as 'immediate', 'instant' or 'faster' payments. This is the topic of the second article in this guide (see page 102). RTP systems in operation include Faster Payments UK, G3 Singapore, Swish Sweden and Paydirekt Germany. However, many other countries are planning to introduce similar systems.

Low-value, retail real-time payments are quite distinct from the already widely used high-value, primarily wholesale real-time gross settlement (RTGS) systems. In the latter case, the transfer of funds between banks is in real time but receipt by the payee is usually only 'same day', and the systems only operate during the working week, rather than all the time.

Key features of real-time payments are as follows:

• they are for retail use;

• they are available '24/7/365';

• there is immediate interbank clearing;

• there is immediate crediting of the payee’s account;

• confirmation of payment is provided to the payer within seconds;

• they can be made by several payment methods (credit transfer, direct debit, payment card);

• and they can be cleared and settled by different payment infrastructures.

EBA Clearing has set up an instant payment task force to create Europe-wide instant euro payment processing services to banks and other payment service providers by 2018. EBA Clearing is the bank-owned company (which is not part of the Euro Banking Association) that provides Euro1 (the RTGS large-value payment system) and Step2 (the pan-European automated clearing house for processing low-value euro retail payments).

At its first meeting in March this year, the EBA Clearing task force said its first priority would be to work on a “roadmap and blueprint for the required deliverables”. The initiative is in response to a call for action from the Euro Retail Payments Board and the European Central Bank for the payments industry to create a competitive market for instant payments in euro. Instant payments has significant consequences for intra-day liquidity management in banks, as explained in the third article in this guide (see page 106).

The cyber threat

Banks are in the frontline of the cyber war, which is the subject of our fourth article (see page 108). “The retail and wholesale payments sectors are experiencing an unprecedented cyber crime wave,” says Thomas Kellermann, chief cyber security officer at security software company Trend Micro. “I have been covering financial sector security issues since 1999 when I was at the World Bank on the treasury security team, and attacks have become much more advanced.”

This is due to three things, says Mr Kellermann, who is also an adjunct professor at the American University, Washington DC, serves on the board of the National Cyber Security Alliance, and was a commissioner on the Commission on Cyber Security for the 44th Presidency.

The first factor is the activity of what he calls “the guilds of thieves involved in bank heists”. “The most prolific ones are Russian and Brazilian, and they are building the latest and greatest malware and safe-cracking tools to break into financial institutions,” he says. “They can bypass most perimeter-based cyber security defences and are selling these capabilities in underground arms bazaars to other hacker crews.”

Second, criminals are using 'island hopping' techniques to break into banks. This is where they hack into external suppliers – such as legal advisers or IT providers – and using their trusted communications channels to infiltrate bank networks.

“Third, financial institutions are over-reliant on encryption to protect the fraudulent transfer of funds,” says Mr Kellermann. “Hackers have devised ways to steal the credentials not just of retail and business customers, but also the keys and authentication details of those authorised to transfer their funds. Most wire transfer frauds today, according to FinCEN, the financial intelligence unit of the US government, are occurring in cyberspace.”

There is no denying that change in the payments industry is happening at a lightning pace. In most respects, as with real-time payments, it is a positive force, beneficial both for banks and their customers. But in other cases, as in cyberspace, malign forces are at work which banks are struggling to contain.

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