A typical M&A closing highlights the need for and value add of instant payments:
parties to the transaction with an acquisition finance element meet late in the evening to sign the documents and prepare everything for the closing. It is their plan that when the banking day starts the payments will be ordered and hopefully processed.
This is a classic example of where one would think: wouldn’t it be great if a payment could be processed instantly and
the transferred amounts were visible by the payee within a few seconds? Yes, it would be great. Is that possible? Yes, it is.
So why is this option not widely used? The bridges to a world where instant payments are the “new normal” are in the process of being built.
What are instant payments?
Instant payments are electronic payment solutions that process payments in real time, 24/7, all year long. Transactions
are settled within seconds and funds are made available immediately including on weekends and bank holidays. The classic use cases are payments by scanning a QR code, or transfer of funds using a mobile phone number.
The first faster payments system was launched in Japan in 1973. In 2019, 54 countries registered active real-time payment schemes, a growth of 35% from the previous year. A growth trend is apparent, and more countries, such as Canada, Peru, Indonesia, New Zealand and Colombia, are expected to offer instant payments in the near future.
In the United States, there are only two major players that offer real-time payments: The Clearing House’s RTP and
The Federal Reserve’s FedNow (which is still in its pilot stage), envisaged to be launched in 2023.
In Europe, in 2017 the European Payments Council has developed a ‘Scheme’ for instant payments in euros (the ‘SCT
Inst. Scheme’). Based on this scheme, funds up to a threshold of EUR 100,000 can be made available in the account of the payee in less than ten seconds. According to the Retail Payments Strategy for the EU, despite its introduction in 2017, the adherence rate is lower than expected: only 59% of the European payments services providers.
Another scheme launched by the European Payments Council in 2019, the ‘SEPA proxy-look-up’ also has a less than ideal adherence rate. This scheme allows customers to use their mobile phone to “transfer money from their payment account to the account of another individual in the EU without manually exchanging payment information such as the International Bank Account Number (IBAN)”.
So why is the adoption of instant payments so slow?
The adoption of the Payment Services Directive, as further revised, paved the way in Europe to boosting innovation and opening the payments segment to the wider market. This stands in contrast to years prior where the industry was traditionally dominated by banks.
Currently, there are several fintech players (including Big Techs like Google and Apple) that are looking into leveraging their infrastructure and data to make available to their customers innovative payment products.
WhatsApp has also entered the payments market in countries like India and Brazil where instant payments
are making strong year-on-year gains.
Instant payments are at the forefront of fintech innovation. Traditional players such as banks are now making
use of the big data that they hold in order to build customer-tailored products.
To all of the above, COVID-19 added another layer which triggered an increase in the adoption rate of instant payments due to their no touch feature which has become key in industries such as retail, restaurants and entertainment businesses.
The advantages of instant payments are clear, but a bumpy road lies ahead. Firstly, there are costs attached to building a scalable infrastructure to ensure connectivity at a national level and then cross border. Secondly, inter-operability of all systems must be ensured by creating standards applicable across the board to all players. Thirdly regulatory efforts are required in order to regulate IT standards, security, privacy, fraud prevention, AML checks, dispute resolution mechanisms, etc.
Currently, instant payments are not covered by the same guarantees available for other payment methods
such as protection against fraud, reimbursement policies, and strong security features. Further, a uniform
acceptance is yet to be achieved. Lastly, unlike more traditional payment methods, instant payments require
a stable internet connection, from both parties, and other potential requirements depending on the devise
All the above make it hard for a one size fits all system to emerge.
However, the European Commission is driving efforts to make instant payments the new norm in Europe, thereby allowing customers to choose, on an informed basis, the payment method that suits their needs.
To this end, the Commission is currently in the process of revisiting the applicable legislation in order to allow
“an EU-wide cross-border instant payment solution (that) would complement current card schemes, reducing the risk of external disruption and making the EU more efficient but also more autonomous.”
The sooner these developments culminate in an uptick in adherence rates, the sooner businesses and individuals will benefit from the advantages of instant payments.