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Propelling Instant Payments Forward: Where We’re at Today
Do you remember a time when it would take hours for an electronic payment to appear in your account? Thankfully those days are long gone when it comes to peer-to-peer payments, but not so much when we talk about credit card payments, debit card payments and even bank transfers. After all, if the money is liquid sitting in someone’s account, why shouldn’t it be available instantly for the beneficiary?
This has been a question that many banks, fintechs and governments have tried to answer with instant payment initiatives and solutions based on one of the following two models:
- Centralized clearing system: A standardized national infrastructure that provides connectivity to banks
- Open Banking: Each participating bank is accessible through application programming interfacing (APIs), e.g. PSD2 in Europe
Either model creates infrastructure to enable instant payments directly from customer accounts to the payment provider bank account, bypassing card schemes and fees while speeding payments to settle in 10 seconds or less. Here’s what different geographies around the world have planned and/or executed to kickstart instant payments:
Before all payments across all the geographies mentioned above can become uniformly instant, there are a variety of challenges standing in the way:
- Liquidity management
- Not only do payments need to be instant, but the availability (liquidity) of funds needs to be such that the payee can freely use the money immediately for any payment transaction
- Security and strong customer authentication
- There is no standard available for strong customer authentication yet
- Current mobile apps that aid strong customer authentication are not designed to be modular, and they are difficult to incorporate into an existing mobile banking solution
- Differentiation between transaction types
- In the case of the individual transaction types, differentiation should be made between the transactions that are effectively executed immediately (in a few seconds) and those that are not time-critical but may be processed in the instant payment system
- Only individual credit transfers – particularly the small-value transactions – should be executed with instant settlement
- Use of highly scalable, high-quality, cloud-friendly technologies
- Smooth and automated scale up to account for a quickly rising number of transactions and integration points, as well as shortened transaction times
- Highly configurable routing of payment requests
- Routing must be able to handle dozens of domestic and international rules and find the right bank to process payment based on a secondary account identifier
- This necessitates the creation of an easy UI to manage rules
- Routing needs to support both centralized clearing system and Open Banking models
As these challenges are solved by banks, fintechs and even governments to make instant payments ubiquitous for all types of transactions, we can expect consumers to give their business to the companies who truly make their lives easier. If you’re looking to become one of these companies and accelerate access to instant payments for your customers, check out our Instant Payment Solution Blueprint or drop me a line on LinkedIn.