Discussion hosted by Inbound FinTech, led by Apply Financial, Ebury Group, Form3 and Railsbank, on 28th February 2019
To the end-user, the advent of instant payments is an overdue recognition by banks and the broader payments industry of new realities and expectations in the digital economy. To payments providers, especially long-established players, the pros and cons are less clear cut. Instant payments can be viewed as both an exciting opportunity to deliver new services and a potentially terrifying existential threat.
Notwithstanding the speed, convenience and transparency they can offer individuals and businesses, the combined disruptive power of instant payments and open banking are nothing short of transformational for banks, payment service providers (PSPs), merchant acquirers, card scheme operators, and other incumbent institutions. It could make obsolete the products, services, systems, processes and relationships on which business models and revenue streams have relied for decades. Could credit cards and direct debits really be a thing of the past; what new benefits can B2B end-users expect to enjoy; when will the full effects of the instant payments revolution really be felt; and who will be delivering them?
With so much at stake, it is small wonder that the atmosphere fairly crackled with energy and anticipation at the Financial Markets Insights (FMI) round table event hosted by Apply Financial and Inbound FinTech at London’s Devonshire Club at the end of February.
The round table event was framed by our recent report into the future of instant payments in the B2B space. Take a look at our debrief of the discussion, including the key talking points and quotes from the contributors.
Delivering Business Value
The UK’s Faster Payments scheme might have recently celebrated its first decade, but we’re very much still in the foothills of a new instant payments landscape, particularly when it comes to delivering real business value to B2B clients. Much still needs to change from an infrastructure, security and support perspective to even deliver effectively to the end-user. Citing the recent delay to Pay. UK’s Confirmation of Payee scheme, Apply Financial founder and managing director Mark Bradbury opened the discussion with a call for collaboration. Banks, fintechs, FX and payment service providers must work together closely to overcome the barriers to delivering secure, added-value services in a real-time context.
Mike Walters, chief product officer, Form3, a cloud-native payments solutions developer, underlined the magnitude of the task ahead, insisting that a “systematic re-platforming” is required by incumbent banks and payment institutions for long-term survival. Walters asked roundtable participants to consider all the critical underlying processes – from AML and sanctions screening to liquidity management and settlement – that must soon be executed within fractions of a second. Walters further asserted that service level differentials between firms that make the necessary investments and those still struggling to hack their legacy platforms would be ‘chalk and cheese’. Once end-users experience truly instant payment services, they will not accept anything less, he suggested.
Instant payments for B2B
To date, instant payments has been a largely retail-level activity, but current developments are making it more relevant and attractive to B2B players. Existing domestic schemes such as UK Faster Payments are lifting value caps; increasing number of countries worldwide are upgrading their payments infrastructures; and international, cross-border channels such as SWIFT are also upping their game, under pressure from fintech competitors. This will not only offer new opportunities for better control, visibility and certainty of payments for business users, but also facilitate new services and business models, roundtable participants agreed.
But the B2B instant payments market will only take flight if all the underlying processes and technology associated with payments can be upgraded too. Brad van Leeuwen, head of partner network at open banking platform provider Railsbank, suggested that many banks and other market participants may face problems in mobilising liquidity to fund the close-to-real-time drawdowns required in a high-value instant payments context. Payment institutions around the table confirmed the growing liquidity challenges of supporting real-time payments in multiple markets, but noted also the increased interoperability efforts of central banks to facilitate cross-border flows.
Toby Young, chief technology officer, Ebury, an FX and payment services fintech provider, proposed that artificial intelligence-based solutions could help service providers to manage liquidity requirements and cut-off times across global markets. But he also pointed to positive developments that are improving the cross-border payment experience of corporates and institutions. In particular, Young pointed to the impact of SWIFT’s gpi service, which provides greater transparency on cross-border payment transaction status and charges, whilst acknowledging also the work of the Bank of England on framing common payment data standards to improve reconciliation efficiency.
Although such developments were welcomed, roundtable participants emphasised the challenge of reengineering internal systems, structures and processes. Form3’s Walters predicted that many incumbents would have to adopt a “scorched earth” policy to thrive in the new environment. Others recognised both the need for urgent action – driven by the speed of instant payment scheme adoption in developing and mature economies – and the difficulties of building a traditional business case at a time when high levels of disruption and uncertainty are rendering return on investment estimates redundant.
Railsbank’s van Leeuwen suggested that business models based on per payment charges would not survive in the world of open banking and instant payments; others advocated using the thought-experiment of imagining how they would acquire, retain and deliver differentiated services in five to seven years’ time, as a means of framing their priorities for today.
Among all the uncertainty, it seems that many of today’s payment products will be replaced, and soon. Whilst some see instant payments as a direct threat to card franchises, with request for payment (RFP) schemes touted to replace direct debits, doubts remain over the timing and the speed of migration. Like ‘vanilla’ instant payments, RFP is initially seen as a retail instrument, but roundtable participants also saw strong B2B potential, due to its scope for additional flexibility and control, including the ability to offer discounts for early settlement. Equally, they recognised the need for regulatory drivers to help overcome inertia amongst institutional payment users and providers.
Railsbank’s van Leeuwen said it was up to providers to develop the compelling customer journeys and experiences that would drive migration, but Walters at Form3 reiterated the critical role of regulatory mandate in widespread adoption of new payment types. Ebury Group’s Young suggested that early adopters would continue to innovate and explore new channels ahead of regulatory changes, predicting the growth of cross-border RFP solutions. With many institutions gearing up to meet the September 2019 deadline for full compliance with PSD2 many see 2021 as a realistic timeframe for regulatory intervention to mandate universal use of instant payments.
As Apply Financial’s Bradbury concluded, both the pace of payments and the pace of change is accelerating. Will you be left behind?
If you’d like to get the FMI whitepaper on the future of instant payments in the B2B space, you can download it for free here: Seizing the opportunity; understanding the reality (capitalising on the growth of instant B2B payments).
This Blog post was originally published on Apply Financial website on March 27, 2019