Modern digital technologies are amazing, aren’t they? All around the globe, we can get packages within hours, order pizza without leaving homes, connect to friends living thousands of kilometers away. The Internet made our lives way more engaging and more straightforward. It’s an infinite source of information accessible in a few mouse clicks or finger taps.
And it’s even stranger that this world still can’t provide us with instant pay transactions. In 2019, FIS identified only 54 countries with active real-time payments (RTP) systems. It’s 14 more than in 2018 but still not enough. Banks and even the Clearing House real-time payments are too bounded. Customers can’t transfer money on weekends or beyond banking hours while international transfers take up to weeks!
Our clients from the banking industry often ask us to update their in-house systems or build new ones. That’s why we’ve gathered enough knowledge on this topic. Catch the first insight: real-time payments will skyrocket soon. The current situation features outdated payment technologies, so more and more companies invest in RTP. Businesses that want to grow or even survive should care about this tech now.
With the help of experts from DICEUS and major analytical groups like EY, Deloitte, and Accenture, let’s define the basics of real-time payments, find out prominent use cases, and grasp how to catch this wave.
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An RTP history lesson
Real-time payments aren’t new at all. There are dozens of software providers with their own RTP schemes. And there are dozens of countries that implemented these schemes. You may be wondered, but the very first real-time platform was launched in Japan in far 1973! Although it uses RTGS and deferred net settlements, it processes transactions instantly. And the first true real-time payment solution with no settlement limitations was released in Switzerland in 1987.
There are more examples, according to Accenture, but we will list the most representative ones:
- 2001: South Korea, deferred net, 1 settlement per day, 1-2 seconds speed.
- 2004: Mexico, real-time, 0-60 seconds speed.
- 2006: South Africa, deferred net, 1-4 settlements per day, 0-60 seconds speed.
- 2008: Chile, deferred net, 2 settlements per day, up to 15 seconds speed.
- 2010: China, deferred net, 6 settlements per day, 0-20 seconds speed.
- 2012: Sweden, deferred net, multiple settlements, 1-2 seconds speed.
- 2017: Australia, real-time, up to 60 seconds speed.
Many countries use proprietary systems, but the majority still sticks to the global standard – ISO 20022. As you can see, the network launched in Switzerland in 1987 set an almost unreachable level: real-time payments, instant payment speed, etc. But businesses and governments try to improve their services by moving to true RTP schemes with quick payee speeds. Further, we will talk about the tech basics, as well as its recent rise.
Also, you can find more stories about national RTP models in the study by the European Central Bank. To save some time, let’s just accept that this technology is pretty familiar for different regions today – it’s presented in Europe, both Americas (real-time payments in the US were launched not very long ago, though), Asia, and even Africa.
Fundamentals of real-time transactions
It’s essential to grasp how real-time payments work to prove that they set new industry norms. In the next few paragraphs, you will learn the tech basements and find out how innovative approaches change the financial landscape. As well, consider another fundamental point – the rise in capitalization that reflects the supply/demand balance.
According to MarketsandMarkets, the global RTP market size will increase from $6.8 billion in 2018 to almost $26 billion in 2023. Among the reasons, researchers mention the growing demand for connected gadgets and quick settlements. Our experts add another factor – open banking that brings more transparency + flexibility for bank customers and providers.
For all readers interested in open banking, we have an article dedicated to this topic: How Open Banking Has Changed Financial Services So Far.
And if you’re ready to dive into the world of RTP, let’s go!
How the technology works?
Actually, there are no tangled algorithms. Real-time payments are pretty simple to understand yet not as simple to implement, so we still don’t see the mass adoption. According to the name, the technology enables instant money transfers available as multi-channel operations 24/7/365. It starts with a small request that triggers an interbank transaction between personal accounts with equally instant notification.
All RTP schemes include these key aspects:
- Authorization. In other words, it’s a payment certificate that verifies the operation.
- Posting. During this step, funds become available for the transaction immediately.
- Settlement. This step comes as an instant pay. It sets obligations between institutions.
- Notification. It includes info about delivery for both payee and payer.
Put simply, real-time payments focus on immediate processing of money transfers between different parties in various segments: B2B, B2C, etc. It’s clear that RTP opens new interaction ways. But what are the benefits exactly?
What are the key benefits?
Let’s refer to our experts again. Anthony Walton, CEO at Iliad Solutions, analyzes the 2018 study by Ovum and finds some intriguing statistics. According to the report, more than ¾ of businesses expect or are currently facing improvements in customer service related to RTP. As well, Walton refers to Chris Skinner, an independent financial expert, who states critical advantages of real-time operations: ubiquity, speed, data exchange, and 24/7 availability.
To understand these benefits, we want to show four potential RTP use cases in five segments. They come with different tasks and advantages.
Business to business – B2B
In short, this category includes supplier payments. Both parties in this sphere benefit from the higher speed and better data exchange. For instance, buyers can make payments precisely on time to avoid extra expenses. Suppliers also can benefit from instant money transfers, better DSO, and data-driven remittance info. RTP tech here boosts forecasting, too.
Business to customer – B2C
Major players in this field include underwriters, lenders, and FinTech startups. Real-time payments facilitate salary delivery, claims, and various settlements. As a result, scalability grows while transactions become simpler. It also boosts the presence of a gig economy where entities and individuals can exchange money/data way faster and on smaller levels.
Customer to business – C2B
This group unites all transactions in the direction opposite to B2C. In other words, it includes payments from clients to companies and/or governments. C2B deals feature bills, hospital payments, POS payments, etc. Real-time operations here also can boost user experience by making all transactions faster and enabling payments in non-working time.
Peer to peer – P2P
The last category is divided into two smaller parts. Both of them feature peer to peer operations, i.e. payments from one individual to another through a specific P2P gateway. This space features the most common uses of RTP because people appreciate availability, convenience, and speed of payments in these two cases:
- Cross-border P2P. It includes remittance and other transnational operations.
- Domestic P2P. Here are repayments to relatives, rent, gifts, etc.
Current RTP driving factors
Chris Skinner, already mentioned in the previous part, explains the rise of RTP ideas clearly. He reminds that one of the most significant economies in the world – the USA – has launched its own real-time payments network in 2017 only. The Clearing House real-time payments system became the first of its kind launched here in the last forty years!
But what about driving forces? According to Skinner, innovations are often driven by regulatory changes, the desire to mitigate tech risks, and tighter competition. However, the most definitive factor is the wish to improve payment systems to help clients access faster and smoother transactions.
Considering this opinion, we also can define a few major driving factors:
- Globalization. Regardless of the business or customer location, parties expect equally high speed and convenience of transactions. Thus, the adoption of RTP in the developed regions forces other countries to work in this direction.
- More expectations. Both clients and merchants want to get better processing options. They want to improve cash flow management, access services at any time, and forget about delays. Speed becomes the top priority.
- New business models. FinTech startups are quickly disrupting the financial industry. They offer much faster and simpler solutions than competitors. Mobile-only banks, payment innovators, and other players force traditional companies to evolve, too.
- Regulatory influence. National teams also want to adopt RTP faster. They push private businesses to introduce new standards, install new solutions, and offer new real-time services. In developed countries, it’s the main driving force.
- Tech innovations. Last but not least, new technologies also stimulate companies to transform. Smartphones, P2P payments, social media, cryptocurrencies, NFC – all these concepts move our world towards instant payment transactions.
Combined, these factors enable fast growth of RTP bounded to high demand. However, some obstacles prevent this rise.
Challenges that prevent total adoption
Anthony Walton says that the main barrier features integration issues. The expert isn’t sure how modern RTP systems can be smoothly connected to legacy payment solutions that still dominate the financial world. In this case, interoperability becomes the most urgent question. Common standards can help to find a solution, however.
Another challenge for companies that want to enable RTP lies in customer attitude. If your bank fails to deliver a reliable and functional real-time payment solution, you may lose the audience. Happily, for clients, there are dozens of alternative FinTech services that have already deployed successful RTP platforms.
To deal with these challenges, industries should follow at least three core steps:
- Collaborate for innovations. Thanks to open banking, financial institutions can cooperate freely. Banks, startups, payment providers, and governments should work together to establish reliable and secure RTP ecosystems.
- Enable authentication and control. Instant payments are processed immediately, so they come with more risks of fraud. Proper KYC/AML policies, along with next-gen identification, should help businesses to fight scams, as well as reduce new risks.
- Invest in digital transformation. It’s all about tech. New payments require relevant infrastructures and technologies like message standards, notifications, data transparency, etc. It’s crucial to modernize your systems if you’re going to implement RTP.
Don’t forget that any bank must have a well-developed IT infrastructure to integrate RTP solutions. The link will open an ultimate guide on upgrading your software/hardware.
The future of real-time payments
Considering all of the above, we can be sure that the RTP concept is here to stay. It works successfully in more than fifty countries, with dozens more to go. Governments, banks, and FinTech startups are investing in it because of the growing ubiquitous idea of client primacy. Customer-centric ecosystems study demand carefully, so they know how to please their users. Evidently, people want to access faster and simpler transactions.
We can’t name exact terms, but it’s clear that real-time payments in the US and other regions will become standard in all industries and all countries sooner or later. From Deutsche Bank to the US Federal Reserve, even the most traditional entities start integrating RTP systems, not to mention disruptive startups. At DICEUS, developers and analysts see how this trend is rising because we work closely with various financial businesses. It’s the right moment to find such an experienced tech partner, huh?
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