A changing ecosystem
Steadily climbing the innovative curve for a couple of centuries, the financial services industry is now progressing in leaps and bounds. The rise of technologies and the ensuing advent of fintech, followed by a change in the regulatory landscape, are enablers pushing forward developments in the field. The payments ecosystem is at the heart of this change, with the shift of user expectations as the main driver.
The payments industry is being impacted by the adoption of innovative technologies, such as wearables, biometrics and mobile. Nevertheless, within this bubbling ecosystem, we see instant payments as a key area with the potential to change businesses’ approach to payment experience and cash management. Less grandiose than some hyped developments, such a blockchain and machine learning, the instant payments impact on business practices will be decisively resulting in fundamental changes within the financial industry.
What are instant payments?
If instant payments are nothing new, going back to the 70s in Japan, recent evolutions in the sectors are clearing the way for scalability and performance. These payments, more than just speed, are part of the overall digital philosophy of instant gratification and onward innovation. It is about creating a seamless merchant ecosystem, never asleep and always accessible. The new payment schemes are thus looking into 24/7/365 systems that are able to process transactions instantly, not only at a local scale, but also globally.
However, a series of challenges are today preventing those from fulfilling their role as enablers of tomorrow’s payment ecosystem. A lack of harmonization and security issues, particularly at an international level, represent roadblocks for their development.
To overcome this impediment, the paradigm of open banking could provide solutions to further develop instant payments schemes already being developed around the globe. In Europe, the SEPA Instant Credit Transfer (SCT Inst) was launched in November 2017 to support pan-European instant payments, and is the base for solutions such as the EBA Clearing and the TARGET Instant Payments System (TIPS).
The roots of an open environment
The next step, that is the integration of such systems within open infrastructures, will radically change our conception of payments. The advent of open banking is catalysing instant payments, and vice versa.
New market entrants will challenge inert legacy structures, while offering new ways to exploit financial data. The API’s approach is breaking the payment value chain into distinct elements, paving the way for new business models. Open APIs, based on public standards, have a huge potential for bank customers to access better- tailored services, by opening up exploitation of financial data. Banks will have to adjust their offering to customers’ needs and characteristics.
Open APIs facilitate requests made in real-time on account balance and smooth payment orders. They enable the aggregation of data, allowing providers to deliver better services and an accelerated payment process. For instance, this opening enables merchants to become PISPs (Payment Initiation Service Providers) and to benefit from instant payments.
From their standpoint, instant payments have a crucial role to play, as they could accelerate the factual implementation of open banking. It is about creating an open system, as an open system is required for instant payments.
Finland is leading the way in this regard, with the Siirto scheme, which features an open banking interface where third parties can plug in their solutions. In Europe, PSD2 is setting the stage for such development by opening access to financial data.
What does this mean for businesses?
This upcoming change will have certain effects on corporates. Instant payments supported by open APIs are going to impact both small and large organisations due to their effect on liquidity planning and cash management.
Real-time practices will change businesses’ approach to payments, as they make the process of authorisation, confirmation and clearing more certain, taking some burden off treasurers’ shoulders. Cash management will be reinforced by a better planning and use of funds. These funds staying longer in the company’s accounts, it will allow businesses to better micro-manage cash flows.
A concrete adoption of instant payments at a corporate level would lead to upgrading back offices from batch to real-time processing, radically changing the approach to cash management. The adoption of real-time through open and instant schemes would also facilitate just in time supplier management and instant suppliers payment, leading to a swifter supply chain.
Following the same logic, instant payments will allow businesses to benefit from short-term loans servicing (Capgemini, World Payment Report, 2018). They will ease instant remuneration for freelancers, an essential feature for businesses built on such models. The possibility to pay these elements of the value chain in real-time prepares companies for the upcoming gig economy. Finally, the combination of APIs with instant transfer will provide a way for businesses to increase their profits by offering better flows to suppliers and customers.
From a larger approach, business preparing to be aligned with open banking and real-time processing will better ensure their smooth digital transformation.
The shift currently taking place within financial services is driving organisations to change their practices, while redundancies and inconsistencies in the payment value chain are being corrected by new technology use cases. This open and instant ecosystem is on the brink of being globally adopted, a change businesses need to be aware of to ensure a seamless and efficient adaptation for better customer experience, frictionless payments and leaner cash management.
By Jean Leguy, Research Coordinator