Immediate Payments: Payments. Start profiting from real-time payments in no time with a partner who s been there before.

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1 Immediate Payments: Designing the Future of European Payments Start profiting from real-time payments in no time with a partner who s been there before.

2 TABLE OF CONTENTS Introduction...3 Defining Immediate Payments...3 Drivers for Immediate Payments Economic growth Innovation Competition... 4 A connected real-time world... 4 Standards for Immediate Payments... 5 The future for payments... 5 Potential impact for domestic schemes... 5 Regional scheme developments... 6 Schemes using older standards... 6 International payments and correspondent banking... 6 The future for banking business models... 6 ACI and Immediate Payments...7 Immediate Payments: Designing the Future of European Payments

3 INTRODUCTION We live in an instant world, where children as young as two know the finger swipe used on mobile devices and, as adults, we get frustrated if we have to wait more than three seconds for a web page to load. This demand for instantaneous events is ingrained in our way of life, and the same expectations are increasingly held about banking and financial services. Customers expect their interactions to be as dynamic as the Amazon website, or provides a seamless a user experience as they have with itunes. The banking industry infrastructure, however, is not all based on modern technology in fact, some of the systems involved in processing a payment are more than 40 years old. Nor does the industry always respond as quickly as it should, to competitive threats. Banks are seeing their profits being eaten away by new entrants to the market, including PayPal which, despite a dependence on the same clearing and settlement systems as the banks, has managed to create a profitable business by insulating the customer from legacy systems and providing exceptional user experience. This paper addresses the challenges that a real-time world presents to banks, with an analysis of the opportunity provided by Immediate Payments for banks to take back control and re-assert their place at the heart of financial services. The paper discusses how Immediate Payments are impacting the banking landscape today, and the challenges as well as the opportunity for banks to increase their relevance and retain their all-important customer relationships. Defining Immediate Payments Most countries have had electronic payment systems for several decades, usually including automated clearing houses (ACH) for batched low-value, high-volume payments and real-time gross settlement (RTGS) systems for high-value, low-volume payments. ACH payments typically take one to three days for the funds to be credited to the beneficiary s account (depending on country and service), although they are often debited from the payee s account as soon as the payment is made. While the payment is in transit, there is little assurance for either party that it will arrive as expected, but this is a low cost or free payment method for the customer. RTGS systems move funds in real time, making them suitable for payments where speed is crucial to the transaction, such as when purchasing a house. RTGS payments are expensive for both the customer and the bank, but they deliver rapid confirmation that funds have arrived. Immediate (or real-time) Payments take the best elements of both ACH and RTGS, delivering speed, information and cost effectiveness. For consumers, they move the funds in real-time, provide confirmation that the payment has been made and are cheap or free to use. For the bank, they are less expensive than RTGS payments, but more expensive than ACH. Drivers for Immediate Payments Historically the initial pressure for Immediate Payments has been regulatory, as was the case in Australia, Singapore and the United Kingdom. However, Italy and Finland are today developing schemes through their domestic banking associations and ACHs, without regulatory pressure but in response to consumer demand and a growing recognition of the associated business opportunities. Despite this, regulatory pressures do persist and, in Europe, the new regulatory framework defined by the European Payment Services Directive 2 (PSD2), and the Regulation on Multilateral Interchange Fees will have multiple impacts on banks cards Although many banks are looking to replace lost income by introducing new forms of card fees, others are looking at embracing real-time payment methods as a way of offering services needed by consumers and retailers, at a lower cost than card alternatives. 3

4 businesses. Although many banks are looking to replace lost income by introducing new forms of card fees, others are looking at embracing real-time payment methods as a way of offering services needed by consumers and retailers, at a lower cost than card alternatives. Today, there are perhaps three main drivers for Immediate Payments: economic growth, innovation and competition. 1. economic growth An Immediate Payments scheme, by its nature, moves money faster and more efficiently than a traditional ACH. This means not only that the sender receives confirmation and the beneficiary has the funds available instantly, but also that money does not get tied up in the banking system for days at a time. This allows improved cash flow management, as knowing where their money is in real-time enables customers to use it more effectively, earning more interest, gaining discounts for paying early or simply avoiding the need to maintain large balances to cover their obligations. For corporates especially, this enables greater control and frees up funds to be used for other growth opportunities (hiring more staff, product development) or to reduce borrowing. This improved liquidity helps drive economic growth and, as greater control and more accessible payment methods become available, is likely to accelerate the drive towards a cashless society. 2. Innovation While Immediate Payments have existed since the 1970s (introduced in Japan in 1973) it is only in recent years that they have moved centre stage. The growth in internet connectivity and widespread adoption of smart phones, tablets and other mobile devices has rapidly increased consumers expectations of online and real-time service delivery. Regulators have strongly promoted the adoption of Immediate Payments to enable service delivery in real-time and on the go and banks and other payment service providers (PSPs) have recognised the potential of Immediate Payments schemes to generate new revenues from existing and new customers. Since 2012, when banks were required to use the Faster Payments scheme for standing orders, the U.K. has seen a dramatic rise in usage, with the introduction of new mobile services such as Barclays Pingit and industry initiatives such as PAYM and ZAPP. Along with the growth in contactless card usage, this has resulted in electronic payments now outstripping cash usage in the U.K. In Australia, the majority of banks are now fully behind the New Payments Platform (NPP) which has innovation at its heart through overlay services that banks and PSPs can provide. 3. Competition Opening up restrictive banking and payment systems to nonbank PSPs and trusted third parties (TTPs) is one of the main intentions behind the PSD2 and a key objective for most regulators. They will also closely review scheme ownership, management and drive the provision of information by banks to TTPs, to enable new service offerings. As we have observed in recent months, competition can come from quite unexpected players (for example Apple, Samsung, Google, Microsoft, Facebook) as they seek to move ever closer to end users and provide a comprehensive service offering and intuitive customer experience. In the United States, The Clearing House has seen alternative payment solutions such as Apple Pay and PayPal as serious competition. In response, it is now one of the major driving forces behind a U.S. Immediate Payments scheme, driving adoption by the U.S. banks in order to regain competitive advantage. Clearing houses and banks are not only under threat from new entrants to the payments market. Long-standing members of the industry are also being driven to innovate in ways that can take business away from the banks as can be seen in MasterCard s announcement of their new Money Send offering in the U.S., which allows consumers to make person-to-person payments using the card network. By adjusting the balance of power away from traditional banks, regulators are effectively challenging these banks to either innovate or be disintermediated, becoming simply the regulated clearing and settlement process behind transactions. Many traditional banks have responded to this pressure by starting new digital bank or core banking replacement programmes. Most existing core banking systems are based on legacy solutions, old standards, batch processing and are difficult to modernise to support Immediate Payments, the integration of TTPs and the new business models that will evolve. Having new real-time back office and payment systems is only the beginning of the story, however. To retain customer loyalty, banks need to become the single point of access to a wide range of financial services just as Amazon is today for consumers purchasing goods on the internet, and itunes is for music. Immediate Payments are a critical catalyst that will fundamentally change the banking market and banks ignore this at their peril. A Connected Real-Time World According to SWIFT, 47 countries around the world are currently running, deploying or exploring an Immediate Payments scheme. In Europe, the U.K. Faster Payments scheme was introduced in 2008, the clearing house in Sweden (Bankgriot) has been processing payments in real time since 2012, Poland has developed Express Elixir and, in The Netherlands, IDEAL can be considered an immediate scheme to some extent. Since more than 95% of 4

5 payments remain within the country of origin today, the initial focus for Immediate Payment schemes is understandably domestic. Regional schemes, where groups of countries implement a common Immediate Payment scheme will also become commonplace. This can already be seen with the 14 members of the Southern African Development Community (SADC) and in Europe, the European Union has asked the Euro Retail Payments Board (ERPB) to investigate the potential for at least one pan-european Immediate Payments scheme. Interoperability on a global scale will be harder to achieve, although not impossible and it may prove easier to connect these pockets of regional schemes rather than individual countries, if messaging standards, settlement cycles, risk and FX rules can be agreed upon. Standards for Immediate Payments Financial and scheme messaging standards are a critical component of any payment system and a number of international and proprietary standards are in use in existing payment schemes. Even international standards such as ISO 8583 (widely used for credit and debit cards, ATM payments and also now in use for Immediate Payments) have been so heavily customised that interoperability between payment schemes using this standard remains extremely complex. In addition, many messaging standards were developed using the technology available 20 to 40 years ago, when the payment system itself was designed. Today, they are outdated and unsuitable for modern Immediate Payment schemes where a far richer data set is required for processes such as regulatory reporting, extra remittance information, and invoice and purchase order numbers that will allow overlay or additional payments services to be developed. So much more information now needs to be transmitted about the transaction that a richer messaging standard is required. By far the most common international message standard used in recent payment schemes is ISO 20022, a relatively new standard first published in The standard does not dictate the technical format of the message, although to date that has been XML, but it defines a platform for the modelling of financial business processes in a formal syntax-independent notation, which are then converted into the desired message syntax, such as XML. More information can be found on the standard s website Despite being well defined, even standards such as ISO can be implemented in ways that make interoperability between schemes more complex than it needs to be. To address this, the ISO Registration Management Group (RMG) is engaging with the industry to develop additional rules and practices for using ISO for Immediate Payments, supporting interoperability with other schemes. This is a welcome move by ISO that should help to make a connected, global Immediate Payments environment achievable. The Future for Payments With so much happening in the world of payments, and the pace of technological change, it is hard to predict what will happen to products, services, TTPs, PSPs and interoperable schemes. We can be certain, however, that the pace of change will not soon slacken, and that this change will bring major new challenges and opportunities to banks and other payment service providers. If we assume that most countries will ultimately have domestic Immediate Payments schemes, that many of these schemes especially in Europe will provide cross-border services, that more PSPs will have direct access to Immediate Payments schemes and that TTPs will have access to banking information, then here are a few potential implications for the future: Potential impact for domestic schemes As more and more transactions and services utilise the Immediate Payments scheme via mobile devices Interoperability on a global scale will be harder to achieve, although not impossible and it may prove easier to connect these pockets of regional schemes rather than individual countries, if messaging standards, settlement cycles, risk and FX rules can be agreed upon. 5

6 such as smart phones, tablets and watches, and the population becomes ever more comfortable with this technology, fewer payments will go via traditional routes such as ACH, RTGS and cards. This change will be accelerated as Immediate Payment size limits become larger, as is underway in the U.K., or even unlimited, as in Australia. If we take the U.K. as an example, where a real-time scheme has been running since 2008, certain trends become apparent. The U.K. Faster Payments Service (UKFPS) payments volume is growing at 13% per annum, with ACH (BACS) growing at 3%, RTGS (CHAPS) growing at 4% and cheques falling by 12% in the 12 months to May 2015 (Source: U.K. Payments Council s Payment Statistics May 2015). In addition, over 70% of CHAPS volume is classed as retail and, once the UKFPS limit is increased, this traffic could move over to it, which would be more cost effective for banks. Many banks are already questioning the need to support four U.K. payment schemes, as well as cards, and having a single Faster Payments scheme for low-value payments and a RTGS scheme for high-value payments would improve liquidity and aid economic growth. This would save the banking system much of the cost associated with running the schemes and maintaining interfaces to multiple clearing systems. Moving to such a real-time environment also gives banks the opportunity to retire the legacy, complex and expensive batched processing systems required to support these older schemes, saving budget on maintenance and freeing it up to spend on innovation. Regional scheme Developments Across Europe, 35 countries have deployed SEPA as a means of payment, enabling millions of people and thousands of corporates to rely on an interoperable standard ruled by a regulator independent of these countries. There now exists a unique opportunity for the Euro (SEPA) zone to implement a multicountry and interoperable Immediate Payments scheme. There are two initiatives currently underway to realise a solution that takes advantage of this opportunity: The European Automated Clearing Houses Association (EACHA) in January 2015 released a study on interoperability of Immediate Payments schemes, and suggests that a solution can be achieved across Europe. Their approach would allow individual countries to continue to develop their own solutions while considering the wider needs of pan-european interoperability. The European Banking Association (EBA), which already operates several pan- European payment schemes, has recently initiated an open forum discussion, involving 20 member banks, in a working group to design a new pan-european scheme. SEPA Credit Transfer (SCT) and SEPA Direct Debit (SDD) are two payment schemes active today that are based on ISO The remaining gap in investment required to reach an Immediate Payments scheme is no longer as great as it was for Europe, as account information has been standardised, rules set, banks and corporates have either renewed or updated their systems, with remaining issues of interoperability likely to be resolved in the coming months. Therefore, Europe is in an ideal position to influence a wider Immediate Payments scheme based on ISO Schemes using older standards While new schemes are being developed using ISO as the messaging standard, some older schemes were developed on different standards the U.K. Faster Payments scheme, for example, is on ISO For a truly interoperable European or global Immediate Payments scheme to exist, such schemes will need to use ISO This is a significant challenge, although translation services can ease the process until all participants are fully able to migrate to ISO The ultimate gain will be the ability to participate fully in worldwide Immediate Payments, to take advantage of the richness of ISO to assist with management of financial crime and money laundering, and a much improved infrastructure on which to offer new services and products. International payments and correspondent banking International payments and correspondent banking typically use SWIFT, a complex and expensive scheme to manage and maintain. In a world where cross-border payments are made via a much cheaper Immediate Payments infrastructure, the traditional and ageing SWIFT FIN service may become less important and could ultimately be replaced, further reducing the cost to the banking ecosystem. This would have additional consequences as, today, many global banks provide correspondent banking services to banks that do not have a presence in all countries where they need to conduct business. With a global Immediate Payments scheme that allows payments to be made easily and quickly in any foreign country and currency, the need for traditional correspondent banks will be reduced. It is true to say that correspondent banking is not just about making a payment; it also requires an understanding of local laws and regulations, and a recovery process in case a payment goes astray. While a local contact will remain necessary, in future the parties involved in the transaction may not all be banks, may enter the process via APIs and may not use the current infrastructure to send the funds. The future for banking business models Immediate Payments opens banking to increased competition from nonbank PSPs and TTPs, and banks will need to re-invent themselves, to ensure that they remain central to their customers daily financial needs. Just as Amazon retains the customer relationship by coordinating service delivery from a wide range of other vendors and partners, so banks will need to position themselves to coordinate a variety of existing and new services and provide these to their customers. 6

7 The pace of change in payments has been remarkable and, while the future remains uncertain, we know that change and innovation are here to stay. If the banking industry does not step up to the challenge, there is a risk that banks could be relegated to clearing and settlement, or become redundant. Yet, there is also an enormous opportunity here, and banks are well placed to take advantage of it. Those that do so will not only place themselves at the centre of their customers financial world, they will also engender trust and loyalty and lay strong foundations for a digital banking future. ACI and Immediate Payments ACI Worldwide has been closely involved in the drive to Immediate Payments. Over 60% of the current direct participants in the U.K. Faster Payments scheme use ACI technology and ACI is working with the U.K. s Payment Services Regulator (PSR) and Faster Payments Scheme Ltd (FPSL) as they consider how to open up the U.K. scheme to more direct participants. ACI will offer market aggregator services to these new participants, as outlined in the FPSL Faster Payments New Access Model white paper of May ACI is actively engaged in Europe, working with continental European regulators, ACHs and banks, and participating in a number of working parties and initiatives to help shape the European payments landscape. ACI is participating in the EBA s Real-time Payments Forum and the ISO RMG s Real-time Payment Interoperability working group, sharing its extensive experience of using ISO 20022, ISO 8583 and IFX standards for real-time payments. Within the EBA working group on Electronic and Alternative Payments, ACI is helping to shape how players in European payments markets will interact, and helping to define the common interfaces (APIs) needed to allow Third Party Providers to access information and transaction resources offered via account providers systems. ACI supports customers in Singapore with the FAST Immediate Payments scheme, which has been live since We are developing products and services for the Australian New Payment Platform (NPP) and working within the U.S. Federal Reserve working group in the U.S. All of these developments use the ACI Universal Payments strategy and framework, providing a modern infrastructure for Immediate Payments and supporting transformation to a services-based, agile banking environment for the digital age. 7

8 AUTHOR ABOUT ACI WORLDWIDE Barry Kislingbury Senior Principle Solution Consultant ACI Worldwide ACI Worldwide, the Universal Payments company, powers electronic payments and banking for more than 5,600 financial institutions, retailers, billers and processors around the world. ACI software processes $13 trillion each day in payments and securities transactions for more than 300 of the leading global retailers, and 18 of the world s 20 largest banks. Universal Payments is ACI s strategy to deliver the industry s broadest, most unified end-toend enterprise payment solutions. Through our comprehensive suite of software products and hosted services, we deliver solutions for payments processing; card and merchant management; online banking; mobile, branch and voice banking; fraud detection; trade finance; and electronic bill presentment and payment. To learn more about ACI, please visit www. aciworldwide.com. You can also find us on Americas Asia Pacific Europe, Middle East, Africa +44 (0) Copyright ACI Worldwide, Inc ACI, ACI Payment Systems, the ACI logo, ACI Universal Payments, UP, the UP logo, ReD and all ACI product names are trademarks or registered trademarks of ACI Worldwide, Inc., or one of its subsidiaries, in the United States, other countries or both. Other parties trademarks referenced are the property of their respective owners. Immediate payments: Designing the future of European payments - ATL