Mobile and online technologies have made rapid progress in the past decade as smartphones have become ubiquitous and broadband communications have been rolled out across the world. Businesses and consumers have come to expect rapid access to information and want to conduct transactions in real, or near real time. These developments have not been matched, however, in the payments space. The majority of financial institutions are burdened with ageing core banking systems and myriad regulatory demands are monopolising resources that might otherwise be diverted to upgrade programmes. The relatively slow clearing cycles in the payments world are coming under scrutiny as consumers and businesses demand more agile systems.
Little surprise, then, that the UK’s Faster Payment Service (FPS) which launched in May 2008 has been watched with international interest – certainly of late. Generally speaking, faster payment schemes enable customers to make electronic payments almost instantaneously, seven days a week, 24 hours a day. The payments are typically made via a phone or internet-enabled device and involve the transfer of money between accounts, to other people, to pay bills or to make regular standing order payments.
Although countries such as Nigeria and Poland also have real-time payments schemes in place already, one jurisdiction in particular is leading the way when it comes to faster payments initiatives, namely Asia Pacific. Let’s take a look at what is happening in the region.
Singapore’s Immediate Payments G3 scheme was launched in mid-March 2014 and supports credit transfers and direct debits. The scheme focuses on two principal areas: real-time payments (RTP, low-value real-time gross settlement) and bulk payments (automated clearing house). RTP features include payer-to-beneficiary payment completion within five minutes (up to a maximum of SGD 10,000) and payment completion within 15 seconds between participating banks, which are obliged to be able to receive and credit payments on a 24–hour-a-day, seven-day-a-week basis. The Singapore ACH for bulk payments has also been improved to provide support for additional details that will facilitate payment identification and invoice reconciliation.
G3 replaces Singapore’s eGiro payment system that dates back to the 1980s. It will deliver real-time payment processing and automation of direct debit authorisations. The scheme will present operational and technical challenges for member banks, many of which are encumbered with ageing payment processing platforms and core systems. Moving from the eGiro system, member banks will have to update their payment systems to be compliant with ISO 20022 payment messages, real-time service levels, a 24/7 operating environment and provision for multiple clearing and settlement cycles.
The initial phase of the scheme – real-time payments – came into effect on 17th March this year. Phase two, which involves bulk payments (G3 Bulk), is due for launch in September or October. The final piece of the jigsaw, an electronic direct debit authorisation (EDDA) system is expected to be rolled out in late 2015.
The direct debit authorisations will be set up and exchanged electronically, leveraging the scheme infrastructure and capabilities to support the adoption of a bulk payment and will benefit real-time debit transactions. It will reduce the turnaround time required to set up an authorisation from the existing 12 to 15 working days to five working days or fewer, depending on the readiness of billing organisations’ banks and the billing organisations themselves. Amendments and termination features will be included as part of the module.
VocaLink, which designed, built and runs the Faster Payments Service in the UK, has partnered with Singapore-based payments solution provider BCSIS, to deliver its Immediate Payments in Singapore as the real-time payments infrastructure for the G3 scheme. There are some differences between the Singapore scheme and that in the UK. Singapore is using the more modern ISO 20022 standard, whereas the UK scheme is based on the ISO 8583 messaging standard.
“A lot of work had to be done to upgrade the VocaLink system to operate on ISO 20022,” says Stephen Peters, a Vice-President at Clear2Pay, which is also involved in the project. “Within G3 the banks participating will have to implement solutions that will interface to the central hub through secure, transparent networks. If they are processing real-time payments they will have to upgrade their core banking systems because many existing systems cannot deal with that flow of real-time payments; they are set up around batch or overnight processes.” Several banks in Singapore are using Clear2Pay’s Open Payments Framework as a module to run the G3 scheme.
India is also undergoing significant changes and improvements to its clearing infrastructure. One of the main developments is the Interbank Mobile Payment Service (IMPS, now called the Immediate Payment Service), which is live at nearly 60 banks. Introduced in November 2010 by the National Payments Corporation of India, the service is a mobile remittance solution. It offers an instant, 24/7 interbank electronic fund transfer service through mobile phones. Customers can use mobile handsets or tablets as a channel for accessing their bank accounts. Payments are transferred in a secure way and confirmation is immediately issued.
The IMPS platform processes person-to-person, person-to-account and person-to-merchant remittances. Transactions can be initiated from mobile phones, internet-enabled devices and from ATMs.
Applications of IMPS include the purchase of goods from stores via users’ mobile devices and online purchases via internet-enabled devices. IMPS offers multiple modes of funds transfers for mobile purchases, including a mobile application, SMS and a national, unified unstructured supplementary services data platform. Funds can also be transferred over the internet via accounts registered to IMPS or other accounts, using the Indian Financial System Code. The ATM network is also hosting IMPS payments, enabling funds to be transferred.
A challenge for promoters of IMPS is the patchy nature of mobile coverage across India. The Indian mobile network is relatively slow and is also unreliable. At this stage, IMPS is dependent on a mobile device and on users having bank accounts. According to the Reserve Bank of India (RBI), as of December 2013 IMPS payments represented only about 1% of India’s total payments volumes, with only 1.93 million payments made via the scheme in that month, compared with the more than 60 million payments cleared via the National Electronic Funds Transfer (NEFT).
The RBI says, however, that IMPS has improved the efficiency of mobile banking by enabling real-time transfer of funds between bank accounts and providing a centralised interbank settlement service for mobile banking transactions. The IMPS has also been enhanced to support merchant payments using mobile phones to promote a move towards a cashless society. An option is being considered for mobile merchant payments whereby merchants, on initiating the payment request, complete the transaction by accepting an OTP generated by customers on their mobile phones.
The IMPS initiative has been helped by the Reserve Bank of India’s support and encouragement of electronic payments. The country’s electronic payments systems are being upgraded and there has been significant growth in the use of the two electronic clearing systems, NEFT and RTGS.
While developments may have stalled in India, the idea of faster payments has gained more momentum in Australia. A project is underway to modernise the country’s payments system, which to date has been based on bilateral clearing arrangements.
Faster payments will be ushered in on the back of the New Payments Platform (NPP), a new infrastructure for Australia’s low value payments. It will provide businesses and consumers with a fast, versatile, data-rich payments system for making their everyday payments. An industry steering committee is overseeing development of the NPP. Chaired by Paul Lahiff, the New Payments Platform Steering Committee comprises senior representatives from the Australian banking and mutual sector, an alternative payments provider and the Chief Executive of the Australian Payments Clearing Association, Chris Hamilton. The Steering Committee appointed KPMG as programme manager to the project.
The NPP will comprise a basic infrastructure, which all financial institutions, and through them businesses and consumers, connect to. This will enable payments to be made quickly between financial institutions and their customers’ accounts. The system will enable funds to be accessible almost as soon as payment is received – even when the payer and payee have accounts at different financial institutions.
The idea of the NPP is to provide an infrastructure that will support value-added services developed by individual financial institutions. The multi-layered infrastructure has been designed to promote competition and drive innovation in payment services.
The NPP is being developed collaboratively by authorised deposit-taking institutions. A total of 17 institutions are taking part in the programme, including Australia’s ‘big four’ banks: ANZ, Commonwealth Bank, National Australia Bank and Westpac. Foreign institutions such as Citi, Bank of America Merrill Lynch, ING and HSBC are also involved. The NPP is the Australian payment industry’s response to the central bank Reserve Bank of Australia’s strategic objectives on payments innovation.
Drivers and benefits
While the ability to meet the increasing demand of consumers and businesses for more rapid response times is one driver behind the implementation of faster payment schemes, there are other forces at work. Lahiff says many financial institutions have responded to the desire of consumers for faster or real-time payments, but to date only within their own institution. “The Australian payments market’s move from a bilateral system to a multilateral approach will enable us to make faster payments between banks, rather than just within a financial institution,” he says. A benefit for businesses, particularly small and medium enterprises, will be the ability to have more data accompanying payments.
In a review of innovation in the Australian payments system, published in 2012, the RBA found a demand among both consumers and businesses to make real-time payments. Rather than mandating a specific solution, the RBA has required the payments industry in Australia to meet this demand by the end of 2016.
“The RBA’s view is that faster payments will be good for the Australian economy, because fast money is more efficient money. Consumers and businesses will have more choice to make payments safely,” says Lahiff. “We are trying to provide a fast, versatile, data-rich payment system for making everyday payments.”
Clear2Pay’s Peters agrees with this assessment: “The driving idea behind faster payments initiatives is to increase the velocity of money moving through the economy by accelerating the clearing and settlement of payments. The hope is that once money is cleared by the system it will have a follow-on effect into the general commercial environment. If money is received instantly, goods can be shipped more quickly and the economy speeds up.”
Peters is less sure about the impact faster payments will have on corporates, particularly large organisations. “The operations of large corporates are based on overnight settlement. It is difficult to see at this stage what the long-term effect of faster payments will be on these organisations. Possibly there will be an impact on corporate treasuries’ operations and liquidity requirements. Faster payments may give a clearer, near real-time view of liquidity positions.”
The ultimate success of faster payments schemes will possibly reside with financial institutions; as with the Australian scheme, it will be up to the banks and other organisations to develop new and innovative products and services to complement the faster payments. However, many banks are burdened with ageing core banking systems and upgrading these is costly.
The development of Faster Payments in the UK was a slow burn initially, with banks rolling out the scheme very slowly and to little fanfare. A similar scenario is playing out in Singapore, where the MAS has kept fairly quiet about the G3 project, wanting to ensure the platform is stable before promoting it widely. Many banks in Singapore are adopting a wait-and-see approach, enabling the trailblazers to test the market first.
It is possible that some banks may see more rapid payments as a differentiator for corporate banking services. By enabling Singapore banks and financial institutions to process low value payments in real time, innovative and commercially attractive banking products could be developed to counteract the threat of new market entrants, while minimising settlement risk and offering customers the surety and guarantees of a bank-based payment. By moving money at a higher velocity, the MAS hopes the economy and Singapore’s business community will benefit and will keep Singapore at the forefront of regional payments and set the benchmark for innovation.
The future of faster payments
Despite the radical introduction of the FPS in the UK, it has taken around five years for the market to gain momentum and be widely recognised. However, proponents of faster payments say schemes can provide a platform for value-added services, improving the efficiency of payments systems and ultimately bringing down costs.
Building on the Faster Payments platform in the UK, Barclays for example, has developed Pingit for corporates, an extension of its retail instant payments solution. Corporates can integrate mobile payments into their multi-channel customer strategies. Barclays says this will enable corporates to improve their cashflow, increase their level of customer engagement and grow their businesses.
Many countries around the world, not just in Asia, are investigating instant payment schemes. The US Federal Reserve Board, for example, is encouraging US banks to introduce faster retail payments as part of a wider effort to modernise the country’s payments infrastructure. As more and more countries look to upgrade their ageing payments infrastructures, faster payments will inevitably become ubiquitous – it just may take more time than proponents would wish.