In an increasingly digital world, the demand for real-time payments for business to business transactions is simply not being met – despite the financial industry working hard to make payments better, more efficient, simpler, cheaper and faster for consumers.
Consumers expect payment services that are as fast, convenient, secure and provide the same value for money to match other digital services they come into contact with on a daily basis, such as streaming music, reading the news or ordering a takeaway from their smartphone. These immediate, real-time interactions with technology form a huge part of everyday life. But when it comes to the business world, payments processes don’t appear to be nimble nor innovative enough to meet these expectations when it comes to the digital landscape.
The cost and speed of real-time payments is mostly dependent on the value of the payment, and the financial system through which transactions are made. Typically, large value, inter-bank payments are undertaken by real-time gross settlement (RTGS) systems operated by central banks. These high value payments are settled on a one-to-one basis without bundling or netting, and as payment is immediate, final and irrevocable, this results in lower credit risks as settlement lags are eliminated. CHAPS is the United Kingdom’s real-time gross settlement system, with infrastructure provided by the Bank of England.
For those who need to process high-volume, low-value payments, the likelihood is that they’ll be dependent on automated clearing houses (ACH). These include the Pan-European Automated Clearing House (PE-ACH), which is responsible for SEPA compliant credit transfers and direct debits across the Eurozone, and BACS, which processes UK domestic payments. Again, ACHs are mostly operated and controlled by central banks, or are outsourced to a third party.
Payments are usually batched and netted to optimise the use of liquidity, and are processed on a deferred net settlement basis (DNS), meaning transactions are often not completed within the same day. Even longer delays and higher costs occur when processing cross border transfers. The most successful expedited payments system is the UK based Faster Payments Service (FPS), which is made up of just ten members – all of them established banks.
However, advances in technology and changes to the Faster Payments Service will allow businesses to move away from the high fees charged by banks to process payments quickly and the restrictions that come with the use of single, end of day batch processing. Instead, customers will be able to access more affordable real-time payments solutions.
With six FinTech vendors already committed to working with the new Payments Regulator to develop new technical access solutions, the barriers holding back real-time payments should now be coming down. But the industry as a whole must also reflect on the requirements for payments infrastructure by businesses trading on a global scale.
FinTechs have been disrupting the payment sector by providing solutions that enable their customers to make payments in a more efficient way, whether business-to-consumer, peer-to-peer or business-to-business. These innovators are enabling real-time transactions – as well as providing FX conversion in real-time, demonstrating that cross border real-time payments are already possible. It’s just a question of finding the providers to deliver such a solution.
The majority of FinTechs have developed their own systems, allowing them to operate outside of the existing banking infrastructure to speed up payment processing times. While these systems tick most of the boxes when it comes to making payments more efficient, typically both the payer and payee must be users to take advantage of the service. Without the ties to regulated financial institutions, problems around compliance and security may arise and have the potential to increase their costs and impact the original business model. There is also the added risk that the small and isolated pools of liquidity that are created in a standalone system may not necessarily benefit their customers. These problems are often exacerbated when cross border payments are involved.
FinTechs serving an international market can become part of a larger community as Banking Circle members, giving them access to an Oracle based platform in a regulated environment. Through the Banking Circle, Members and their merchants are able to make payments in real-time, and, with access to a large daily FX liquidity pool and low transfer fees, thereby extending their value chain significantly with minimal risk.