Payments have not changed very much over the years. We still use payment systems such as cash and checks that are centuries old. Even electronic payment systems have, in many cases, been in operation for over 50 years. The last ten years, however, have seen a rapid shift in the way we think about payments. Driven by improvements in technology, new innovations in payments are finding their way in to our everyday personal and business lives.
And while there are countless new products and innovations in payments, there are three intertwining themes that are driving this acceleration.
Real Time Payments
Electronic payments have traditionally operated using a batch settlement process. Banks, merchants, and payment processors alike group payment instructions into bundles, or batches, and submit them to the network operators. The payment networks, or rails as they are often called, accept these batches and initiate settlement. This process can take anywhere from a few hours to a few days.
Starting in the early 2000’s, banks and payment system operators began developing faster payment methods. In 2008, the aptly named Faster Payments was launched in the UK, becoming the first “real-time” system. Since then, several other countries have deployed real-time systems. The pace of deployment of real time systems has accelerated, and there are now more than 50 real-time networks in operation around the world. In 2017, The Clearing House launched Real Time Payments (RTP) in the US, and the Federal Reserve has announced plans to launch its own real-time network, FedNow, in 2023.
Real-time networks have the potential to change payments across multiple use cases. B2B payments, from invoices to trade finance, can be streamlined. B2C (business to consumer) payments, such as payroll or government disbursements, can be made faster and with more certainty. C2B (consumer to business) payments, especially for bills, can be made immediately, avoiding late fees and reducing biller risk. And P2P (person-to-person) payments can be executed immediately.
P2P going P2B
P2P payments have become a primary way for individuals to pay each other, especially those leveraging smartphone-based mobile apps and wallets. Such payments have not, however, been designed for consumers to pay businesses. To be sure, these transactions do take place, at small businesses, between consumers and home service providers, etc., but this is not what the systems were intended for and can actually violate the terms of service.
Adding to the appeal of P2P payments is the real-time nature of the transfer. Many systems are based on real-time networks, offering settlement in seconds. In other cases, the payment occurs on slower rails (such as ACH), but the operators make the funds available to the recipient immediately, creating the impression or real time. Zelle, a P2P network operated by The Clearing House, is currently transitioning the system to RTP.
In many parts of the world, app-based payments have become a dominant method of making payments to both individuals and businesses. And increasingly, P2P networks are opening up to allow for this type of person to business (or P2B) payments. Merchants, in turn, are embracing these options to satisfy their customers.
Data, Data, Data
Most real time networks have an additional advantage: they are based on the ISO 20022 messaging standard. ISO 20022 defines a framework for payment messages that is much richer than the messages used for legacy systems. This means that each payment instruction potentially comes with important data elements that can be further leveraged. For example, the message can contain identity information for the sender and receiver, allowing for AML screening and fraud prevention. Payment models can be optimized to reduce costs and increase likelihood of settlement. The additional data can also mean less manual exception handling.
The fact that ISO 20022 is being used around the world also streamlines cross border payments. Although different systems have implemented the framework in different ways, messages moving between countries will have more in common than ever before, reducing processing overhead and the need for manual intervention. To learn more about enabling new payment methods according to the demands of the customer base, join us for the upcoming webinar, “Payments”, live on September 1st at 11 AM/ET. Click the button below to register.