October 31, 2017

Real-time payments: Towards speed and transparency

While payments might seem ‘instant’ to those engaged in the transaction, the reality is, apart from cash, they are generally not. ‘Real time clearing’ is what happens when you hand over a bank note. It is generally not the case when you make a card, mobile or internet payment.


These take time to process, as they are settled through clearing systems which process transactions in batches, sometimes taking hours, or even days, to complete[1].  This matters for customers, who may need to see their immediate balance if they are making a large purchase. And it matters for companies for whom payments can be significant determinant of liquidity and cash flow. As the world increasingly moves away from cash, the pace of payment settlement will be a relevant factor for convenience in consumer and b2b sectors.


Instant payments, in contrast, are real-time. The Euro Retail Payments Boards defines them thus: ‘electronic retail payment solutions available 24/7/365 and resulting in the immediate or close-to-immediate interbank clearing of the transaction and crediting of the payee’s account with confirmation to the payer (within seconds of payment initiation)[2].


They are not few, although they are not mainstream. Japan was the first mover, implementing real time payments back in 1973 (Zengin), with others including Switzerland (SIX, 1987), Brazil (SITRAF, 2002), Mexico (SPEI, 2004), the  UK (FPS, 2008), and Singapore (FAST, 2014)[3]. The  UK’s ‘Faster Payments’ Service in 2008[4], now has seventeen banks and building societies participating, and is enabled on payments as large as £250,000.


Real-time payments poses challenges for the card business, which is currently dogged by a slower process in which a bank authorises a transaction by sending an authorisation code to the merchant, hence beginning settlement, which is done in batches – not immediately[5]. If real-time payment by mobile takes off, this might be preferred by consumers. UK-based Zapp has signed deals with banks including HSBC, First Direct, Nationwide, Santander and Metro Bank, allowing customers to pay in shops and online using mobile, rather than cards[6]. Zapp’s technology means a customer can see their real time balance on their account after making the payment, which is useful after making any kind of sizeable purchase[7]. Sweden is another leader. Swish, an app developed in conjunction with Nordea, Handelsbanken, SEB, Danske Bank and Swedbank, allows smartphone users to transfer money from one bank account to another in real time[8]. One 2017 survey up to 60% of retailers expect real-time payments to have an impact on their sector as customers demand a “smoother shopping experience with an uncomplicated, fast and secure payment process”[9].


Real time payments help both merchants and consumers by improving visibility and transparency for both about their cash flow. It can especially assist retailers buying bulk and wholesale. The combination of technology, higher speed data flows, and rising consumer expectations for convenience, are all supporting the process, which could represent the next big shift in payments, from plastic to digital.


[1] https://www.instapay.today/2017/02/02/merchants-embrace-instant-payments-first-two-part-article/

[2] https://www.ecb.europa.eu/paym/retpaym/instant/html/index.en.html

[3] http://edgardunn.com/wp-content/uploads/2017/06/EDC_AdvancedPaymentA4_2017.pdf

[4] https://www.instapay.today/2017/02/02/merchants-embrace-instant-payments-first-two-part-article/

[5] https://www.instapay.today/2017/02/02/merchants-embrace-instant-payments-first-two-part-article/

[6] http://www.telegraph.co.uk/technology/news/10573226/Five-UK-banks-sign-up-for-mobile-payments-with-Zapp.html

[7] http://www.bbc.co.uk/news/technology-25727333

[8] https://www.theguardian.com/business/2016/jun/04/sweden-cashless-society-cards-phone-apps-leading-europe

[9] http://edgardunn.com/wp-content/uploads/2017/06/EDC_AdvancedPaymentA4_2017.pdf