Global Trends and Developments in Instant Payments
Merchant Payments Ecosystem, Berlin
14th February, 2017
© Edgar, Dunn & Company, 2017
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What are instant payments?
Real-time payments
Near real-time payments
Faster payments
Instant Payments
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“…electronic retail payment solutions available 24/7/365 and resulting in
the immediateor close-to-immediate interbank clearing of the
transaction and crediting of the payee’s account with
confirmation to the payer (within seconds of payment initiation).”*
Instant payments are …
* Definition from the Euro Retail Payments Board (ERPB)
How do instant payments differ from traditional ACH payments
Instant Payments
Funds are cleared (posted on beneficiary’s account) in real or near real-time
Funds are available for use immediately
Settlement can vary depending on the system, but can take place at the same time as clearing or several times a day
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Traditional ACH Payments
Funds are typically cleared after settlement occurs
Beneficiary may have to wait several days to use funds
Settlement can take 1-3 days depending on the system
There are over 20 established instant payment systems across the world with several more planned in the near future
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Established SystemPlanned System
Planned ImplementationArgentina
Australia (2017)
Belgium
Canada
Germany
Finland
France (2017)
Hong Kong
Hungary
Italy
Ireland
Kenya
Luxembourg
Malaysia
Sources: Instapay, EDC
Netherlands
New Zealand
Norway
Peru
Philippines
Portugal
Saudi Arabia
Spain
Thailand
United States (2017)
Europe/SEPA (2017)
Regulation, competition and market demand is driving instant payment implementations in various European markets…
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United Kingdom
¡ Launched: 2008¡ Transfer limit: £250K¡ Transactions completed
within 1 second¡ 3 settlement cycles/day¡ Steps being taken to map
existing ISO 8583 message protocol to ISO 20022
Denmark
¡ Launched in 2014¡ Based on ISO 20022¡ Transaction processing of
less than 40 milliseconds per transaction
¡ 6 settlement cycles a day¡ Transaction limit: DKr
500,000
France
¡ Driven by need to be SCTInst compatible
¡ Planned launch in 2017¡ 24/7/365 availably¡ Less than 1 second for C&S
processing – 10 seconds for end-to-end processing
¡ Multilateral net settlement
…and in other markets across the world
USA
¡ Initiative from The Clearing House (2017) –Real Time Payments (RTP)
¡ 24/7/365 ¡ Multiple settlement cycles per day¡ Based on ISO 20022¡ Vocalink providing payment switch
technology
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Australia
¡ New Payments Platform (NPP Australia) planned launch 2017
¡ NPP is industry response to the Reserve Bank of Australia’s Payment Systems Board Strategic Review (2012)
¡ The system will be 24/7/365 ¡ Instant settlement – at time of transaction ¡ Based on ISO 20022
Typical payment flow for an instant payment transaction
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Instant Payment System
Execution of payment
Confirmation of Payment
1Sending
CustomerReceiving Customer
Sending Bank
Receiving Bank
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3
Sending customer authenticates themselves and provides instructions to their bank for transfer of funds
Sending bank checks if there are sufficient funds in the account and validates payment request
Sending bank submits payment to the instant payment system; at this point transaction can not be cancelled
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4 The instant payment system validates transaction and sends the payment to the receiving bank
5 Receiving bank checks account number is valid & sends a message to the system accepting/rejecting the transaction; system sends a message to sending bank letting them know transaction is successful
6 Receiving bank credits receiving customer’s account
7 Sending bank marks the transaction as complete
8 Sending bank confirms status of transaction to sending customer
Settlement of Funds
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ISO20022 enables a data rich environment
Not a standardised message format – the 140 message characters are flexible in character lengths and types
Enables overlay services such as Paym or Zapp in the UK and various add on services provided by Payment Initiation Services (PIS) providers
Systems on ISO 20022 standards are not interoperable but have the potential to be
ISO Real-Time Payments Group (RTPG) – define a common approach to using ISO20022 for real-time payment messages and processing rules
So what is the role of ISO 20022 in instant payments?
What will be the impact of instant payments on key stakeholders
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¡ Convenience¡Real-time access to funds¡ Secure access to a trusted funding
source (bank account)¡ Leverages existing infrastructure
(e.g. online banking)
Consumers¡ Lower costs¡ Immediate access to funds¡ “Fast & Final”¡No need for authorization
Merchants
¡ Efficient and relatively inexpensive payment processing
¡ Less transaction risk¡Brand recognition for consumers¡… however, risk of
commoditisation and customer disintermediation
Banks¡ Potential loss of revenue¡ Schemes are anticipating rise of
instant payments and are investing in infrastructure
¡Need to refocus on card specific added values
Card Schemes
What are the advantages of instant payments relative to card payments – particularly from a merchant’s perspective
AdvantagesFaster settlement timesMerchants have access to funds immediately – helps with cash flowCheaper acceptance costs than payment cards (online)
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AdvantagesGlobal interoperability using international card schemes Defined set of rules for exception handling/dispute resolutionPayment guarantee, reserves, open amountsOmni-channel capabilities
Instant Payments Card Payments
Disadvantages Not yet globally interoperable – may lead to market fragmentationNo defined common set of rules for exception handling/dispute resolutionNo real-time fraud detectionCurrently viable for online transactions only – not omni-channel
DisadvantagesSlower settlement times for merchantsRelatively expensive acceptance costs
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…places where consumers have instant gratification (of purchase)…
Who will be early adopters of instant payments?
Grocery stores Digital content¡ Consumers typically have
their meals prior to payment
¡ Customers have access to goods as soon as payments is made
Restaurants¡ Small value transactions ¡ Content (e.g. music) is
available as soon as payment is made
…as customers are less likely to request a return or raise issues that may result in refunds/exceptions/disputes
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Merchants that are categorised as higher risk merchants or require additional payment services (e.g. pre-authorization), which can lead to friction at POS
Who are likely to adopt at instant payments at later stages?
Airlines Online Gambling¡Hotels often require pre-
authorization of payment in the event of use of additional services (e.g. mini-bar) or damages
¡Higher chance to non-delivery of goods (e.g. airline goes out of business prior to flight)
Hotels¡High risk merchant with
typically higher fraud and chargeback rates
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Exception/dispute resolution
Who will be responsible for developing exception/dispute resolution rules
How will these be uniform across multiple markets – will there be a need for an ‘Instant Payment Scheme’?
Whilst instant payments enable innovative and potentially cheaper payment options – there are still outstanding questions
Real-time fraud detection and online security
What will be the impact of 2-factor authentication on instant payments
What fraud detection tools will be available
How do merchants operate globally with multiple domestic schemes?
How to avoid market fragmentation?
How will merchants/customers know what the payment limit is in each market?
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