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The Global Real-Time Rail Ecosystem (Part II)
Until recently, the services provided by most financial institutions tended to be very siloed. For example, transacting between checking and investment accounts within the same financial institution could take days to finalize. However, driven by the emergence of technological advancements, regulatory changes and consumer demand, there is a trend within the financial services industry toward frictionless experiences that are robust enough to also allow for customization. This is where the development of the Real-Time Rail (RTR) ecosystem enters the picture. Advancements within the RTR ecosystem aim to:
- Increase efficiencies for businesses due to better transaction data
- Make commerce more convenient, fluid and ubiquitous
- Create an environment to foster innovative products and services to enhance the payment experience
- Lower overall risk associated with payments due to guaranteed “good funds”
- Support global competitiveness
Part I of this blog series examined the global RTR journey, highlighting the advancements made following the rollout of various RTR ecosystems around the world. Part II of this series will explore the benefits made possible by those rollouts, as well as key lessons learned from around the globe.
Key Lessons of RTR Modernization from Around the World
The move toward the implementation and expansion of RTR systems around the globe has helped to shed light on some insights and takeaways. For those organizations and institutions sitting on the sidelines and debating how to implement or join an RTR ecosystem, it’s worth noting the following:
- Opening access to the RTR to include both traditional financial institutions and other payment service providers is paramount to gaining critical mass and driving innovation and adoption. It took 10 years after the UK launch to onboard their first non-FI to their real-time rail and in hindsight, this was poor execution. Processes for new members (i.e., both financial and non-financial), need to be properly documented and coordinated with necessary stakeholders (i.e., the Bank of Canada) and need to be completed as part of the program launch.
- A central authority that can drive implementation (i.e., Payments Canada), for new overlay service design and implementation enables faster-to-market core services, than does leaving it to the market. Federating an implementation responsibility to all members without a central service (for example Pay.Uk’s Request to Pay service), without any legislative timeline, leads to a much extended or even stalled implementation pathway.
- To encourage more B2B payments to be processed through the RTR, either as single RTR transfers or as part of batch payments, the limits on the RTR need to match the businesses’ needs. The UK’s limit, which started from £10,000/transaction, is, as of February 2022, £1m/transaction, and in April 2022, the TCH raised its RTR limit to USD $1m/transaction. A key enabler to this is the need to implement real time fraud monitoring capabilities to enable members to be able to confidently transact at these higher values.
- Real-time fraud detection is required for the roll-out of the real-time rail to be successful because the fact that RTR transactions are fast and irrevocable will encourage new types of fraud attempts. The UK saw volumes of authorized push payment (APP) scams increase by 77% between 2018 and 2020, and by 2020, APP scams accounted for 38% of all reported UK fraud losses. Starting with smaller limits, strong fraud prevention controls (i.e., multi-factor authentication) for customers and taking lessons from pioneer countries on fraud check processes and rules are some ways to mitigate this risk.
- Some capabilities require laws governing payments processing to be updated. For example, when it comes to e-checks, government alignment is required for any changes being proposed.
Proposal and Potential Benefits
As noted in the “Global RTR Modernization Journey” section from Part I of this series, building all the needed additional capabilities cannot be done by any one organization or body. An ecosystem of stakeholders will need to come together to agree on a roadmap, identify which capabilities are a priority and fund and build the utilities required to support these capabilities. In some instances, this may require the concept of "co-opetition," a term coined by renowned U.S. businessman Raymond Noorda, which is defined as an arrangement between competing firms to cooperate on specific projects or in certain areas of business for mutual benefit, even while remaining competitors in general.
Payments is an industry where network effect is critical. The more stakeholders are connected to a rail, the better it is for all. Companies can only focus on competing on differentiating their services once the core infrastructure works and is readily available.
Key benefits of building a co-opetive ecosystem around the RTR include:
- Enhancement of the stakeholder's business model: A co-opetive ecosystem allows for synergies among competitors that enable them to be better. By using the key strengths of partners, and utilizing their diverse skills and technologies, solutions that will profoundly change the market can be created.
- Providing true end-to-end solutions for clients: In today's world, it is near impossible for one company to fully satisfy a customer's needs alone. Most organizations pick aspects of the customer journey and build products to cater to those while partnering with others who cater to the rest. Sometimes these partnerships introduce security risks and friction, which taint the overall customer experience. Co-opetition allows all stakeholders to work in tandem to develop utilities that will power products and that will satisfy the end-to-end customer journey. The leveraging of partners’ strengths to provide an optimized solution that will deliver greater value to customers and break down silos without losing the necessary security or compliance features is required.
- Future-proof and grow the market: Competitors in the payments space are no longer just banks, fintechs and financial service providers. Tech companies and social media giants are also getting involved, and they tend to play by a separate set of rules. These companies are quick to adapt as they are not weighed down by regulation, have active and dedicated users and excel at their ability to go-to-market quickly with solutions customers did not even know they needed. Co-opetition allows stakeholders to show their consumers that they are capable and willing to meet rapidly changing demands, while staying true to the core of who they are – time-trusted organizations that can be relied upon. It also allows them to take a larger view of the market up for grabs beyond their core business, as there are adjacent markets that only partnerships will enable them to access.
The journey to modernization is in progress, but it is far from finished. The global payments industry, powered by the new infrastructure being deployed, can digitize some of the old payment alternatives (i.e., EFTs) and totally redesign others (i.e., checks). This is a quest that cannot be solved by competition, but can be advanced by various players in the industry coming together to create a whole that is more than the sum of their individual parts.