Pan-European instant payments: Less talk, more action!

Last December the European Retail Payments Board (ERPB) proposed a definition for a European wide immediate payment solution, which included the following summary text:

“Instant payments are hence defined as electronic retail payment solutions 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 (within seconds of payment initiation)…..”

Views On Pan-European Instant Payments

Last month I attended the Euro Banking Association’s inaugural Open Forum on Pan-European Instant payments in Frankfurt. The event, which included representation from banks, consultancies and solution providers from across Europe, asked attendees to propose use cases for this evolving instant payment solution.

Tom Hay (our Head of Payments) and I also then attended the second gathering of the forum at the EBA Day 2015 event , both of which explored the subject in greater detail.

So How Would I Sum Up The Assimilated Views?

Well, firstly, everyone acknowledges that the banks must do something and quickly. The consensus is that failure to deliver a live service by late 2016 will leave banks very vulnerable to enforced regulation and/or pressure from competition.

Indeed, current estimates suggest that FinTech start-ups will be funded to the tune of some $20 billion in 2015, and a large percentage of that money will be targeted at creating payments processing propositions which challenge the banks’ market position. If banks (continue to) lose the battle to act as the interface between a customer and their spending, then they lose the customer relationship – and with it all of the cross-selling, marketing and data mining benefits.

A Second, More Worrying Observation

Despite the fact that the initial European Retail Payments Board (ERPB) definition has been around for over five months, there remains quite a range of views as to what that ‘something’ the banks must do actually is!

The spectrum of use cases put forward to use the solution broadly align to three incremental levels of service for the ‘instant’ part of the offering:

a) The remitter instantly knows he has sent you the money.
b) The remitter and the beneficiary both instantly know the money has been sent and irrevocably received.
c) The beneficiary can instantly spend the money.

Service ‘a’ is similar to the treatment of Standing Orders through the UK Faster Payment system, but aside from that use case it isn’t particularly ambitious and doesn’t satisfy many other needs. Indeed, my knowing that I have definitely sent some money somewhere is unlikely to impress anyone waiting for it to arrive!

On the other hand service option ‘b’ is useful, not least because it meets the ‘point-of-sale’ use case whereby a seller will let me leave the shop with my goods once he has a guarantee that I have sent him the payment (broadly the basis upon which the evolving ZAPP solution in the UK is built). That said, someone suggested at the conference that this use case is already satisfied domestically by the paper cheque systems. Aside from the fact that cheques can still be revoked, this ‘solution’ isn’t likely to impress customers or legislators.

But service offering ‘c’ is the only approach which meets all potential use cases one can imagine for instant payments – including the popular example of where a parent wants to transfer money to the bank account of their errant offspring when they are stranded at the train station with no money to get home.

And of course approach ‘c’ is the only one which meets the definition of instant payments as set out in the ERPB statement in December 2014.

The Need To Re-Focus Efforts

But my overriding impression of these sessions is why are we still discussing the ‘what’ instead of ‘how?’. Why aren’t we using our energies to build towards the five month-old ERPB definition?

Is it a case of self-serving interests, where banks are looking to do as little as possible because they are already swamped making changes to meet other regulatory initiatives?

Maybe it is, but I find it unlikely. Any compromise offering may placate the regulators, but surely none of the banks believe it will stem the tide of completion from the likes of Google Pay and ApplePay?

It strikes me that any reticence to embrace the ERPB definition is because many organisations know that they have a choice to make – do a full-blown solution or deliver quickly. They know they cannot do both.

So What Should The Industry Do?

Perhaps the UK Faster-Payments experience gives hope that a middle ground option is possible (Ok, I appreciate that the UK FP was actually delivered a little late but I’d suggest that was caused by separate scoping issues!).

In the UK we set out to deliver a full-blown (option ‘c’) solution which guaranteed delivery of funds and aimed to make them immediately available to the recipient. So the solution (rules, infrastructure and connectivity) was set up to underpin this.

However, the industry also acknowledged that for some institutions the legacy systems, batch processing cycles and connectivity would make such an objective hard to deliver in the short term.
The answer wasn’t to water down the destination, or to delay delivery as we waited for the slowest player. Instead the scheme rules provided some latitude in the service offered, allowing receivers to qualify their acceptance of a payment, and delay posting, for up to 2 hours.

A Potential Compromise?

In theory that two tiered offering could be seen as compromising the benefit of the solution. And of course it does. But it strikes me as being a realistic compromise which gets something out there and provides the foundation upon which new service offerings can be built.

And as more and more overlay services take advantage of this solution, pressure will be applied to those payment providers who offer a sub optimal solution, such that eventually the fully fledged solution will become the new norm.

Whether any of that will be agreed and delivered by the end of 2016 is, of course, still debatable.