Global developments in retail real-time payments
by Michael Moon, Director, Payments Markets, Asia Pacific - SWIFT
One of the biggest challenges for businesses and consumers who send electronic payments is that it can take days rather than minutes for the payments to arrive. With the advent of real-time payments likely to become a reality in Australia in the near future however, the wait will be over and payments will be far faster for corporates and consumers alike. This is an exciting development that we think is a harbinger of what future payment systems will increasingly look like – and that will bring immediate benefits to banks and their customers in terms of improving liquidity management.
The main reason payments have taken longer thus far is that the batch file systems used for most payments today (often an Automated Clearinghouse (ACH) or direct file transfer system) process large files of transactions in batches, which results in delays. Although the Real Time Gross Settlement (RTGS) systems that have been deployed since the early 1990s enabled real-time payments, costs are relatively high and they have generally been used for smaller numbers of high-value transactions.
A new category of payment system is emerging both locally and globally that combines the benefits of low-value file transfer systems with the speed of RTGS. The new real-time payments system in Australia, which is being developed collaboratively by the financial community, reflects a growing global trend towards speedier payments and richer information for customers.
Real-time payments in other countries
In the UK, for example, the Faster Payments system has been available since 2008 and is already processing about three million transactions a day. Sweden launched its real-time mobile-to-mobile payments system (known as Swish) in 2012, and Singapore’s “G3” real-time system is expected to go live next year. The United States recently kicked off public consultations about innovations in payments, and Canada is developing its vision and roadmap for payments innovation as well.
Here in Australia, the financial services industry is committed to providing a new real-time payments system by 2016, with a system known as the New Payments Platform (NPP). This system is expected to provide faster payment outcomes for customers as well as more information-rich transactions beyond the 18 character limitation of the current Bulk Electronic Clearing System (BECS).
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This shift results from a multitude of drivers. As consumers and businesses alike look for the speedier outcomes and increased convenience that they experience online to be available in other realms as well, they expect to be able to pay anyone anywhere, and be paid very quickly. New technology, from more powerful software to more convenient mobile devices, makes faster payments technically easier and more accessible. And as regulators look for faster settlement to reduce risk and for improved efficiency to enhance the public good, real-time payments offer an effective solution.
The benefits of real-time payments
Real-time payments offer a multitude of benefits for companies and consumers alike. Along with improving cash flow and working capital for companies, for example, the more complete information that comes with the payments can enable them to reconcile transactions more easily. For example, consumers who have faced difficulties in the property market because discharging mortgage documents and making payment had to happen at the same time may be able to process everything real-time. And the extended message format that is part of the ISO 20022 standard will enable longer messages that increase efficiency for companies reconciling payments to back-end accounting systems, after they pay into superannuation accounts for employees or employees make top-up payments – to name just a few.
As the financial institutions that will process real-time payments go about developing the technology that enables these benefits, they are looking for solutions that will make their work as efficient as possible. Multinational banks need to connect to UK Faster Payments, Singapore’s G3, the Australian NPP and a multitude of other systems. It is vital, then, to standardize offerings so that banks can leverage their technology and expertise between markets rather than incurring the costs of developing customized solutions in each country.
The technology behind the change
Behind the new payments system that is coming to Australia is the technology that enables banks to make funds available in near real-time to customers. While there are commonalities among the technologies that support real-time payments, there are also differences that can have critical impacts on financial institutions as well as the company or individual receiving the money.
One key difference between Australia and other countries, which is resulting in Australia becoming a global leader and innovator, is that the cooperation between financial institutions for building a more basic common payments infrastructure enables a less expensive and more efficient solution. Specifically, the Australian industry is developing an architecture that maintains a basic utility-style payment infrastructure for bank-to-bank payments while also allowing commercial overlays for services related to the underlying payments. A useful analogy is the distinction between an electricity grid that can be used by all and the commercial services that access this grid. This separation of infrastructure allows collaboration and cooperation in the middle (the utility), and competition on the edge (commercial services).
Whereas the UK and Singapore have developed somewhat complex, expensive and purpose-built solutions, the financial community in Australia is seeking to keep the common payments platform in the middle less complex, which can reduce the investment burden while still allowing banks to provide their own customized solutions on top of this basic infrastructure. Having already established key objectives for this technology backbone and for using ISO 20022, banks can now focus on adding commercial overlays related to invoicing, mortgages or other services that can differentiate their offerings. Some industry professionals in Australia foresee a future where hundreds of different overlays use the basic payment infrastructure.
Another difference is how fast funds are actually posted. Whereas systems implemented in many other countries aim for real-time settlement of transactions, few actually achieve this objective. Even in the UK, with five years of experience, some banks post funds immediately and others wait up to two hours. To provide greater benefits here, financial institutions in Australia are moving towards settling every transaction on a near-real-time basis so that the recipients receive their money immediately.
With its global experience from having implemented more than 70 real-time gross settlement solutions as well as more than twenty low-value systems and 70 securities market infrastructures around the world, SWIFT brings a wealth of experience and best practices that we use to assist financial institutions and market infrastructures with developing and building their new payments infrastructures as well as helping them to use it for maximum benefit once it’s ready.
As Australia moves towards real-time payments with an industry-leading solution, there’s much to be learned from what we already know about the benefits of standardization and lighter infrastructure in the middle between the banks so that these systems of the future are ready today. And that’s a good thing, because it means less investment for the industry and improved payment outcomes and benefits. Bank customers -- companies and consumers alike -- have much to look forward to as the new real-time payments system moves on towards implementation in the near future.