Instant Payments: Innovating the Way We Pay
Mathias Schuetz, most people have vague ideas of what it’s about, but can you please describe what exactly an Instant Payment (IP) is?
An IP is a payment executed in seconds, with immediate confirmation sent to the payer and beneficiary. It’s fast. It’s 24/7/365. It’s irrevocable. And it eliminates any need for physical exchange, as cash requires while restoring real-time to the transaction. The real-time sense of a credit card payment was an illusion, experienced solely on the client’s side.
IP does settle instantly between banks so it reduces transaction risk for them. It moves at lightning speed through central clearing systems to instantly debit a payer’s account and credit the beneficiary with the price of a purchase.
Aren’t you just saying it’s a faster version of a credit card payment? And easier than carrying around cash?
No, it’s more than that. It updates traditional payment methods to bring them on par with the parallel payment worlds created by fintechs and neobanks. And it introduces new use cases that benefit consumers and businesses alike when making transactions, from P2P and B2B to every permutation in between.
Its greatest promise might lie in its potential to connect with and accelerate other tech trends such as the Internet of Things. In just one coming application, cars «themselves» will soon be paying for fuel at the gas station and for tolls on the highway. This trend is often referred to as «invisible payments».
I understand the European market already handles IP. What is the state of affairs there?
The Single Euro Payment Area (SEPA) adopted the SEPA Instant Credit Transfer (SEPA SCT Inst) standard, which by Q1 2021 was already processing 8.6 percent of all payments as IP. Local clearing and settlement mechanisms (CSMs) developed models to process SCT Inst payments with the aid of major banks in those markets.
What is the best way to connect with the SCT Inst payment scheme?
There are two pan-European CSMs that support SEPA instant credit transfers and IP in euro across European borders: the European Banking Association’s (EBA) RT1 and the Eurosystem’s TARGET Instant Payments (TIPS).
TIPS was launched by the ECB, which has since made it mandatory for all CSMs offering SEPA IP to connect to TIPS by the end of 2021. Because TIPS will prevent future fragmentation of the EU payment landscape, it is the best way to connect.
Do you see any exciting opportunities for banks that offer IP?
Yes, definitely! IP reflects current customer expectations as shaped by neobanks and the latest payment apps. It represents a chance for banks to catch up and bring the customer experience into the digital age. Corporate clients can also profit. They will be able to budget and manage their cash more effectively.
A company’s monthly payroll can be handled within seconds, leaving liquidity in its own coffers for an additional day every month. Banks can also recover ownership of payment data that credit card and payment app providers have hijacked from them. This data has enormous value for offering better, more personalized services in such areas as wealth management.
What is the best way for banks to connect to the new IP standard?
Banks have three options. The optimal choice depends on their particular situation. The first is to upgrade their legacy infrastructure, which can be costly and complex. The second is to replace their current payment operation system. Again, potentially expensive. The third option is to integrate a parallel payment hub «as-a-service.»
The Avaloq Payment Hub is core-banking agnostic so it can connect with and run on any core banking system on the market.
What are the advantages of a cloud-based payment solution like Avaloq’s?
Ease and efficiency are the chief advantages. Cloud-based infrastructure can handle transaction peaks by relying on almost limitless processing power. It’s cost-effective, too. Banks pay only per use.
Avaloq’s solution also builds in software that handles embargo/sanctions screening and anti-money laundering (AML) and counter-terrorism financing (CTF) compliance checks able to be performed in the needed response times. The total cost of ownership ends up being lower than with legacy system upgrades, as do operational risks.
