This is the first in a series of blog posts which explores various aspects surrounding real-time payments. It is meant to complement Lipis Advisors’ ongoing research for the Global Payment Systems Analysis (GPSA), which will also be covering 19 real-time systems. Check back every month for additional insights into real-time systems and the broader payments ecosystem.
What is a real-time system and why is it still such a big topic in the payments industry? While there is no agreed upon industry-wide definition of what constitutes a real-time system, we at Lipis Advisors believe that true real-time systems – from the end-consumer’s perspective – share four key characteristics, as discussed in our upcoming 2016 Global Payment System Analysis, namely:
- The system has to be available 24/7
- Confirmation must be sent to the sender and receiver in or near real-time (in seconds, rather than in minutes)
- The receiving party needs to have access to the funds in or near real-time
- The system needs to reach all consumers in a given market, i.e. payments cannot be only made to other account holders at the same bank or group of banks.
If any of these four characteristics is missing, the system cannot be considered a true real-time system. For example, if confirmation is not sent back to the sender in or near real-time, then the system being used is actually a deferred settlement system, just like many other low-value bulk ACH systems. Similarly, if the system is not available for use 24/7, this means that senders and receivers have to wait until the next (business) day before the transaction actually takes place – which is also true of typical ACH-based systems. Lastly, if the system is not available to all consumers but rather members of a specific bank or group of banks, we cannot call this payment method a payment system, as systems do not discriminate based on bank.
So why are real-time payments such a big topic in payments? Real-time payments are where the most rapid development and highest levels of investment in the payments industry are happening. For example, the world’s two largest single-markets, the Eurozone (via SEPA) and the USA, are both planning on implementing real-time payments. These changes will represent the biggest single changes in the payments industry in both markets since the implementation of SEPA, in the case of Europe, and the introduction of widespread online banking in the USA more than a decade ago.
Opportunities for development and beyond
Even before the first real-time payment is made in either of these geographies, the development opportunities for multiple sectors of the payments industry will be plentiful as retail banks and central banks hammer out the technical details that need to be put in place for a real-time system to successfully enter the market. These opportunities include data encryption, unifying data standards, the creation of a whole new network, updates to and potentially newly built liquidity management systems for settlement accounts, and system rules to standardize how gateways will work for a multiplicity of members. And then, of course, there are the non-technical rules-based issues such as how settlement will take place and how often (once a day, twice a day, or even more), how settlement would be wound down should a member bank go bankrupt, determining optimal collateral arrangements, and much more.
Who uses real-time systems?
Real-time systems tend to have several key user groups, including P2P (person-to-person), B2B (business-to-business), C2B (consumer-to-business), and B2C (business-to-consumer). This list, however, is by no means exhaustive, as mobile POS (point-of-sale) transactions as well as international payments and e-commerce are also high-growth areas for real-time payments. These different user groups all present different opportunities and challenges for both users and the businesses serving these users.
On top of the various user groups interested in real-time payments, there is a wide range of PSPs (payment service providers) that service these various markets, including both banks and non-banking institutions. Services like Apple Pay, PayPay, Google Wallet, Bitcoin, and Square Cash are all examples of non-bank PSPs active in the real-time market. These non-bank PSPs can be further broken down into two broad categories based on how they function, namely account/wallet providers (such as PayPal, Google Wallet, and bitcoin) and payment gateways (Apple Pay, LevelUp, and Facebook’s messenger-based payment system). While the difference between these two types of systems may seem subtle, there are important differences, namely that account/wallet providers allow users to actually store currency and then spend it whereas gateways in essence store account/card details and allow you to access them via their service, meaning the funds never actually leave your account.
Lastly, there is the technical aspect of how these systems are constructed and the implications they have for risk management and providing value-added services, including how the real-time system connects with the settlement system from a settlement account perspective, which overlay services the central network provides, and access rules and methods for individual banks and other PSPs.
As real-time systems continue to develop and expand around the globe, there is no payments community that will not be affected by the shift in speed. Once systems are in place, the potential for real-time products and services will culminate the next phase of market development. With a focus on real-time systems since 2012, the Lipis Advisors’ Global Payment Systems Analysis (GPSA) will enable the payments industry to examine trends and products available in established real-time markets. The GPSA details the functionality and operational practices of the most mature real-time systems as well as those built in the last five years. Reviewing the spectrum of real-time systems allows GPSA subscribers to gain insight into the pitfalls fledgling real-time systems face on the road to maturity.