There is currently a lot of discussion about the payment systems of the future. Precedents have been set at the European level for a long time now, and the technical and legal prerequisites defined for new payment services. One example is instant payments.
Europe banks on instant payments:
In December 2014, the European Retail Payments Board (ERPB) declared that, in the near future, at least in Europe, there will be a solution to make retail payment systems capable of real-time payments with 24/7/365 availability. Instant payments differ from express transfers in that instant payments are in fact cleared immediately, or close-to-immediately, while express transfers use the existing clearing & settlement time window.
In November 2015, the European Payments Council (EPC) published a suggestion for an optional SEPA Instant Credit Transfer (SCT Inst). In the case of instant payments, payments will be sent into clearing and, in some cases, also into settlement for each individual transaction. Currently, there is a trend towards deferred settlement (for example via TARGET2): In this case, the recipient can only access the amount at a later date.
The EPC plans to have the scheme for instant payments developed by November 2016, as an electronic, multichannel-capable payment solution in EURO. The plan is to implement the instant payment system by November 2017.
National instant payment solutions are already in place in the European countries Denmark, Poland and Sweden, as well as in the United Kingdom. In order to avoid a fragmentation of solutions and to further harmonise payment methods, a Europe-wide scheme must now be created.
The regulatory requirements are explained on the following websites:
- European Central Bank
- European Payments Council
Requirements for parties involved:
Retailers and entrepreneurs:
Retailers want to strengthen their market share by simplifying the payment processes (e-commerce and POS) and to offer payment methods with far reach. For this process to be accepted, it must offer high security standards, easy use and pragmatic technology (interoperability, high transaction speed, multichannel capability etc.).
For the retailer, the costs of establishing the necessary infrastructure and the fees for transactions must be commensurate to the expected benefit.
The instant payments method generally allows no refunds, rather involves guaranteed payments. This spares retailers the costs for processing returns. Nevertheless, the retailer ought to offer his customers buyer protection, thus allowing them to initiate a reverse transaction in retrospect.
The instant payments process must also meet the critical mass of consumers. Analogously to the retailers' side of things, this can be achieved by offering high security standards, easy handling and pragmatic technology. As an additional security aspect, anonymous payment must be possible. This means the retailer only receives the customer's name, address and account details if the customer explicitly authorises it.
Furthermore, it must also be possible to make transfers elsewhere with immediate effect, such as in a restaurant for splitting the bill between several people.
Challenges in the instant payment process
- The entire payment process at the POS currently takes only 15 to 20 seconds, and the instant payment process must be at least equally fast. The following time windows are currently under discussion:
- Interbank processing within 1.5 seconds
- Complete process concluded within 5 seconds
- The billing data are sent from the portal or from the payee's checkout at the POS to the payment app on the payer's mobile device. This can be done using a QR code/barcode, for example, or by NFC. An open standard must be defined to guarantee interoperability of all systems. The retailer is responsible for providing the infrastructure at the POS.
- The payer's and payee's banks must provide an infrastructure that allows instant payments. The IT systems, interfaces and processes are currently not designed for real-time processing. The payee also needs to be able to verify and confirm the immediate receipt of payment.
- Should the first or second paying agent refuse the transaction, then the payer and payee must be informed of the failed transaction. This is currently not covered in the scheme developed by the EPC.
- Execution within seconds means that, instead of the current batch processing, clearing houses must allow immediate execution. For this, the corresponding availabilities must be established and capacities expanded. Labour law aspects must also be taken into consideration in light of the 24/7/365 operation.
- In the case of deferred settlement, the settlement risk must be examined, assessed and managed. Corresponding securities must be created and pre-financing clarified.
- In the entire payment transaction process, standard guidelines on the prevention of fraud and money laundering must be observed. The implementation of anti-money-laundering and anti-terrorist-financing regulations is mandatory.
- The specifications of the Payment Services Directive II (PSD II) must be observed. You can learn more about this topic HERE.
Advantages of instant payments
Providers will be able to tap into new revenue potentials and strengthen customer relationships. Instant payments will ensure and increase the returns from payment transactions and account management. They will become a Europe-wide competing service for PayPal and the German giropay and paydirekt processes. It will be possible to develop other financial services with high availability based on the instant payment infrastructure.
The availability of instant payments represents a milestone in the digitalisation of Europe, since this process also further encourages e- and m-payments.
Using instant payments, companies can optimise their cash flow management and thus, in some cases, reduce their need for external financing.
Those transactions currently done in cash and with checks will in future be handled with instant payments. Costs will thus be reduced on the macroeconomic scale, since cash and checks will no longer need to be managed.
Instant payments process
- The payer initiates an instant payment with his bank via a mobile app. The payer receives the payment data from the payee, e.g. by scanning in a QR code (open standard).
- The bank immediately checks the funds in the account. If there are insufficient funds, then both the payer and payee should be notified (2a), although there is so far no plan to inform the payee. When funds are sufficient, the instructing bank immediately forwards the payment to clearing.
- In clearing, the payment is also immediately processed. If the payment cannot be processed, then the instructing bank is immediately notified. The instructing bank should forward this information to both the payer and payee. The settlement can take place either immediately or deferred.
- The recipient bank also processes the received payment immediately and notifies the payee of the receipt of payment upon successful processing. If the payment cannot be processed, then the recipient bank forwards a feedback message to the instructing bank.
Our range of services
We offer the following services in relation to instant payments:
- We give you advice about instant payment and the ways it can be used.
- We help you identify new market opportunities arising from instant payment offers, and give tips on your Europe-wide business development.
- We support you on the analysis, development, project management and implementation of your instant payments strategy
Would you like professional advice?
Our consultants will be glad to arrange a one-on-one consultation with you
E-mail : payments (at) it-economics.de
By phone: +49 89 215 488 0-0