In recent years, payments have been one of the most significant areas of financial innovation. Advances such as virtual currencies and new retail payment services replacing debit and credit cards with “push” transfers in e- commerce are changing the traditional landscape. Most of these innovations offer low-cost and fast transfer of funds, even if cross-border transactions are involved. Furthermore, technology is rapidly evolving, offering tools to process information in real time and to consume it ubiquitously on sophisticated mobile devices. These capabilities are changing the consumer’s expectations of payment services, meaning that delayed availability of funds is no longer acceptable.
Thus, traditional clearing and settlement platforms, in which retail payments are typically batched and then netted (usually on a multilateral basis) for settlement each day, are becoming obsolete (in spite of remaining in force for processes that do not require immediacy as pensions or payrolls).
On the other hand, faster payment initiatives are fostering the emergence of innovative means of payment. Most of them are related to “person to person” or “person to business” payments and enhance mobile devices to become the new channel for payments. Innovative solutions also permit the use of an alternative and convenient identifier for consumers, such as e-mail or telephone number, that links to their bank account.
Faster payments initiatives
Most countries around the world have already faced the development of real-time payments infrastructure such as Japan or Mexico. In Europe, most relevant European experiences came from Faster Payments UK (2008) or, more recently, the Danish Nest Real-Time 24×7 system (2014). Both initiatives are implemented on a deferred net settlement with three cycles per day, which is not exactly instant payments but provides a good start to it. It is important to take into account that faster and irrevocable real-time payments demand new risk management frameworks, in which real-time capabilities should be developed to review transactions for possible fraud, money laundering or terrorist financing. This is probably the most important hindrance to be faced in the development of faster payment infrastructures.
While domestic initiatives are more than welcome as they enhance local innovation, a global perspective is also needed to really modernize payment infrastructures and to compete with alternative networks that seek to disintermediate the banks.
Catalytic action of regulators and central banks
Regulators and central banks are urgently demanded to catalyse the development of faster retail payment infrastructures. Good news comes from the Federal Reserve that is working to speed up and further secure the retail payments infrastructure in the U.S. Following a public consultation in September 2013, it has just released a paper with its Strategies for Improving the U.S. Payment System. Likewise, the ECB is chairing the European Retail Payments Board (ERPB), a multi-stakeholder group that is fostering the development of an integrated, innovative and competitive market for retail payments in the European Union. The ERPB has recently included in its agenda the topic of faster payments and has invited stakeholders to present their first assessments in June 2015.
Both of them, the Fed and the ECB, are encouraged to seize the opportunity to modernise current payment systems by setting the incentives to develop schemes and standards needed to reach interoperability in a trustworthy global retail payments environment.