Much is changing in the payments world – and one of the most significant developments in recent years is the rise of real-time payments.
“This revolution is really about a change in customer expectations,” says Matthew C Miller, Managing Director, Head of International Payments – Global Payments Solutions at Bank of America. “As consumers, we’re all used to an immediate environment where we can interact with our technology and services whenever and wherever we want, 24/7. But this conflicts with how payments have historically worked, which is more of a 9-5 approach.”
From a transactional perspective, says Miller, one of the opportunities presented by real-time payments is the ability to bring those two worlds together. As a result, corporations, institutions and consumers are seeing some fundamental changes.
For banks, this is leading to questions about how to provide corporations, institutions and consumers with the ability to transact and make payments. “It’s shifting the whole concept of banking into the 24/7 space,” Miller notes. “And where treasury services are concerned, this is leading to some fundamental questions around liquidity positions and pre-funding at the different clearings.”
That said, not all customers are choosing to use real-time payments. “So another challenge for banks is to provide these capabilities where they are expected, while recognising that not every client has the same requirements,” says Miller. “This does mean that a certain level of customisation is needed.”
Pressing for transformation
The last decade has seen the arrival of many new real-time payment systems around the world. Notable developments include Brazil’s instant payment platform Pix, United Payments Interface (UPI) in India, the RTP network in the US and the SEPA Instant Credit Transfer scheme in Europe.
“These developments are all pressing for transformation,” says Miller. “These schemes have created requirements, established them within their respective countries and regions, and proved that real-time payments can work for both consumers and corporates.”
Miller regards the fact these payment and clearing systems have been established as a “big win”. He says these initiatives have demonstrated there is clear interest in real-time payments, which is very significant for the future of payments.
Some of these initiatives have also made adoption mandatory for banks, which is a significant step forward in forcing the industry to accept real-time payments. “This has really helped to open up the concept and technologies, and we’re starting to see these developments being replicated around the world,” Miller notes.
That said, he argues there is a clear opportunity for these initiatives to work together more effectively in the future. “All these clearing models were created at different times for different reasons, resulting in structural differences that hinder interoperability. For financial institutions, this presents some challenges when it comes to integrating the different solutions.”
Tackling fragmentation
There are clear differences between building real-time payment rails in a single country, compared to developing them in a multi-country bloc like SEPA. While there may not be a lot of differentiation in terms of the core technology, the different countries will layer on their own legal requirements and needs.
So although the core principles may be very similar across different schemes, blocs that include multiple countries will come with significantly greater requirements and compliance concerns. That leads to complexity for participants and fragmentation in the client experience which can affect adoption.
“The easiest way to think about fragmentation is from a client experience perspective,” says Miller. “If you are a company making a payment from one country or region to another, you wouldn’t expect there to be different value limits for the amount of money that can be sent, or the information you need to make sure the payment is received. But those differences exist today.”
As such, there is a clear opportunity to collapse that fragmentation by increasing interoperability between schemes and promoting more understanding between businesses and governments. This, in turn, will enable new opportunities, such as cross-border real-time payments, improved fraud detection, and faster speed and availability.
But as Miller warns, achieving this level of interoperability and collaboration will not be easy. In recent years globalisation has given way to greater levels of protectionism, with some markets putting up barriers for non-domestic financial institutions to participate locally.
“In my view, achieving the level of coordination needed isn’t something that can be achieved by governments and regulators alone,” says Miller. “An independent third party, such as Swift, is needed to help overcome these barriers and bridge the gap between different systems.”
Direction of travel
Looking ahead, Miller is confident that the industry will continue to tackle the issue of fragmentation – but the change is not going to happen overnight. “In three-to-five years, I think we’re going to see clear leaders emerge, both in terms of what payments look like, and from an adoption perspective,” he says.
“There will still be regulatory differences and disparate jurisdictional structures. But we will also see greater collaboration among industry groups, governments and businesses to drive the innovation that’s needed. It will take time, but I’m confident the industry will achieve stronger connections between the different clearing schemes.”
Bank of America is supporting major initiatives like Swift’s digital ledger for cross-border payments. Last year, Swift announced that it is working with a group of financial institutions to add a blockchain-based ledger to its infrastructure, with the first use case focusing on 24/7 cross-border payments.
“This really is one of the biggest opportunities the industry has to meet global requirements for processing digital payments,” says Miller. “As the incumbent, Swift has the advantage when it comes to deploying a worldwide solution – and as part of our plan, we’re excited to participate in this initiative.
“If the industry can achieve a digital ledger, we will be better placed to start talking about fixing the interoperability of RTP schemes and linking those schemes together. The RTP scheme would then become the local leg, with an independent third party connecting them together.” As Miller explains, this would help remove any friction between two entities that have different priorities or regulatory considerations.
Supporting corporate clients
Miller says Bank of America is squarely focused on providing the best payment capabilities for its customers – and cross-border real-time payment solutions are an important topic for the bank.
“Our support for Fortune 500 and Fortune 1000 companies, both globally and here in the US – as well as our reach with US consumers – means we have a huge opportunity to help our clients send payments whenever, wherever and however they want,” he says.
“Our corporate clients can not only access the significant footprint that we have in the US, but also link to the other RTP clearings in locations that we are connected to. This allows cross-border payments to happen in that 24/7 environment, where this is permitted by local clearings.”
Change is happening
Reflecting on the evolution of real-time payments, Miller argues that this shift is one of the most significant developments in the world of payments, with corporates and consumers already seeing the impact.
“We’ve been talking about the evolution of the payments landscape for a long time,” he says “There has been considerable discussion about what developments like blockchain, cryptocurrencies and digital currencies could mean for the industry – and of course, we’re actively tracking these developments and identifying how we can participate in and support them.”
“But the shift to 24/7 payments represents one of the most meaningful changes the industry has seen in years. It’s real, it’s significant, and it’s happening right now.”
