The Global Real-Time Rail Ecosystem (Part I)
The last decade has seen some major innovation with regards to how money moves globally, both within countries and cross-border. From a global perspective, many countries have implemented faster domestic payment rails with more information besides just payment instructions travelling with the payment. This has been enabled by real-time rail infrastructure and ISO 20022 messaging standards.
Take, for example, Canada, which has also been on this modernization journey. Unlike most other countries, Canada has had a faster payment rail for domestic electronic transfers run by Interac since 2003. Although the service started with individual-to-individual transfers, it has been expanded to cater to businesses, too. While this service was good, the regulators and stakeholders recognized that the system could be better. As a result, Payments Canada, the body which owns and manages Canada's payment infrastructure, has been on a modernization journey that seeks to deliver:
- Increasing efficiencies for businesses due to better transaction data to support straight-through processing
- Making commerce more convenient, fluid and ubiquitous
- Creating an environment to foster innovative products and services to enhance the payment experience
- Lowering overall risk associated with payments due to guaranteed “good funds” and,
- Supporting the global competitiveness of the Canadian economy
The Real-Time Rail (RTR), which is a net new infrastructure being built, will go live in the Fall of 2023. This rail will support both real-time payment message exchanges compliant with ISO20022 standards and real-time clearing and settlement. While this is much needed progress, a review of other countries with faster payment systems shows that this is just the beginning, as a rail alone does not provide all the intended benefits of modernization.
A Brief Look at the Global RTR Modernization Journey
1. The UK Faster Payment, which was launched in 2008, allows individuals and businesses to transact and send money 24/7. In 2021, the system processed 3.4 billion payments (up 20% from 2020) amounting to a combined value of over £2.6 trillion (an increase of 24% from 2020). Additional services built to support Faster Payment include;
a. PayM, launched in 2014, provides end-users with the functionality to make a payment without the need of an account number or sort code, or to set up a new payee in their online banking. Instead, a cell phone number is used as a proxy to identify a bank account. This functionality has also been extended to using email as a proxy.
b. Confirmation of Payee is a name checking service for UK-based payments that Pay.UK launched in 2020. The aim of the service is to reduce certain types of fraud (i.e., push payment fraud as well as misdirected payments). Current volumes of Confirmation of Payee requests are averaging more than one million a day.
c. Request To Pay (RtP) is a messaging service that was created to complement existing payment infrastructure and gives billers the ability to request payment for a bill rather than simply sending an invoice. RtP coexists alongside direct debit and other existing bill payment methods to give consumers and businesses additional choice and flexibility when managing their finances. It is estimated that this could save the UK economy £1.3 billion per year. However, subsequent research to that conducted in 2016 and 2017 would now suggest that this is a conservative figure, and it is more likely to be between £2 and £3 billion.
2. The Australian New Payment Platform (NPP) was launched in 2018 with daily transactions processed exceeding two million as of March 2021. As noted by the head of engagement at the NPPA, the platform’s initial design was to have a separation between the underlying infrastructure and the products that would sit on top of it, as it was envisaged that third parties might build those products and work with the different banks to bring them to market. However, the reality since going live is that most organizations just want to be able to use whatever capability is there. Additional services built to support Faster Payment include;
a. Pay ID, launched with the NPP in February 2018, is an alias proxy service that allows for a phone number, email address or registered business number to be used for sending and receiving payments. It has a built-in name confirmation functionality so that customers can confirm they are paying the right person before completing the transaction. Pay IDs can only be linked to one account at a time.
b. Osko, a 24/7 service, utilizes Pay IDs to send payments to anyone via a banking platform. The existence of Osko and PayID have enabled other use cases such as share trading applications, government aid relief disbursement and on-demand, real-time earning disbursement to employees.
3. Hong Kong’s Faster Payment System (FPS) was launched in September 2018. As of 2021, it has reached an average of 750,000 daily transactions, translating to about HK$ 5.2 billion. The FPS is a 24/7 service that sends money in two currencies, i.e., Hong Kong Dollar (HKD) and Chinese Renminbi (RMB) in real-time. Additional services built to support the FPS include:
a. Addressing Service which was built as part of the FPS implementation. The addressing service allowed users to register their mobile numbers or email addresses to receive payments. Payees can link their mobile number or email address to more than one bank and designate one of them as the default receiving account. Merchants can also make use of Faster Payment Service Identifier (FPS ID) as a proxy for an account number to receive payments from their customers. An FPS ID is a string of numbers generated by the FPS system to link up with a bank account. Each FPS ID is unique and can only be linked with one bank account. Individuals, merchants and corporations may request an FPS ID from their banks depending on their FPS service scopes.
b. Electronic Direct Debit Authorization (e-DDA) which supports the setting up of an authorization to debit the payer’s account by direct debit initiated by the payee via the FPS. It allows customers to link their accounts for e-commerce top-ups when making a real-time direct debit transfer.
4. The United States’ Real-Time Payments (RTP), launched in 2017, is a payment processing network that sends money electronically between banks in the US with instant settlement. The system aims at improving payment experience while reducing transaction risk. Any federally insured depository institution can join the RTP network (i.e., they do not need to be members of The Clearing House (TCH)). On April 6, 2022, TCH announced it is increasing the value limit for payments on the RTP network to $1 million up from the prior limit of $100,000. RTP only supports credit or “push” payments. You cannot “pull” or debit another bank account using RTP, therefore payments are irrevocable once the transaction is completed. Overlay services built on top of the RTP include;
a. Document Exchange (DE), which enhances the RTP network’s capabilities by providing easy access to PDF or XML documents such as bills, invoices and remittances in the same transaction flow with the payment or payment request. It forms part of a secure, two-way communication for billers, suppliers and providers of benefits, payroll and more. The DE is an integral part of the RTP network and is accessed via API which minimizes any integration efforts.
b. Secure Token Exchange (STE), a new capability available for payments on the RTP network that issues tokens for financial institutions’ account numbers. These tokens imitate real account numbers in the RTP network, which helps reduce the number of financial institution account numbers stored outside the banking system.
c. RTB Bill Pay, a product with scalable capabilities to enable customers to receive Request for Payments and send credit transfers. It serves as one example of the type of solutions being designed and developed by TCH in partnership with participating financial institutions to solve customer pain points. Participating organizations are currently completing early production tests and will be launching soon.
d. FedNow, which the US is developing now as a second real-time rail. This new payment rail is being designed by the Federal Reserve to enable real-time payments for financial institutions of any size, in any community – 365 days of the year. It is expected to go live in 2023 or 2024. It differs from the RTP as it will service all federal reserve banks through the FedLine network, which provides payment and information services to over 10,000 financial institutions.
As evidenced, the introduction of an RTR isn’t an end goal; it’s really only the beginning of the modernization journey. The enhancements and additional service offerings that have historically followed the RTR introduction process have the potential for far-sweeping economic impacts for the countries and financial institutions involved, in many cases eclipsing the importance of the initial rollout itself. In part II of this series, we will explore in more depth the specifics surrounding those benefits, as well as key lessons learned from RTR projects from around the globe.