Adoption of real-time retail payments systems (RT-RPSs) is growing across the world, with 18 countries already using an RT-RPS and almost 30 more in various stages of exploration or implementation. The momentum behind RT-RPS installation stems largely from the same kind of forces that have revolutionised consumer spending behaviour in recent decades, notably in the purchasing of books, music and other forms of entertainment. “In the era of mobile commerce and online selling, moving money can’t be the slowest part of the process anymore,” explains Robert Kauffman, professor of information systems at Singapore Management University. Mark Buitenhek, global head of transaction services at ING, agrees. “The digitisation of the world means everything is happening faster than ever before, but the current payments system is based on developments in the 1970s,” he observes.</p> Today it is possible to order products online in the morning and receive them in the afternoon. Some retailers are even trialling drone technology that will enable them to deliver products in a matter of hours. Yet with conventional end-of-day settlement of retail payments there is a high chance that goods will be received before money has moved between accounts.</p> Having to wait until the end of the day is not likely to be a major issue for a big retailer, but internet-based commerce is also a critical – indeed, for some, only – channel for small businesses. These small business owners are most likely to suffer from any payments delays as they may be operating with relatively limited finance capabilities, meaning the completion of one sale may provide the funding for the next. For this army of entrepreneurs – widely seen as the true engines of economic growth – having to wait for payments could be damaging for business.</p> Regulatory support</strong></p> Combine the advance of e-commerce and consumer technology with policy objectives of governments to provide better support for SMEs and it is unsurprising that regulation is the second major factor influencing the adoption of RT-RPSs. “The introduction of the Single Euro Payments Area (SEPA) will be the final frontier of achieving real-time payments across Europe,” says Buitenhek.</p> Europe’s elimination of cross-border payments in the euro-zone via SEPA facilitates migration to real-time payments, but regulators have also played a direct role in the adoption of RT-RPSs. In the UK, government legislation mandated the introduction of Faster Payments, an industry-owned non-profit initiative created to speed up retail payments.</p> A recent SWIFT white paper found that regulatory initiatives were the key driver behind the move to real-time payments in 73% of countries that have already implemented an RT-RPS, while for remaining countries there was an even split between third-party competition and commercial issues. Indeed, the competitive environment has changed significantly for payments banks in recent years, with many new entrants looking to use technology and increasing market sophistication to encroach on territory traditionally dominated by banks.</p> Payments has long seemed an extremely secure area for banks, with barriers to entry erected by high and increasing levels of regulation as well as many decades of expertise and investment in underlying systems. But now competition is being felt and many major internet-based technology companies are offering viable alternatives. In large parts of the developing world, while many people remain unbanked, they are using smartphone technology to send and receive payments.</p> But Kauffman says technology specialists have been relatively slow to move into the payments space. “At the moment, there’s not that much competition from fintech companies. There’s a lot of interest, but the banks do have time to marshal their forces and take action,” he says. “We’re also seeing banks invest in the next generation of payments innovation. For example, in 2012 Citi Ventures invested in payments start-up Square. Banks shouldn’t try to do this on their own and should look at opportunities to make strategic investments.”</p> “A natural evolution”</strong></p> A major driver of RT-RPS adoptions, of course, has been the range and pace of technology innovation in recent years. “This is part of the natural evolution of banking,” says Buitenhek. “First we started to offer banking services online, then made those services available on smartphones.” However he accepts that the next stage of development for payment systems will be the hardest part of that evolutionary process, which explains why it has taken longer than many other innovations. It’s not simply a process of upgrading existing technology to cope with real-time processing, asserts Buitenhek: the entire architecture of banking payments IT has to be redesigned from the ground up.</p> “Under the current system of batch processing, we do all of our testing and system upgrades overnight or at the weekend when the system is out of use. With real-time this is no longer possible, so we will need to create new systems that can cope with this,” he observes.</p> Payments banks have long been divided between those that continually invest in the systems required to clear and settle payments across multiple markets and those that outsource much of the heavy lifting, specialising in delivery to end-customers. But the sheer cost of adapting existing systems to handle the migration of a core market to an RT-RPS might cause more banks to revisit their payments strategies. It is telling that many of the countries that are most advanced in implementing RT-RPS already have relatively consolidated banking sectors, such as the UK or Australia.</p> On business case grounds alone, RT-RPS adoption may not appeal to many banks. In its report on migrating to faster payments, the US Federal Reserve Bank estimated implementation costs of US$ 0.9 to 1.8 billion and a reduction in per-transaction costs from US$ 0.47 to US$ 0.27, adding up to neutral or negative business case. But, as the SWIFT white paper points out, other factors need to be taken into consideration, such as customer expectation, disintermediation threat, and the potential to develop new products and services.</p> Can banks that simply cannot afford to support RT-RPS find some way to fit into this new world? “This is a natural, long-term evolution and the short-term business case is negative,” explains Buitenhek. “If you want to remain relevant then you will need to follow this path, and over the long-term you will get to a position where you can do everything instantly, which will ultimately benefit your business and your customers.”</p>