BERLIN -- Real-time payments talk is everywhere these days. There are myriad variables that factor into creating a successful real-time system, be it domestic or international. Last week at the Payments Innovation Alliance meeting, attendees broke into groups to discuss four major trends affecting real-time.
A group focusing on real-time adoption found that there are significant questions around ubiquity. While some experts see ubiquity as the starting point for real-time adoption, others view it as the endgame. “It’s ease of use and application that will bring banks together to create that ubiquity,” said one attendee.
The group also discussed ways to achieve the reach of a real-time payments system across large areas. In order to achieve mass adoption, there likely needs to be a strong relationship between the payment operator and the banks across a particular region. “Perhaps we need to turn to ERP systems to build that bridge in order to create better reach for the larger environments like Europe and the United States,” said the group leader.
Lastly, the group concluded that both consumers and corporates will pay for the convenience of real-time payments. But a big part of that equation is awareness; as these systems are launched—particularly in the U.S.—the public needs to be educated on what they are and how they work. “Banks and payment operators need to create that awareness and marketing around real-time payments,” the group leader added. “The UK is a great example of this; regulators wouldn’t let banks off the hook in terms of promoting services.”
Another group focused on the potential for use of blockchain or distributed ledger technology (DLT) for a real-time. Generally, the group agreed that there is not much potential for DLT for a central infrastructure. As revolutionary as DLT may be, the majority of efforts underway to establish real-time capabilities in domestic or international payments systems will involve traditional payment rails and legacy systems. Building out a national or international payments system that uses DLT would be a huge, costly undertaking.
Instead, the group agreed that there is more potential for DLT in providing information around real-time payments than the payments themselves. “Perhaps they might allow for a registry that banks can connect to get KYC information and other information that may have some relation to a transaction but isn’t the transaction itself,” said the group moderator.
There is also a lot of potential for DLT internally at a bank or a corporate. The group believes it could allow for more transparency, essentially breaking down internal silos related to payments or other functions.
Additionally, strong governance will be needed for any mainstream DLT. Thus, permissioned ledgers are more likely to win out over the permissionless, bitcoin-model ledgers, at least when it comes to bank and corporate use. “Even if we’re entering an era of open data, you still need to have rules and have that trust,” said the group moderator.
Expanding upon this point, the group addressed the “transparency paradox” with DLT. While transparency is a major goal of the technology, not everyone—particularly banks and corporates—are going to want the full details of their transactions available to the public. Therefore, again, permissioned ledgers are pretty much the only way DLT is going to work in a corporate setting.
Real-time system design
A third group looked at the various real-time system designs around the world that have either been deployed or are under development. A decade ago when faster payments systems first began to appear, the trend was toward deferred net settlement. “But over the last few years, with Poland and Sweden, and now SEPA and the U.S., we definitely see a clear movement towards prefunding,” said the group leader.
Regarding the Single Euro Payments Area (SEPA), in an earlier session, Payments Innovation Alliance attendees received a look at the TARGET Instant Payments Settlement (TIPS) initiative that launched in September 2016 to explore whether a real-time system is warranted in the euro area. The ECB defines instant payments as electronic retail payments that are available 24/7/365, which enable instant clearing, deferred or real-time settlement, and immediate availability for the beneficiary.
However, unlike SEPA, banks will not be required to use TIPS. “No mandatory instant payment regulation is planned,” said one banker in attendance with in-depth knowledge of TIPS. The decision on whether TIPS goes into effect will be made later this month, and the general consensus is that Europe will follow the rest of the world on real-time.
The group also touched on what will happen with fraud once a real-time system goes live in a country. The group concluded that it generally takes a few years before different regulatory bodies to determine what the real fraud risks are.
The last group focused on the feasibility of a real-time payments solution for cross-border/cross-currency transactions. For such a solution to work, there first needs to be an appropriate infrastructure in place on both sides of payment process.
The group also debated whether a cross-border real-time solution is truly necessary, and concluded that the need for such a system will be driven by the market. There is not a major push for cross-border real-time payments right now, but eventually, there will be. SEPA’s resolution could be the turning point; once cross-border real-time payments are available in the euro area, we could begin to see a larger demand for them on a global level.