About Instant Payments

• What Is Instant Payments?

‘Instant Payments’ as it’s named clearly means “paying or receiving payment instantly*”

Instantly* means within few seconds anytime – 24/7, 365 days

Instant payments also known as “Immediate Payments” or “Real time payments” have been dubbed as the “New Cash” of this era of digital payments as it works at least as fast as cash (if not faster than cash).

According to the ERPB, instant payments are defined as –

“An electronic retail payment solution 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). This is irrespective of the underlying payment instrument used (credit transfer, direct debit or payment card) and of the underlying arrangements for clearing (whether bilateral interbank clearing or clearing via infrastructures) and settlement (e.g. with guarantees or in real time) that make this possible.”

• Why Instant Payments?

Instant payments are set to drive the most significant transformation in the global payments landscape since the introduction of today’s electronic payment mechanisms.

In the digital era, it is incomprehensible why e-payments should take longer than e-mails or instant messages/ SMS, live movie streaming or Instagram. There is definite growing demand for immediacy of retail payments transactions and delaying things would be denying customers of their needs and expectations.

• What are the key drivers of Instant Payments?

• Customer’s need for overlay services – To meet the Customer’s growing demand for immediacy of retail payments Customers expect to pay for and receive their purchases as fast as possible. Suppliers, on the other hand, wish to have the certainty to be paid as soon as they release their goods and services.
• Need for banks to remain competitive – Instant payments will help banks to not just stay competitive by improving the transaction velocity, reducing fraud risks in the transaction processing but also boost its business growth by offering holistic payments solutions spanning the value chain in order to differentiate from Non-Bank Players.
• Regulators need for encouraging competition and digitalization – Regulators and central authority’s top agenda is to promote fair competition, Anti-Money Laundering, customer protection, and improving clearing & settlement mechanisms and digitalization of the economy.
• Need for ubiquitous Payments – Industry’s growing demand to modernize legacy payments infrastructure across countries to offer more ubiquitous payments instruments.
• Non-bank player’s need for customer acquisition – There will be a level field in a post PSD2 world and Non-Bank players want to enter into this space and use Instant Payments as a potent tool to drive significant market customer growth.

• What are the main benefits of Instant Payments?

• Dramatically improves the transaction velocity, overall efficiency and therefore customer’s satisfaction.
• Reduces fraud risk in the transaction processing by reducing transfer time.
• Creates new revenue sources and business growth by offering holistic payments solutions.
• Reduces transaction, treatment and settlement costs and nearly zero cost of cash management, handling and reconciliation for merchants.
• Reach new markets
• Obtain competitive advantage of being providers of holistic payment services

• Recent development in Instant Payments

1. TIPS
TARGET Instant Payment Settlement (TIPS) is a new market infrastructure service launched by the Euro system in November 2018. It enables payment service providers to offer fund transfers to their customers in real time and around the clock, every day of the year. This means that thanks to TIPS, individuals and firms can transfer money between each other within seconds, irrespective of the opening hours of their local bank.
TIPS was developed as an extension of TARGET2 and settles payments in central bank money. TIPS currently only settles payment transfers in euro. However, in case of demand other currencies could be supported as well.

There are three ways to access TIPS:-

• participant – eligible to open one or more accounts in TIPS
• reachable party – able to access a participant’s TIPS account by entering into a contractual agreement with that participant
• instructing party – enters into a contractual agreement with one or more participant/reachable party to instruct on their behalf

2. SEPA Instant

SEPA Instant Credit Transfer (SEPA Instant) is a unique real-time payments scheme in that it is a regional interoperable scheme. It fits within the global trend where the rise of mobile offerings, the wish to reduce cash and alternatives to classic Payment Service Provider (PSP) environments are driving the uptake and PSP propositions towards real time payments. The SEPA Instant scheme is an optional scheme, available to any Payment Service Provider (PSP) in the geographic scope of SEPA.
The SEPA Instant Credit Transfer, as defined by the European Payments Council (EPC), specifies a target maximum execution time of 10 seconds. In this timeframe, the funds have to be made available to the beneficiary or the payment rejected. The scheme operates 24/7/365 and delivers real time failure notifications. The maximum SEPA Instant transaction amount is EUR 15,000. The limit will be increased to EUR 100,000 on the 1st July 2020.

3. RT1

EBA CLEARING launched RT1, an infrastructure solution for the processing of instant SEPA credit transfers at a pan-European level. The payment system operates around the clock on any day of the year. It supports payment service providers in transferring euro transactions between payment accounts in less than 10 seconds end to end, with immediate availability of the payment amount to the beneficiary. RT1 has been engaged in substantial onboarding activities since its launch and currently reaches over 1,000 payment service providers (PSPs) in 12 countries through its 32 participant institutions

• What are the challenges for Instant Payments?

• Instant Payments currently does not have a proven business case – there is uncertainty on if customers would be willing to pay premium for the service?
• Banks would face investment costs (both one-off & on-going maintenance) as a key challenge – depending upon the complexity of the implementation with the existing systems.
• Implementation would be challenge especially when banks would like to integrate it with its existing infrastructure/systems and implement in parts.
• How will banks handle AML and KYC requirements in an instant environment?
• Interoperability will be a key challenge – as different countries may operate with different schemes. There is a call from the payments regulatory bodies for at least one single uniform scheme to serve Euro transactions in Europe

(According to EACHA – A published pan-European scheme is a pre-requisite to create the necessary clarity for infrastructures and operators in the clearing and settlement space, to design working solutions)

• Is there Regulatory framework or set standards for Instant Payments?

Earlier the Real Time Payment services were deployed using ISO8583, a standard that governs the cards and ATM market. More recently ISO 20022 is emerging as dominant standard. It has been around for a decade and has matured sufficiently to be adopted more broadly.

• What’s the current state of Instant Payments Landscape, current deployments?

Innovations in domestic retail payments have multiplied at a gravity-defying pace in recent years, driving unimaginable improvements. Entire domestic markets have completely transformed the way they shift value.

Current internet-based technologies and multi-functional technological devices have deeply changed the way payments are made. In just eight years between 2010 and 2018, the usage of cash in low value retail transactions in Sweden, for instance, dropped from 59% to 20%

The global development of internet-based retailers operating worldwide has spurred the emergence of transnational e-commerce. Payment solutions and service providers now aim to deliver the same level of service irrespective of the payer’s and the payee’s location, albeit with the obligation to comply with a number of different national or regional regulatory frameworks. In this context, cross-border payments tend to become a key prerequisite both for global merchants and consumers.

• What are the types of use cases for Instant Payments?

There are four principal use cases:

• P2P (Person-to-Person): Like – Instant money transfer of funds between consumers to instead of cash.
• P2B (Person-to-Business): Like – instant e-commerce or bill payments for utility bills – electricity, rent, gas, other payments for services like – electrician, cleaner etc.
• B2P (Business-to-Person): Like – instant pay-out of salaries, pensions, insurance claims, etc.
• B2B (Business-to-Business): Like – instantly paying taxes or fines/penalties, or simply one company paying for certain services from other company. (eg printing brochures)

• What sort of investments is needed to launch IP scheme?

According to some experts the investment required may go up to Euros 5 million but the actual amount may vary from an organization to another, depending on the level of existing payment infrastructure and systems and the amount of time and efforts needed to integrate them with the existing systems – it could also be as low as only Euros 500,000/-

• Define Instant Payments in the banking ecosystem

According to the European Central Bank (ECB) in order to preserve the ecosystem from fragmentation and leverage the harmonization and integration achieved with previous initiatives, the Instant Payment ecosystem should be divided in three main layers.These three layers are the

• Scheme layer (end user scheme and banking scheme layers)
• Clearing layer
• Settlement layer

• Has block chain technology any role to play along with Instant Payments?

Yes, experts believe that block chain technology is a perfect companion for Instant Payments when used in the clearing and settlement layers.