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Instant payments: disrupting payment services

Main acceleration reasons

In a constantly changing service sector, payment service providers aim to offer solutions and tools to implement funds transfers in an immediate and ubiquitous way. 

Fintech, challenger banks - are driving market disruption too by offering customers better user experiences and lower prices.

Business relationships and models require fast and instant payment options. Lengthy payments create obstructions for smooth payment operations, having a negative impact on payment processing and business efficience.

Instant Payments bring speed and convenience for funds transfer, along with transparency, certainty, and precision. In these ways, they meet the needs of consumers and businesses and comply with the expectations of the next generation.

Many countries have already developed their own instant payment solutions. The solutions present quite different schemes and use-cases. However, the basic common payments messaging standard is ISO 20022 XML-based format.

Most of the international instant payment systems are switching to ISO 20022 XML, such as SWIFT and TARGET2.

SEPA Instant Credit Transfer (SCT Inst) is based on SEPA credit transfers (SCTs) and can be seen as an evolution of the SEPA scheme introduced in 2008. The introduction of this scheme determined the development of Instant Payments in the SEPA zone. SCT Inst assumes that the services should be provided in seconds and be available 24/7, and immediate notification of the payer’s PSP from the recipient’s PSP side upon the funds’ receipt. 

Open banking and  API-based solution for their cross-border payment clearing and settlement needs, from traditional SWIFT to gpi and other next-generation alternatives are increasing the trend towards Instants payments. 

European Central Bank proposes the following layer’s scheme in order to to avoid any fragmentation and increase competition:

  • end-user solution layer: cooperatively or competitively developed in the market (e.g. for person-to-person mobile payments);
  • scheme layer: underlying payment schemes;
  • clearing layer: arrangements for the clearing of transactions between payment service providers;
  • settlement layer: arrangements for settlement of transactions between payment service providers.

According to Deloitte (“Real-time payments are changing the reality of payments”,  2015) the main aspects of real-time payment systems are:

  • Authorization – certification of the payment
  • Posting – funds are made immediately available to the transaction
  • Settlement – instant settlement of outstanding obligations between financial institutions
  • Notification – payee receives the funds and payer receives confirmation of the transaction

Main use-cases

There are various cases of use for Instant Payments across different business models. 

An Instant Payments system has a disrupting effect on P2P, B2C, B2B, and C2B payments, including payments to and from governments, as well as international remittances.

  • P2P - payments between consumers are considered to be the most straightforward and shortest use case, meaning the transaction is implemented between consumers via an app on a mobile phone or mobile banking. Such cases are met in the payments by PayPal with the implementation of money transfers between wallets. 
  • B2C and C2B - Businesses can use Instant payments for paying wages, returns, making settlements - all payments that consider the involvement of corporations or governments. Consequently, the payment scheme is more complicated since the involvement of corporates implies authorization and reconciliation, which means an additional step in the line of payment transactions, but, in general, corporates benefit from this payment method due to speed and convenience. 
  • B2B is the model of payments to suppliers, partners, or providers. B2B presents quite a complicated structure, when real-time processing includes different processes in withing at least two corporate organization, often in different countries, what in its turn adds an additional link to the processing chain. The complexity is in the need to embody all the payment method in one corporate structure and set up a settlement, clearing, and governance within one firm to produce a logical payment structure

Three advantages of instant payments for banks and why they should modernize as soon as possible

Customer retainment

  • The adoption of Instant Payments will make banks’ services more attractive for the next-generations who tend to use more innovative solutions and tools, than services offered by traditional Financial Institutes.  By providing innovative services such as the Instant Payments system, a bank will increase its chances of retaining existing customers and attracting new ones, which in turn will ensure clients remain within its orbit for its traditional offerings like loans and long-term account services.

Speed, convenience, and transparency

  • Speed, transparency, reduced settlement speed  help reduce many of the risks in the current system by shortening the delay between payment initiation, clearing, and settlement

Serving the under-banked

  • Mobile banking and wallets are on the rise in the areas, where access to traditional banking is difficult. Due to instant payments technology people in a distanced areas get access to the most vital facilitiesç such as payments for product purchases. 

Instant Payments in their turn bring speed and convenience for funds transfer, along with transparency, certainty, and precision. In these ways, they meet the needs of consumers and businesses and comply with the expectations of the next generation. 

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