Real time payments significant impact on Financial Services

As real-time payment rails expand geographically, there’s an underlying infrastructure that allows payments to be paid to anyone at anytime, anywhere. These payments can be account-to-account (e.g., VocaLink and debit cards) or with underlying credit approval (e.g., Visa and Mastercard). The movement of money, once the preserve of banks, is now open to more lightly regulated companies, such as PayPal. Competition, aided and abetted by Open Banking and PSD2, will become much more active across banking services.

Here’s how a variety of ecosystem players will be impacted:

• Retail banks. As the payment process becomes unendingly simpler, the ability for consumers to switch banks becomes painless. In the UK, where real-time payments originated, in the last three months of 2018, 235,648 account switches were successfully completed – up 22% compared with the previous quarter, for a total of 929,070 switches in all of 2018. Retail banks now need to make certain their customer requirements are met – and at a competitive price.

International payments were once complex and costly. Retail banks had special international departments that charge 10 to 20 times the cost of a domestic payment and were expensive to maintain. Banks themselves can use the new consolidated payment rails to provide a cheaper, transparent and easy-to-use service for clients. Nonbank competition (e.g., Fintechs such as Transferwise) are entering the space using the new payment rail infrastructure.

• Commercial banks. It’s here that the biggest changes are taking place, as the consolidated rails provide a much better global payments service than what corporate banks offer customers. The corporate banks can use the rails to dramatically improve service to their corporate customers while removing in-house costs. The global payments become transparent, fast (within 24 hours) and, for the first time, trackable. Efficiency is higher as the straight-through processing (STP) rates approach 100%.

The banks have to decide on which internal, international infrastructure it now needs itself. All currencies have to be cleared and settled in their own country. Each country has a set of rules, and the existing corresponding banking system is in decline.  Correspondent banking went from the predominant model for global coverage to one that’s being made to look archaic with the new technologies. This is a big benefit for the corporates, as they now can, with certainty, know the amount of money being sent and its arrival.

• Merchants. E-commerce payments are almost entirely made by cards.  The ecosystem enabling merchants to be paid for their goods and services has many players.  A purchase may well go from a merchant to its payment gateway, to the merchant acquirer, through the card scheme (e.g., Visa/Mastercard), to the issuing (purchaser’s) bank.  All parties in this chain take fees, and it’s the merchant who pays.

It’s no secret that merchants dislike this situation, but currently, they’ve got little choice given the vested interests of the parties in the card payment chain and the near universal acceptance of cards.  However, the growing availability of account-to-account, real-time interbank payment services means that the combination of inventive Fintechs and merchant pressure will eventually lead to alternative payment methods circumventing the card rails and intermediary players in that method.

The advantages to merchants are clear: With fewer intermediaries in the payments process, there will be a significant cost savings for merchants.  The potential for real-time settlement of transactions will improve their cash flow and help their working capital.  The consequences for the card schemes will be loss of revenue and transaction volume.  Perhaps this explains the interest in Visa and Mastercard in Earthport, VocaLink and others.