Immediate. Instant. Real-time. Faster. Different terms for a payment type that can be broadly described as: Available 24 hours a day, 7 days a week, 365 days a year; irrevocable, with value and confirmation of payment delivered to the payee within seconds.
Systems more or less fitting this description have been around since 1973 with the introduction of the Japanese Zengin payment system. However, there seems to be a global trend to more consistently adopt faster payment systems. This is evidenced by recent announcements by The Clearing House in the U.S. and the European Payments Council in the EU regarding their respective new faster payment systems going live, the imminent introduction of the New Payments Platform in Australia, and major infrastructure shake ups in Canada, and the UK.
The trend is being driven by a number of factors. In some cases, regulation and a need to modernise will play a big part. More recently, the demand for faster, cheaper electronic payments is being driven by consumer expectations, to match their experience of ‘always on’ digital services.
Newer generation of faster payment systems, such as The Clearing House’s Real Time Payments, have a set of additional features to support new customer needs, such as a ‘Request to Pay’ component, which may disintermediate cards in some B2B, B2C, and P2P scenarios, and an ‘Enhanced Data’ capability to allow more reference data (invoices, remittance advices etc.) to be carried with the payment. This new functionality is facilitated by the use of ISO20022 XML file structures.
So, where do faster payments fit amongst other payment types, beyond just speed?
As can be seen from Figure 1, Faster Payments typically sits between the speed of a real time gross settlement (RTGS) or card payment, and the cost of an ACH payment. The fixed pricing nature makes it a suitable potential alternative to Card for e-commerce, particularly when used with Open Banking type initiatives. However for Point-of-Sale (POS), other factors come into play. For example, while today’s real-time payment systems can process payments within seconds, they’re no match for the almost instant speed of card transactions, which is what is demanded in high-volume retail. Low merchant acceptance of a new payment types and acquiring banks’ reluctance to offer card alternatives are also tempering the growth of non-card POS payments. It could be argued, however, that POS is becoming less important as the consumer mind-set shifts towards ‘click and collect’ fulfilment options (order online, collect in store).
One of the constraints of faster payments displacing more traditional payments is the item value cap, Whilst many faster payment systems typically start with a modest maximum item value (SEPA Instant Credits are pegged at €15,000 per item for example), these amounts are typically increased relatively quickly as risks are better understood and operational issues are ironed out as volumes increase. The UK’s fairly mature Faster Payments system for example started with a £10,000 cap in 2008 and is looking to increase current limits from today’s £250,000, to a figure in the low double digit millions, this starts to blur the lines with the UK’s RTGS payments.
Figure 1. Payment type comparison.
*It’s worth noting that Same Day ACH (e.g. NACHA, and SEPA-specific same day schemes), although clearing quicker than standard ACH, do not fit into the general definition of faster payments.
Now that we can see where faster payments sit as a payment type, the next article will cover why consumers and organisations use this payment type today and what’s likely to drive use in the future. We’ll also look at how third party technical providers and new methods of accessing central bank settlement are making it possible for banks and PSPs to take advantage of direct access to real-time payment services to improve their customer propositions and compete head to head with larger banks.
With 20+ years of experience, Richard has been involved in some of the most impactful innovations the payments industry has experienced. His specialties include Bacs, FPS, SEPA, Swift-based payments and access to payment systems.