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Accelerating transactions: the global race for faster payments supremacy
Irrelevance, disintermediation and loss of mindshare. These are some of the potential risks facing financial institutions that don’t offer faster payments to customers. But as digital innovations from embedded finance to buy now, pay later continue to evolve at pace, the adoption of real-time or instant payments is moving at different speeds depending on where you are on the planet.
To find out more about the state of play, Iliad Solutions chief executive Anthony Walton sat down for a fireside chat about all things faster payments with Reed Luhtanen, Executive Director with the US Faster Payments Council. Here’s what they had to say on:
How different regions of the world are faring in implementation
Reed: There’ve been some big milestones in the US, for example the Real-Time Payments network has been in-market for five years now and they’re well over 50% in terms of the reach of direct deposit accounts, at least for receive. Alongside this, some US financial institutions have launched request-for-payment functionality. And the next big milestone will be the launch of FedNow in May – June 2023.
Anthony: That’s right, we have a lot of visibility of the US and you can just see the pent-up demand for the kinds of services that the FedNow will enable next year. Looking elsewhere, however, faster payments have been well established in the UK now for more than a decade. Additionally, the EU is set to mandate instant payments in the eurozone and this is going to drive a lot of innovation.
There’s also the P27 initiative in the Nordics, which is genuinely going cross-border. However, the people we’re working with in the Far East, Singapore, Malaysia, Philippines, Singapore and Malaysia are at an early stage of faster cross-border payments.
Reed: So in the US, we’re in a position where we’re observing what’s happening all over the world, whether it’s China, India, Europe, the UK, and we’re bringing those learnings back here. In particular the learnings around fraud. For example a lot of issues in other markets like the UK and Europe are well documented, such as push payment fraud. Hopefully, the US can get ahead of that and take some of those learnings back.
The other thing is that there is a real opportunity for financial institutions in the US to see what has happened in terms of big fintechs in other markets. Businesses such as Alipay and WeChat are really coming to dominate that space in other markets, which is something I’m sure established financial institutions in the US would want to avoid. It’s a case of do or be done to.
The key challenges facing faster payments adoption
Reed: First of all, financial institutions need to put the time in to build up the organisational understanding and develop a strategy, if they haven’t already. They need to do that very quickly, because they’re falling behind rapidly. If they’re not doing things like that they need to identify partners that they can work with, because I think for the most part, most financial institutions aren’t going to be connecting directly to the systems that are going to be going through their core; they’re going to be using payment hubs or various translation services.
Anthony: Yes, I think a legacy system is basically a tax on a bank. They can be 40 years old and internal expertise can be hard to find. And when it comes to something new, like Real-Time Payments, you’ve got to see the flow of the information and the data. And I think there are bankers who often don’t even realise where it is, as some of these systems are 35- to 40-years-old now. But all of a sudden, the new kid in town, Real-Time Payments, needs data. The financial institutions know it’s in a ledger, but are not quite sure how to get it out of the ledger.
Or, if you’re making calls to a database that’s used by your other core systems, how is that going to affect your logs? And again, one million transactions coming in in an hour – it’s going to slow things down, things are going to break. So I think the big challenge for the banks is figuring out early on how the legacy systems work because the documentation they’ve got is probably 30 years ago. One of the major benefits Iliad Solutions brings to customers is an ability to handle legacy technology and simultaneously prepare for the future with confidence.
How current global instability is affecting adoption
Reed: In the short term, uncertainty causes there to be concerns around investing in something that is viewed as a long term play, like faster payments might be for a financial institution. And so I think it can cause financial institutions who aren’t leading edge to think about this with all the other stuff that’s going on in the world and put adoption on hold.
But I think longer term some of the things that we saw when the Ukraine war first began – for instance the need to apply sanctions and control where funds are flowing – if you have a more sophisticated, more modern payment system in place, a lot of those questions I think can be answered more easily. And so I think there’s maybe a longer term likelihood that there’s both a private sector and worldwide governmental focus on ensuring we have 21st century payments infrastructures in place.
Anthony: Agreed. Any financial organisation, whether a banker or a scheme, has got finite resources and as a result we might see projects slowing down. But those who invest now will come out the other side stronger. In terms of instability in Europe, the first time any of my friends outside of the industry have talked to me about SWIFT was when there were sanctions against Russia. But if you’ve got a lot of money and you’re well connected, it’s still quite easy to move money around.
It could actually be the case that the fact that we’ve got more frictionless ways to move millions of pounds around very quickly, makes the enforcement of sanctions more complicated. And that goes back to identity and we were talking about fraud in the UK in the early days of faster payments. Institutions are really going to have to know where money is going. Because if you can make two or three leapfrog jumps in seconds with millions of dollars, then you’re going to have to think about all kinds of things differently.
Where faster payments are heading to
Reed: We’ll see adoption accelerating in the US with the existing RTP rail and the forthcoming FedNow one. This will improve connectivity between bank accounts and from that we’ll see better experiences being built out for end users, whether that’s a consumer or business. But there will be differences. For example, we’ll see further innovations to make the journey faster, easier, simpler and more intuitive for consumers than most business uses need to be. Key questions will be, is it a QR code, is it a text message, is it in an app or a bank app – that’s the real unlock: how do you build an interface that allows consumers to use faster payments in a way that is quick and easy and intuitive to them? This is the focus at the Faster Payments Council with our QR code workgroup.
Anthony: I think we’re looking at it in the UK from a slightly different perspective. Anybody building an app, whether it’s a mainstream institution or a new market entrant, all the features they’ve built around maximising how you use your money don’t really factor instant payments. That’s because they can just use UK Faster Payments, which has been there forever. It’s like a highway or a railway track. But once you’ve gone through that technical conversion where everybody’s ascribed to that standard, then you can start using it in different ways. And you start using it in different ways that are much more creative, because you simply don’t have to worry about how you make the money move because the infrastructure is established. This enables innovators to focus on killer apps that offer more ways of paying quickly and sending money between consumers and people providing the goods. So, I think it’s the volume of the traffic you can put down the track that’s enabled by the track itself.
On top of this, I think the next logical place to go is cross-border payments. The P27 initiative is a really interesting project, with backing from regulators and scheme operators, who are collaborating to make it work. The technology is there – that’s proven. The challenge is making it work with lots of different stakeholders involved.
Reed: As a general final word on the future, we’re at a point now where we continue to talk about ‘faster payments’. But I think in our lifetimes we’re going to be just talking about these as the payments that people expect to happen, for the most part, right? It’ll be the same way that email completely supplanted any sort of physical delivery of mail – it almost seems archaic to think about mailing a letter anymore. It’s hard to overstate how foundational this technology ultimately is going to be.