Faster Payments

Faster payments aren’t just a choice anymore, but a growing necessity.

It refers to the real-time or near real-time transmission of funds and a payment message to a receiving party, all occurring throughout a nearly 24/7 timeframe. As more payment recipients experience the benefits, consumers and businesses alike are coming to expect their receivables faster than ever.

In the U.S., commercial payments provider FLEETCOR Technologies recently launched a blockchain-based pilot program with enterprise blockchain solutions firm Ripple and international payments company Cambridge Global Payments to improve international settlements. Meanwhile, cross-border payments provider Transpay recently rolled out a new direct-to-bank deposit service in Australia, New Zealand and South Africa, enabling freelance workers to receive direct deposit payments in their preferred currencies.

The availability of faster payments services provides a key benefit to businesses, merchants and consumers around the world, giving them quicker access to capital and more stable financial footing. The data provided by a faster payments system also offers recipients insights into their payment patterns, allowing them to make smarter, more informed financial decisions.

Faster payments enable a wide range of use cases. In the P2P space, for example, parties can quickly deliver gift money, split a check or pay a babysitter. In the business-to-business (B2B) context, the service can be used to integrate payments or pay invoices. The value of payment volume in these two segments alone could exceed $15 billion by 2025.

The faster payments systems phenomenon has emerged in several worldwide regions in recent years. The following deep dive presents an in-depth examination of the current state of faster payments and how the market is poised for change.

Faster Payments: An Overview

A variety of FinTech players have emerged to offer their services, including person-to-person (P2P) payments platform Venmo, digital payment service PayPal and money transfer service WorldRemit, among others. These companies provide money transfer services for the quick exchange of funds between parties, and their solutions are opening up new innovation opportunities for point-of-sale (POS), electronic invoicing, mobile payments and eCommerce.

These emerging FinTech players have an advantage: Their services do not depend on legacy systems and, as a result, are more flexible when responding to shifting consumer demands for faster payments. As expectations rise, so does the pressure on established banks, FIs and regulatory agencies to ensure their own consumers and clients are able to enjoy the benefits of a faster payments network.

Faster payments can carry risks for banks, however. Upon delivery to recipients, immediate payments are irrevocable and cannot be reversed. While this is beneficial to a payee, his receiving FI could face credit risk if the sending institution does not quickly settle the transaction – although that risk is more manageable for smaller payment sums and lower payment volumes.

U.S. Faster Payments

Establishing a faster payments system has been a priority for the U.S. Federal Reserve. It organized the Faster Payments Task Force in May 2015, which included stakeholders from more than 320 organizations from around the U.S. financial services sector. The group’s mission was to explore opportunities to establish and implement a faster payments system in the country.

The Task Force released two reports in 2017. The first report, released in January, outlined its mission and objectives and offered an assessment of faster payments needs based on input from its members. The second report, released in July, featured recommendations to establish a system that could allow end users to receive faster payments by 2020. The Faster Payments Task Force disbanded in August 2017.

Based on the Task Force’s findings, the Federal Reserve will pursue a three-prong faster payments strategy. It will first support collaborative financial industry efforts to develop and promote a faster payments ecosystem. Second, the Fed will investigate its own settlement services to address gaps in real-time retail payments settlement. Finally, it will explore whether it should take on the role of service provider — beyond providing settlement services — in the faster payments ecosystem.

In addition to the Fed’s ongoing efforts, payment speeds have significantly improved as a result of the Same-Day Automated Clearing House (Same-Day ACH) rollout that began in September 2016. The first phase allowed Same-Day ACH credits to be processed within a day, enabling recipients to get their funds by the end of the day the credit was submitted. Same-Day ACH debits became available in September 2017, allowing transactions such as late bill payments or online POS transactions to be completed on the same day they were received. The third and final phase, rolled out in March 2018, required that Same-Day ACH funds be available to payees on the same day payments were sent.

Another faster payments service is Zelle, a P2P service backed by a network of U.S. banks and managed by credit reporting agency Early Warning Services. The Clearing House (TCH) also launched its real-time payments (RTP) service last year, the first new payment and clearing system in the U.S. in more than 40 years. RTP can transfer funds between bank accounts in just three seconds.

Faster Payments Systems Around the Globe

Several nations and regions have already launched faster payments systems, and others are now taking steps to roll out their own.

The U.K. became one of the first countries to offer a nationwide faster payment system with the launch of its Faster Payments Service (FPS) in 2008. According to FPS data, the service enables payments to be made on a 24/7 basis, is currently available to 52 million checking account holders in the U.K. and boasts participation from 17 banks and building societies (the U.K. equivalent of credit unions). It has been used to send more than 6 billion faster payments since its launch, and almost all U.K. internet and phone-based banking payments are processed on the FPS network.

The FPS network’s launch has allowed other faster payments offerings to emerge and leverage the service. The U.K.’s Payments Council launched mobile P2P service Paym in April 2014, allowing 16 participating U.K. banks’ customers to send and receive money using their mobile phone numbers as verification. Some banks, like HSBC, are allowing business customers to make payments using the Paym service. Zapp, another bank-backed mobile payment service using the FPS infrastructure, emerged in 2015. It can be integrated into U.K. banks’ mobile banking apps to make online and in-store mobile purchases using mobile devices.

Similarly, India launched its Immediate Payment Service (IMPS) in November 2010 to offer real-time, 24/7 interbank electronic funds transfer services to users. Funds can be accessed via mobile devices, online, at ATMs, through text messages and at physical bank branches, The IMPS network currently has participation from 53 commercial banks, 101 cooperative banks and 24 prepaid payment instruments (PPIs). Its goal is to allow bank customers to use their mobile devices to access bank accounts, transmit funds and assist the Indian government with digitizing the nation’s retail payments.

The SEPA Instant Credit Transfer (SCT Inst) scheme launched in Europe in 2017 to allow instant credit transfers across the pan-European region. Funds transferred using the SCT Inst scheme are delivered within 10 seconds, according to the European Payments Council (EPC). The service is currently available in Austria, Estonia, Germany, Italy, Latvia, Lithuania, the Netherlands and Spain.

Meanwhile, Australia rolled out its own New Payments Platform (NPP) faster payments system in February 2018. The system enables instant payments between bank customers and other financial service providers, and can be used to send money to one person or to many recipients. It offers a PayID service that allows customers to link their financial accounts to personal information, such as mobile phone numbers and email addresses. Users can then provide their PayID to businesses or individuals to receive payments.

The NPP was developed by the Reserve Bank of Australia (RBA) through a collaboration with the nation’s “big four” banks: Commonwealth Bank of Australia (CBA), the National Australia Bank (NAB), the Australia and New Zealand Banking Group (ANZ) and Westpac. Together, these FIs represent a 95 percent market share of Australia’s financial services sector. 

The Future of Faster Payments

Even more faster payments schemes are on their way. The European Central Bank (ECB) will launch the pan-European ECB TARGET Instant Payments Settlement (TIPS) in 2018, a new faster payments service that aims to offer real-time fund transfers on a 24/7/365 basis.

Other nations — including Belgium, the Democratic Republic of the Congo, Hong Kong, Malaysia, Portugal, Slovenia and Spain — also have plans for their own faster payments systems later this year. Even more, including France, Hungary and the Netherlands, have announced their own national offerings will be live by 2019, and Colombia and Peru are also exploring launching South American faster payments schemes that same year.

Potential issues could emerge as a result of new faster payments services, including whether the systems can communicate with each other. Many financial services players fear it will be challenging for various real-time payment systems to be interoperable, as most schemes require a local settlement account. This could impact a bank’s liquidity, from a treasury perspective, which ultimately defeats the purpose of faster payments services.

As the need for interoperability grows, open APIs may be a potential solution to both ensure funds are transferred quickly and that faster payments systems can live up to their names. By investing in open APIs, FIs can connect to the outside world and explore new potential use cases and innovations on a global scale.

The emergence of faster payments systems may present challenges but, as these systems become more widely available in global markets, consumers and merchants are increasingly going to expect to receive their funds quickly. Institutions that fail to deliver faster payments will risk getting left behind.

4 Types of Blockchain

One of the questions I commonly get asked is what is the difference between public and private blockchains. It is easy to see why people get confused as public and private blockchains have many similarities.

• Both are decentralized peer-to-peer networks, where each participant maintains a replica of a shared append-only ledger of digitally signed transactions.
• Both maintain the replicas in sync through a protocol referred to as consensus.
• Both provide certain guarantees on the immutability of the ledger, even when some participants are faulty or malicious.

There are two other types of blockchain networks being introduced – consortium and semi-private blockchains.

Examples of semi-private blockchains could include ones for government entities for record-keeping, land titles, public records, etc.

Advantages

• Launching a semi-private blockchain more closely resembles how a company runs a website.
• The business case is typically well planned ahead of implementation, and supports existing business, thus lowering the risk of failure.
• Companies can more easily integrate blockchain features into this article, I will provide a short explanation on how each blockchain network works, along with what are the advantages of each network.

CONSORTIUM BLOCKCHAINS

A consortium blockchain is a blockchain where the consensus process is controlled by a pre-selected set of nodes, for example, a consortium of 15 financial institutions, each of which operates a node and of which 10 must sign every block in order for the block to be valid. The right to read the blockchain may be public, or restricted to the participants. Some examples of consortium blockchains include R3 (banks) and EWF (Energy). Consortium blockchains are also referred to as federated blockchains.

Advantages

• Reduces transaction costs and data redundancies
• Replaces legacy systems, simplifying document handling and getting rid of semi manual compliance mechanisms

PUBLIC BLOCKCHAINS

A public blockchain is a blockchain that anyone in the world can read, send transactions too and expect to see them included if they are valid, and anyone can participate in the consensus process – the process for determining what blocks get added to the chain and what the current stat is.  

Public blockchains are secured by cryptoeconomics – the combination of economic incentives and cryptographic verification using mechanisms such as proof of work (Bitcoin) or proof of stake (Ethereum). These blockchains are generally considered to be “fully decentralized.” One of the drawbacks is the substantial amount of computational power necessary to maintain a distributed ledger at a large scale.

Advantages

• Public blockchains provide a way to protect the users of an application from the developers, establishing there are certain things that even the developers of an application have no authority to do.
• Because public blockchains are open, they are likely to be used by very many entities, with no third-party verification necessary.

PRIVATE BLOCKCHAINS

A fully private blockchain is a blockchain where write permissions are kept to one organization. Read permissions may be public or restricted to certain participants.

Advantages

• The consortium or company running a private blockchain can easily change the rules of a blockchain, revert transactions, modify balances, etc.  For example, in some case, such as national land registries, this functionality is necessary.
• The validators are known, so any risk of a 51% attack from some miner collusion does not apply.
• Transactions are cheaper, since they only need to be verified by a few nodes that can be trusted to have very high processing power with no need to be verified by 10,000 nodes.
• Since read permissions are restricted, private blockchains provide a greater level of privacy.

SEMI PRIVATE BLOCKCHAINS

Semi-private blockchains are run by a single company who grants access to any user who qualifies, and they typically target business-to-business users. They will be similarly managed as a company would manage private web applications.

• ir own back-end and meld it with a familiar web interface.

Trends & Challenges : Conversational Banking

Three Trends Impacting Growth of Conversational Banking

According to Accenture, three trends are coming together to support the transition from transactions to interactions.

1. Messaging is now the preferred method of interaction: WhatsApp, Facebook Messenger, WeChat, Telegram, Snapchat, etc. have overtaken social media as the preferred way of communication on mobile devices. They are both simple and intuitive, leveraging text or voice-based interfaces. These apps also are AI-ready, offering easy integration with chatbots and cognitive agents.
2. AI is now accessible to all organizations: The decreased cost of data storage, analytic tools and development in machine learning and deep learning enables the automation of repetitive customer support tasks, and lower level advisory services. Over time, AI will enable more advanced interactions at even lower costs.
3. Mass personalization is now possible: The intersection of big data, advanced analytics, and predictive models is enabling personalization at a mass level. This supports vastly improved consumer experiences while increasing expectations of all financial services providers based on the delivery of services across industries.

Challenges to Transitioning to Conversational Banking

There are already more than 33,000 bots on Facebook Messenger and more than 100,000 bots offered by Chinese digital giant WeChat. These bots offer customer support, e-commerce guidance and other interactive experiences.


While a good first step, most bots today have limited capabilities. Some simply replicate already outdated FAQ experience, while others simply replace low level human-based customer service capabilities. The ultimate goal is to move more interactions to voice, supporting sales, advanced customer care and advice, with greater personalization, a better UI, less friction and more automation.

This is a unique example where the technology and consumer acceptance is already out there, but strong use cases have yet to come. Many voice capabilities have had initial success, only to have growth stalled due to lack of value-added capabilities or consumer education. Organizations will need to use education and value-added benefits to ‘sell’ them on new ways of interaction. Without education and consumer-centric benefits, it’s unlikely consumers will use a chatbot, let alone digital assistants as opposed to current human channels.

Another barrier to transition to conversational engagement is the siloed nature of banking. Conversations interactions will not move forward if the experience is not seamless, with all insights, from all areas of the organizations arranged around the consumer. Traditional segmentation or product ownership silos will only inhibit natural and successful dialogue.

Conversational Banking Strategy

Six Keys to a Successful Conversational Banking Strategy

When building a strategy for conversational banking there are six components Accenture believes are necessary for success. Many will require a complete restructuring of current back-office processes, whil others are less daunting.

1. Acquire Needed Talent: Advanced capabilities and skills including neuro-linguists, voice recognition experts, AI developers, and CUI designers are some of those most in demand today. Talent will continue to be a barrier for many years as demand is far outstripping supply.
2. Understand Technologies: Understanding and acquiring new technologies will require a move to real-time back-office processing and ongoing monitoring of advances in text and voice-based technology.
3. Improved Privacy and Security: The collection and application of expanded consumer insights requires a greater focus on securing this insight. Voice biometrics will also need to be utilized for conversational interfaces.
4. Transparency: As chatbots and conversation interfaces better replicate human interactions, it will become more important to let consumers know they are interacting with new technology … and not a human.
5. Consistency Across Channels: It will be important to allow for consistent experiences across channels. Selection of what channels to support may revolve around security as much as anything.
6. Consider a Hybrid Model: Since AI-based interactions are not perfect and a great deal of testing will still be required with conversational interfaces, a hybrid model including technology and humans is recommended.

Banks Are Disrupting Payments – Two International Models

1) Open model - where banks build and control the processing infrastructure, but leave the front-end competition to the market.


2) Where banks are uniting into consortiums to control both parts of the business, processing and user interface, through their own solutions.

Modular framework (central banks are offering robust infrastructure)

Among the most impressive machines falling into the first model is China’s Internet Banking Payment System (IBPS), a part of an established second-generation payment system developed by the People’s Bank of China.


“IBPS connects the online banking systems of the various commercial banks. Payments between banks can be received in near real time, with acknowledgments within 20 seconds.


China offers credit transfers (push payments) and considers direct debits are considered as pull payments. IBPS is ISO 20002-based and is the latest service to operate on the foundation of the China National Advanced Payment System (CNAPS II) interbank clearing platform.


Over recent years, the use of IBPS has skyrocketed. By the end of 2016, there were 195 institutions with direct access to the online payment interbank clearing system. In 2016, the internet interbank settlement systems handled around 4.453 billion payments to the tune of about 37.46 trillion yuan. This represents a growth of over 50% in volume and 35% in value.”


FIS reports that going forward, the expectations are that banks and more interestingly third-party organizations will develop new and innovative products & services on top of the IBPS platform, leading to higher market penetration and dominance.




China’s IBPS is reminiscent of the NPCI UPI model, where the state builds a universal infrastructure, seamlessly powering payments across both sides of the industry – banks and compliant third-parties.


UPI is a platform designed for the mobile age that helps with easy integration of various payment platforms. UPI is powered by a single payment API and a set of supporting APIs. It has a fantastic value proposition including a simple authentication process, simple issuance & acquiring infrastructure, national interoperability, and more.


UPI has reshaped entity-entity relationships (whatever entities those are – merchants, payment gateways, banks, network owners).


As Harshil Mathur, Co-founder & CEO of Razorpay, explained, “…instead of having to build 57 bank relationships a gateway has to build right now, it needs to build only one relationship with the UPI. So it will ease our efforts and help out the merchant.”


Australia’s NPP is also a very important example of how institutions are redefining payments framework on a national level.


As described by Nathan Lynch, Regional Bureau Chief, APAC, Financial Crime & Risk – Thomson Reuters, the Reserve Bank of Australia had insisted that the NPP platform be designed using a distributed layered architecture. This meant the system would be divided into a Basic Infrastructure (BI) layer and have a range of Overlay Services (OS) that could sit on top, allowing innovation and flexibility at the user interface level.

“The BI consists of distributed connectivity points (banks), message flows, a switch, a fast settlement service, and an addressing service. The OS, meanwhile, promises to allow NPP participants, approved third parties and “FinTechs” to develop payment services that sit on top of the basic layer. This forward-looking design means the platform can evolve while the underlying architecture remains stable.”

Infrastructure + front-end competition with proprietary solutions

The second model is a bit more radical than the first one: bank-owned front-end as opposed to the back-end infrastructure (or, in other words, the modular model).


There is one well-known – Zelle in the US – and another one that just made its debut in the news – Japan’s MoneyTap.


This Monday, Ripple announced that the Japan Bank Consortium (comprised of 61 banks covering more than 80% of all banking assets in Japan) will release a smartphone application called “MoneyTap” – powered by Ripple’s blockchain technology – to allow customers of the bank consortium to settle transactions instantly, 24/7. MoneyTap is the first mobile app of its kind to be developed and used by multiple banks in the country.


Three members of the Japan bank consortium: SBI Net Sumishin Bank, Suruga Bank, and Resona Bank will be the first to go live on the mobile app in autumn of 2018. This will be followed by a staggered roll out to the rest of consortium.


MoneyTap allows the bank consortium customers to make instant domestic payments and only requires a bank account, phone number, or QR code. What’s more, Ripple shares, MoneyTap helps shed the costs associated with existing banking and ATM fees that are currently applied to domestic money transfers in Japan, making those payments not just faster, but cheaper overall.
Zelle is the US equivalent of what Japan is doing.


In 2011, Bank of America, Wells Fargo, and JPMorgan Chase teamed up to work on a digital payments solution that would allow their customers to send money to each other.


The first product they developed, with the help of bank-owned company Early Warning, was called clearXchange. The solution was officially rebranded as Zelle in June 2017, with an emphasis on bringing as many financial institutions onboard as possible.


Under the covers, Zelle still functions by combining a directory of emails and phone numbers matched to bank account data along network rules for moving money along the ACH network. Thanks to bank agreements, the money is made available immediately to the receiving user, despite the overnight timing of the actual money movement.


With eventual cooperation from more than 30 of the leading financial institutions in the United States and the world, Zelle is successfully gaining ground. About $1.5 billion worth of payments were processed through Zelle just in October 2017, which is up 90% from the same month last year. At that time, Zelle counted 2.5 million active users, with thousands more signing on every day. At the end of Q3 2017, BofA had 23.6 million active users of its mobile app. The volume of mobile check deposits made on the app corresponds to the work of 1,100 branches.


There are significantly many more examples we could cover – variations of those models and their mix exist across a large number of jurisdictions. But all of this to make an important observation – banks are taking full control over payments. Here is why it’s important: the reality is that financial institutions in developed economies service a large part of the national population, and in economies with a significant number of underbanked, they are looking to offer the easiest way to get plugged into the world of digital financial services. Both models have their advantages and challenges for different types of economies, but one thing is clear – they are run or majorly controlled by banks, not by startups or processors. 

Why PSD2 will make it possible for customers to build their own banks - CRO FROM MONEY CLOUD

ONE OF THE BEST ARTICLE WHICH I COME ACROSS

2018 is going to be the year that permanently changes the way we see, and the way we use banks. Banks in their traditional form are going to start to disappear, and be replaced by what is known as banking technology – which is a completely different beast.

The Revised Payment Service Directive, or PSD2 as it more commonly called, is set to come into force at the beginning of next year, and “gamechanger” barely begins to describe the effect this new set of regulations governing the use of banking data will have.

PSD2 will oblige banks to give third party providers access to their customer’s accounts using Application Programming Interfaces, or APIs.

Using simple call and response technology, any firm will be able to compete tooth and nail with major banks across the same suite of services – but in the main, two new types of agent will be created.

Firstly, AISPs – Account Information Service Providers. These types of agents are service providers who have access to banks customers’ account information. This will allow them to provide customers with aggregated data from all of their various accounts, keep track of their spending, and use the data they collect to make recommendations about how best users can manage their money.

Secondly, PISPs – Payment Initiation Service Providers – PISPs are able to initiate payments on behalf of their users; allowing them to pay friends, or bills, or move money abroad, or shop at brick and mortar stores or online stores, in a wide variety of different ways.

We have already seen disruptive AISP and PISP services emerge and threaten the big banks’ hegemony over services such as Direct Debits, money transfer, customer product recommendations and real-time information (e.g. balance statements or overdraft alerts) supplied via open APIs.

But when PSD2 becomes law, the playing field will not only be levelled, it will be the banks that will be forced onto the back foot.

The banks’ labour-intensive sets of systems and controls will put them at a disadvantage when compared to smaller, more agile service providers which use only the latest technology and have no “legacy” infrastructure to replace or update.

Banks are also likely to lose the “PR War” too; their products and services have been unpopular and mistrusted ever since the global financial collapse of 2008, whereas modern fintech firms are unsullied by what has gone before and receive favourable press, as well as plenty of encouragement from their venture capitalist backers.

But it is not all bad news for banks. Firstly, they have a major advantage over the “challenger” fintech firms in that they have huge existing customer bases – they need only get their post PSD2 services right and it will be easier for them to persuade customers to stick with them rather than transfer their business to a newer, greener service.

Secondly, and somewhat ironically, some of the most successful fintech startups are, in fact, funded by the big banks. Take Atom Bank, which recently received an £83m venture round investment from Banco Bilbao Vizcaya Argentaria, BBVA, one of Spain’s biggest banks.

Or Starling Bank; run by an ex-banker, and backed by a hedge fund manager, with ex bankers and ex Financial Conduct Authority big-wigs on the board.

But from the customer’s perspective, the real difference will be experienced via the PISPs. It is the payments industry that is really set to change the face of the modern banking industry.

The biggest difference will be that payment card usage will drop – by between 9-40%, depending on your source. Eventually, payment cards may be phased out altogether.

Mobile payments, payments using wearables, payments using any Internet of Things connected devices, payments across messaging services, payments over social media. All of these services, possible already, will begin to come even more to the fore.

It isn’t hard to see big tech companies steal market share away from big banks through more agile payments services. PSD2 makes it possible for almost any firm; Apple, Facebook, even SnapChat; to act like a bank and offer the same services – but it does not work the other way.

Natwest, Santander, Barclays are not going to launch hugely popular social media platforms anytime soon – although don’t be surprised if they try – it represents their best chance of staying relevant to their invaluable Millennial customers.

But to return to the point in the title of this post, it should be customers who are most excited about this obscure regulation, PSD2, they have probably never heard of.

It gives customers’ choices galore, and significantly empowers them. For example, a merchant that pays lower fees for processing Apple Pay transactions will be desperate for customers to pay this way, and will try to entice customers to do so.

Or, challenger banks keen to wrestle customers off of big banks will offer too-good-to-be-true sign-up terms. The market for loans will become more competitive. It will become easier to open a new account. Money transfer will become fee-free and immediate.

And customers will be able to pick and choose the services they want – in effect, they will be able to construct their own banks, and maintain a transparent, real-time view of all their different accounts thanks to PSD2.

Overwhelmingly, it is the customer that has the power. They can ask any service provider, for any service, and they will get it – with bells on! They can build their own bespoke suite of services and be the masters of all the accounts they survey, chopping and changing to find the best value at the click of a mouse, or swipe of a screen. It is a future that is tantalisingly close.

And we haven’t even mentioned the blockchain and digital currencies!

The EU decided to push through PSD2 in response to the failings of the first Payments Services Directive, which many observers felt didn’t go far enough in democratising the powers of big banks.
The European Commission, via PSD2, has demonstrated that it wants to achieve 3 major goals. Improve innovation, protect customers better and make internet payments and online accounts access more secure.

But it may well be the customer who has the final word.

Huw Jenkins is CTO of The Money Cloud; Huw has been working in the FX industry, helping to accurately compare the price of sending money overseas offered by different agents and services for over 12 years. At The Money Cloud, Huw and the team are building a holistic platform from which users will be able to access all of their financial accounts, send money overseas, and apply for new products and services in just a few clicks.

Instant payments: US TCH & SCT Inst launch, but are banks ready?

The launch of The Clearing House (TCH) real-time payments (RTP) platform in the US and of Europe’s SCT Inst scheme is an indication that instant payments are at last going global, but how ready are banks?

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The first new payment and clearing infrastructure in over 40 years is now operational in the US after TCH RTP had its first test on 13 November when $3.50 was moved between BNY Mellon and US Bank, prompting the latter’s CEO, Andy Cecere, to say in a statement how “excited” he was.
His counterpart at BNY Mellon, Ian Stewart, hailed it as “one of the most important payment transformation efforts in our industry”. Further transactions have since run involving Citi, J.P. Morgan, PNC and SunTrust, among other early adopters as the system ramps up.

However, the RTP platform is not expected to reach ubiquity until 2020. TCH hopes that ‘by the end of 2018 half of all American depositors will have access to the system’ as the big banks migrate to it. Connecting to the core, integrating and aligning it with internal financial crime compliance activities won’t be easy for banks. But 2020 is a long time to make American consumers and corporates wait for instant payments (IP).


Large processing firms, such as Fiserv and others, are expected to serve the connectivity and processing needs of smaller US banks, credit unions and others that lack the scale or budget to execute their own migration project, but the wait will still be frustrating.


RTP supports fast, irrevocable IP, standardised messaging and data carrying capabilities in the US, which mean new services and functionality such as mobile phone number initiation, liquidity and payment monitoring services should be possible in the future.


The technology was supplied by MasterCard-owned VocaLink and the system built with the collaborative effort of TCH’s 25 owner banks, but it is open to all US depository institutions.
RTP adheres to the objectives of the US Federal Reserve (Fed) Faster Payments Task Force, effectively the scheme overseer, giving the country the chance to finally catch up with other more advanced real-time nations such as Denmark, Singapore and so on but only if banks connect to it.


Europe
European regulators, its central bank and payment service providers (PSPs) are also hopeful of speeding up euro payments. The continent’s new single euro payments area (SEPA) instant credit transfer (SCT Inst) scheme will enable fast euro-denominated payments and new services to be rolled out. Various SCT Inst-compliant clearing and settlement mechanisms (CSMs) are slowly proliferating across the continent.


Nine CSMs, such as France’s Stet automated clearing house (ACH) and Equens Worldline, declared their adherence to the voluntary SCT Inst scheme upon its launch on 21 November, but many more still need to follow.


EBA Clearing’s RT1 platform will initially provide much of the pan-European cross-border ‘reachability’ allowing instant payments to be made across the continent. Often this will be via a cross-border partnership, as in the case of Spain’s Iberpay where the ACH will handle domestic SCT Inst-compliant payments itself but use RT1 to reach far-flung corners of Europe.


The banks are lagging behind too. The European Payments Council (EPC), which designed the voluntary scheme rulebook, said 585 PSPs – only 15% of the total in Europe – were offering instant euro payment services on the launch date, across eight countries from Austria to Estonia, Italy to Spain. A lot of the initial volume was from RT1.


The slow uptake means there are a lot of banks and alternative PSPs that still to adhere to the SCT Inst scheme. In common with its US counterpart, the EPC is not envisaging full uptake anytime soon either. It is predicting PSP uptake will only reach 50% by 2020 following the non-mandatory launch on 21 November. Perhaps it should be made mandatory to speed things up?


SCT Inst is intended to reach the 34 SEPA Countries in Europe including Poland, France, UK and so on. It will encourage adoption of the ISO20022 messaging standard and give its users the ability to:

• Move up to 15,000 euros from one account in Europe to another. The limit may rise later.
• Maximum of ten seconds allowed.
• Operate on a constant 24×7 basis.

It shares the fast settlement and 24×7 operational stance of its US TCH equivalent and other IP schemes around the world. Australia, for instance, has its own similar new payment platform (NPP) planned for 2018.


Numbers in Europe should pick up when large German banks, with the biggest euro flows, move fully next summer to the SCT Inst scheme. For now, a lot of smaller German and other nation’s banks have moved, but the volume figures need more Tier 1 banks to migrate to radically increase uptake.


It is not an easy task to migrate to an IP scheme – whether in the US, EU, Australia or wherever – but if banks want to retain payment volume, customers and the capacity to offer value-adding mobile or liquidity services on new infrastructures then they need to move quickly. Otherwise, alternative PSPs may look to take advantage of these new platforms themselves, where permitted, and to win flow for themselves.

Virtual Card

When it comes to payments in the B2B world, customers are looking for more convenient ways to pay their bills. With the latest technological advancements, their options are expanding. As with any new technology, however, new challenges arrive that can slow down the invoice-to-cash process. But if a supplier has the right A/R process in place, new technology doesn’t have to mean that there will be new challenges to overcome.

Virtual cards, also known as Single-Use Accounts (SUA), are among the latest in payments technologies. They are auto-generated credit card numbers that A/P departments can send to suppliers as a link contained in an email, for a one-time-use payment. Their growing popularity with customers is due to a variety of factors.


One reason is that virtual cards provide A/P departments visibility and control over the buyer’s payments. Another reason is that they automate the account reconciliation process – the more automated the process, the less chance for human error. Additionally, there is an increased level of security on the payments side. We’ve already discussed that virtual cards have a one-time use, randomly generated number. But they can also be set to the exact cost of the bill and can be set to expire after a specific amount of time, reducing the chance of theft or fraud.


On the flip side, this emerging payment process introduces new challenges for the suppliers and the A/R side of the invoice-to-cash process:

• Processes inefficiencies

One challenge is that the infrastructure that supports virtual card payments does not currently integrate neatly with ERP systems to enable straight-through processing. In addition, while the issuing of a single-use number is automated, the supplier processing side of it is not. Consequently, A/R departments receiving virtual card payments often have to manually retrieve the card number and remittance information, process the payment and then manually apply the cash into their ERP system.

• Interchange fees

If a supplier is given a virtual card number for payment, this will often require them to pay an interchange fee on each transaction that is completed. While these interchange fees can differ based on the type of card used, fees can get expensive, costing suppliers an average of 2.5% of the payment per transaction.

• Security gaps

While the A/P department may start using virtual cards due to its improved security, on the A/R side, there can actually be some increased security risks. A company receiving credit card payments, for example, needs to be PCI-compliant, which means they need to comply with Payment Card Industry (PCI) Data Security Standard (DSS) in order to host credit card data securely with a hosting provider.
Additionally, while buyers may have a secure system to send the virtual card payment email, the supplier’s email may not be as secure. Ensuring appropriate security protocols can be costly for many suppliers and can open up businesses to data breach risks.

The future of virtual card payments

Despite its challenges, virtual card payments are not going away. In fact, their usage is growing almost 10% annually. By 2021, virtual card spending is expected to surpass that of traditional purchasing cards and checks. And as we are seeing that increase in the volume of emailed virtual card payments, we are also seeing further strains being put on businesses’ A/R departments.
But that strain can be relieved if the A/R department implements its own automated solution to process those virtual card payments. A part of that solution should include a comprehensive electronic invoice presentment and payment (EIPP) portal. A good portal will give A/R teams the ability to completely automate the payments process, and that includes virtual card payments.


When searching for an EIPP portal, suppliers should find one that can accept payments, generate the payment file, easily integrate with their ERP and then automatically close out each invoice as it is paid. Additionally, it should be PCI-compliant and should incorporate the highest security standards and latest encryption technologies.

Diagram: How Virtual Card Capture works

While virtual cards are not yet mainstream today, they are projected to become commonplace in the near future. As companies utilize more automation in their businesses, virtual cards will be a natural part of the B2B payment process. The ability to handle this payment process seamlessly will result in more predictable cash flow and higher customer satisfaction