The rise of “instant” payments
Recent years have seen the development of instant payment infrastructures in several countries and regions of the world. This is particularly the case in Europe (with TARGET Instant Payment Settlement – TIPS – and EBEA CLEARING’s RT1), in the United States (The Clearing House – TCH – Real-Time Payments) and in Asia with the establishment of instant payment infrastructures in Singapore, Malaysia and Thailand, for example.
Below an introduction to instant payments in the SEPA area and use cases.
The economic and social developments that can result from instant payments, already available in some TMS, seem to be beginning to attract the attention of governments, and are therefore being placed at the centre of regional and national initiatives.
Developments in the economic performance of early adopter countries tend to demonstrate the potential of means of payment as a catalyst for economic growth. In the year following the adoption of its instant payment system, Thailand experienced a spectacular 110% increase in the use of mobile payments. Small businesses offering online payment options increased their sales by 17%, while large companies increased their sales by 22%.
In other countries, such as India, the Payments Infrastructure Modernization Project aims to reduce the use of cash to fight corruption. In order to tackle the drawbacks due to the use of cash (vulnerability to fraud, difficult or even impossible tracing of beneficiaries…), the Indian government has taken a radical step. Indeed, Prime Minister Narendra Modi in 2006 decided to destroy 86% of cash in circulation in order to prevent money laundering and corruption, which caused an economic earthquake in India.
The result of this reform, called DBT (Direct Benefit Transfer), is conclusive. According to the Indian government, it has eliminated double/fake beneficiaries and stopped the leakage of funds abroad. The gains of the DBT reform are estimated at more than $10bn in 2017.
Towards a pan-Asian scheme?
In Asia, Japan pioneered the adoption of instant payments with the improvement of the Zengin system in 1993. To remain at the forefront of global innovation, the ASEAN 2025 community (members: Indonesia, Malaysia, Thailand and Singapore) is committed to unifying and modernizing its payment infrastructures. This led to the signing of a Memorandum of Understanding (MoU) in 2017 to enable real-time cross-border payments between member countries by interconnecting their payment infrastructures.
The agreement stipulates, among other things, the use of ISO 20022 as the payment standard for regional connectivity. In addition, it considers the expansion of connectivity throughout the region, subsequently including other payment system operators in the Asia-Pacific region such as Japan.
Still on the Asian continent, the national banks of Thailand and Singapore plan to link their payment systems by mid-2020. Instant payments will then be possible between Singapore’s PayNow and Thailand’s PromptPay.
Payments: “a Political Issue” in Europe
European banking institutions now consider the issue of payments to be political. The article published on 6 November 2019 on europe1.fr points out that the European banks behind the ECB (European Central Bank) consider payment systems as “a political issue of sovereignty”. This has led to the recent initiative of the ECB, PEPSI (renamed EPI – European Payment Initiative), which aims to counter the American VISA and Mastercard, in a situation of virtual duopoly.
EPI proposes to expand the current instant payment infrastructure and to use it to develop a standard for processing all types of dematerialised payments, either by bank card, mobile phone, transfer, etc. EPI aims to cover 60% of online payments in Europe and operates in a context where the barrier opened by the PSD2 (regulation compelling banks to provide third parties with access to their customers’ data subject to their consent) could promote competition, particularly from Chinese and American BigTechs. As on April 27, 2020, no concrete measures have been taken by EPI.
Towards a global standard for payments messaging?
SWIFT, which dominates the global banking communication market, wants to take advantage of the interoperability and accessibility of domestic instant payment schemes, with its GPI service. This service, which was tested last year as part of the integration of various national instant payment systems (Australia, China, Canada, Luxembourg, the Netherlands, Singapore and Thailand), should enable SWIFT to make international payments more accessible and efficient, thanks to the real-time payment infrastructures already in place. During the trial, SWIFT GPI succeeded, for example, in reducing the transaction time between Australia and China to 18 seconds.
In addition, the G20, demonstrating a strong interest in the benefits of faster, cheaper, more transparent and more inclusive payments, has made improving payments one of its priorities. In particular, several arguments have been put forward by the organization on the potential benefits of improving cross-border payments: support for economic growth, international trade, global development and financial inclusion.
ISO 20022 is also at the heart of other positive initiatives, such as the CGI (Common Global Implementation), supported by SWIFT, which promotes wider acceptance of the ISO 20022 standard to simplify payment exchanges between banks and companies.
To this can be added :
- the Memorandum of Understanding between the ASEAN 2025 community, which requires member countries’ infrastructures to use the ISO 20022 standard
- the current use of ISO20022 in the SEPA zone with SCT INST
- the planned replacement of the MT standard in 2025 by the ISO 20022 for cross-border payments
The FSB (Financial Stability Board) has been asked by the G20 to draw up a roadmap to improve cross-border payments. In the publication of its first step, the FSB mentions that a solution “could be based on existing cross-border and national payment schemes or take the form of new structures and ecosystems”. This suggests that domestic schemes could be used internationally. Another element highlighted in this first step by the FSB is the fragmentation of payment data standards, which could open up new perspectives for the ISO 20022 standard, provided it is imposed.
The standard use of a payment messaging standard could, among other things, simplify payment and collection processes, such as those associated with POBO and ROBO/COBO within an In-house Bank structure. It would also promote the interconnection of domestic schemes and could therefore accelerate the emergence of a system that could connect them.