Instant Payments, are you ready?

by Kevin Flood, director, FIS payments ecosystem strategy, corporate and international banking, FIS Global

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Many of us are familiar with the statement from a bank that “payments are eating the world”. Well, if that is the case, we can follow that up with Instant payments, which will eat the moon, too. Instant, faster, immediate, real-time- whatever name you know them by this method of on-demand payments continues their rise and likely ultimate dominance of how we make payments. In a world where everyone wants everything at the literal click of a button, the ability to make A2A, A2B or maybe even B2B payments in “real-time” is the key for many institutions to remain ever relevant with consumers. As far back as 2008, when they were launched as “Faster Payments Service” (FPS) in the UK, we have been getting used to being able to make payments 24/7/365 from anywhere we have a connection to the internet.

The evolution and impact of instant payments

Between 2014 and 2020, there was a fourfold increase in the number of payment rails supporting instant payments worldwide, pointing towards the rising tide in popularity and the increase in use. In 2023, there were over 4.5 billion payments processed over the UK FPS rails along with a value of over £3.7 trillion if we take into account those nations developing their own capabilities (Europe has SCT Inst, the US has FedNow and the Clearing House RTP, Canada is launching RTR, India uses United Payments Interface (UPI), Australia the NPP, Saudi Arabia’s Sarie, Peru with CCE, and Brazil PIX) all of which are in their relative infancy; the market for the movement of money in this way is truly huge, along with the potential for developing new and innovative ways to harness and grow the technology and its use cases.

Challenges and opportunities in instant payments infrastructure

The increase in instant payments is expected to continue, and by 2029, 1:3 payments will be instant. This drives the increase in the volume of payments that banks and institutions are processing, increasing the load onto the back-office infrastructure & operations teams who have to handle elements like reconciliation and investigation, relying largely on what is often legacy applications and infrastructure asking them to keep pace (for example the volume of transactions settled via TARGET Instant Payment Settlement [TIPS] in 2022 was 17.1 times larger than 2021 as more banks and national communities joined TIPS). With the advent of larger and richer data sets (think, for example, about ISO 20022), integration to value-added services (VAS), which continue to evolve, needing technical innovations and enriched data integration, makes traction into a wider economic boost. This presents more opportunities in the sense that PSPs could have their minds eased with their payments processes, allowing them to look more closely at their core competencies instead and enabling them to focus on innovation in products, overlays, and VAS.

Adopting and embracing instant payments is a key step into the future of payments, but to unlock the true value, one must look to the VAS (or overlays) that are enabled by this technology, such as instant cross-border payments, request-to-pay, liquidity management tools and the ever-expanding fraud landscape. With the advent of instant everything, one cannot shy away from the creep of instant fraud, with “old money” BACS transfers, there were three days to make a decision if you changed your mind about making a payment as something was not right, now with the payment complete in 10 seconds or less the correct decision to make the payment, is more important than ever. The UK market has long been an adopter of Instant payments but, with this, has seen a rise in “APP – Authorised Push Payments” fraud, where in H1 of 2023 alone, there were losses of almost £300m, which prompted the regulators to issue a new ruling outlining responsibility which takes effect October 2024. The need for banks to be able to operate their fraud and AML technologies at a faster pace and keep pace with the evolving ways that fraudsters are operating can stress existing capabilities and/or require the advent of VAS to bolster services. Along with instant everything, the rise of AI & GenAI is prevalent throughout every industry, and payments, especially instant payments and, more importantly, the fight against fraud, are no exception. With advances in technologies such as deep-fake and voice cloning, adopting AI in this way to help combat these methods of attack opens a whole new era of technological advancement.

Coupled with instant payments driving innovation and financial growth within the economy, one crucial and often overlooked benefit of instant payments is Financial inclusion. For some of those that remain unbanked /underbanked or remote from branches (we all know the trend that we see of fewer branches in more locations now, just ask yourself if you know where your “local branch” is and just how local is that…) the ability to be able to leverage any connected device to make payments, offers inclusion to many of those who could otherwise struggle to feel included and relevant in a modern banking and evolving era, or to be to operate in a changing society that we all take for granted. These newer offerings and innovations will provide immediate fund(s) availability, and a certainty of payment(s) receipt could well act to serve as a more secure and lower cost option to many of the underserved, providing better support for a populous that has largely remained on the fringes of the traditional banking environment.

Regulatory responses and future directions

With the continued rise, popularity and demand from the consumer, regulators are taking a keen interest in what is happening and, more importantly, how it happens. The requirement for 24/7/365 puts demand on resilient infrastructure for institutions, and regulators are keen to protect this and our reliance that has developed to this end, for example, DORA (the Digital Operational Resilience Act) will come into force over the next 12 months, which compartmentalises digital operational resilience into five key areas – risk management, incident reporting, digital operational resilience testing, ICT third-party risk management, and information and intelligence sharing.  The European Parliament has made instant payments mandatory under new regulations by the end of 2024, as a bank operating out of the Euro-zone [they] must be ready not only for SEPA instant payments but also to offer the same service for what is called the OLO “One-Leg-Out” whereby one of the accounts lies outside of the Euro-zone bringing into play, cross border instant payments.

Kevin Flood, director, FIS payments ecosystem strategy, corporate and international banking, FIS Global

There is a continued battle between this drive for regulation and the drive for innovation (can both be complementary – this warrants a debate in its own right), the release of what could be inferred to be designed (amongst other things) to help promote both innovation and competition by influencing how current participants and potentially act to encourage new entrants into the market, draft Payment Regulations from the EU by way of the third Payments Services Directive (PSD3) and Payment Services Regulation (PSR) will work to create compliance for both banks and non-bank PSP. Creating, in their own words, “a level playing field”. The need for a revised initiative in PSD3, which builds on the back of the (arguably) successful PSD2, will aim to modernise the regulation in line with the advances and innovation already seen within the payments space. The proposal(s), which can broadly be categorised into key areas of focus (open banking services, the emerging sophisticated fraud risks, safeguarding consumers, increasing competition from banks and non-bank PSPs, data access & standards and the regulatory agenda) will work to provide a platform for consumers to transact domestically and internationally, have greater control over data (it’s sharing and use for things like hyper-personalised offerings) provide a greater choice in providers, who are offering a greater choice in innovative, instant based products.

Which drives us to the question, instant payments, are you ready?

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