At EPAM, we’ve been on the forefront of payments transformation for over a decade as we’ve worked to enable instant payments with innovative technology solutions.
To add to the conversation, we recently interviewed Alistair Brown, Global Head of Payments, EPAM UK, to get his latest thinking on what’s driving the evolution to instant payments, the progress that’s been made so far, and what to expect in the future for customers, banks and fintechs alike.
What factors are driving instant payments and why is this such an important evolution?
If we can send a text or a selfie in real time, modern consumers expect to be able to deal with money equally quickly. It’s now a common requirement of the new economy for payments to be invisibly and immediately transferable, irrespective of the time of day or one’s time zone.
But this requirement has radical implications for the financial services industry and the entire payments ecosystem, since it was built in slower, more patient times, with fundamentally different expectations, such as the standard business day limiting financial activity to a few hours a day driving the development of relevant rules, business models and technology. In the Age of Speed, these are no longer fit for purpose.
What are the likely benefits for instant payments to the consumer? To B2B firms?
Speed and reliability in line with contemporary behavior will result from these developments – but more importantly, banking has finally been forced to become significantly more customer-centric in a way unimaginable even twenty years ago. The cost to the customer of being part of the process – and to businesses handling money – has been brought down by an industry-wide recognition that costs were unnecessarily high and that technological advancement could act as a massive cost reduction exercise across the ecosystem.
For small or medium-sized enterprises, one of the most significant business facts of life is cashflow; speed of payment from customers and suppliers can often be the difference between survival and organizational failure. Instant payments is a fundamental game-changer for small business.
Where are we now with the payments landscape, and is the global/regional/national infrastructure ready for such a change? For example, the UK has Faster Payments and other countries like Singapore are heading that way, but are we ready?
Instant payments has been available in one form or another since the 1970s (Japan’s ZENGIN, 1973), but new technology and intensifying demands from both consumers and businesses have met to throw its evolution into fifth gear. The US has leapt ahead with the work of The Clearing House’s RTP network enabling digital services for corporate and retail customers. In Europe, TARGET Instant Payment Settlement (TIPS) is a new market infrastructure service launched by the European Central Bank (ECB) in November 2018, enabling payment service providers to offer fund transfers to their customers in real time around the clock, 365 days per year. However, while this means that individuals and businesses can transfer money between each other within seconds, irrespective of banking hours, it only settles in Euro since settlement is made in central bank money. This attempt at a pan-European Instant Payments solution is based on the Single Euro Payments Area (SEPA) Instant Credit Transfer (SCT Inst).
Meanwhile, there are several long-term programs addressing the need for fundamental national infrastructural change to enable further instant payments modernization (the Pay.UK program, P27 in the Nordics). This will be a long, drawn-out process, however, and it’s fair to expect fundamental infrastructural changes to take 5-7 years. The Pay.UK process begins with a New Payments Architecture (NPA) formulation, bringing together a consortium of industry players to build a framework within which the specifics of Clearing and Settlement, and the other key payment elements, will be developed. The consortium will not be officially formed until 2020.
For more on where we’re at today, you can read my colleague Ferenc Tarkanyi’s article on instant payments in the Euro zoneor watch interviews conducted at Sibos 2018 to learn the latest about what’s next for financial services in APAC.
Generally speaking, what strategies and approaches are firms taking to implement instant payments?
Two strategies have typically been deployed to implement instant payment capabilities. The first strategy involves upgrading existing legacy systems through a targeted approach that adds an instant payment module that works alongside legacy systems. This approach preserves the legacy architecture and enhances it through the addition of new functionality (e.g. instant payments).
The second strategy is to pursue broader system modernization, which requires the consolidation of interfaces with legacy systems, or even their replacement, with a new central platform or payments hub. This can help to modernize the bank’s IT infrastructure and prepare the bank for future digital banking expansion. While this strategy is more expensive in terms of time and resources, it does offer the potential benefit of helping break down internal siloes that have built up as legacy systems have been extended and expanded over years or decades.
The strategy of modernizing the entire internal payment processing systems inevitably leads to a costly and extended “rip-and-replace” approach. Implementing a full-blown payments hub can easily cost many millions. As such, most banks choose a lighter approach to implementing instant payments and elect to focus on extending legacy systems.