The attractiveness, spread, and the future of instant payments

We’ve all been there at one time or another: looking at our bank statement and wondering if all the outstanding card payments are showing up on the balance. Can we spend any more, or will that leave us overdrawn?

That’s just one of the reasons why we should all be eager to use instant payments. Unlike most credit or debit cards, these real-time bank transfers let you pay in seconds. You enter your details and press ‘pay’ and the money goes from your account to the merchant’s. It’s as fast as handing over a dollar or a euro at the supermarket checkout.

How do instant payments work?

There are two types of instant payment. A buyer can ‘push’ the money to the seller. (S)he might log into their banking app, enter the seller’s bank details and the amount, then hit ‘send’. Alternatively, there’s the ‘pull’ method of instant payment.

With pull payments, if you’re the seller, you enter my banking information into your system and send a request for funds. I see the request in my banking app, confirm — and the payment is complete. In either case, no one is left waiting for their funds.

The underlying technology varies between countries. Many instant-payment services use a common messaging protocol. For example, India’s IMPS (Immediate Payments Service), used for instant money transfers — and its Unified Payments Interface (UPI) — a universal application for mobile payments, both run on the ISO messaging standard 20022. Other platforms such as those in Taiwan and South Korea use proprietary technology.

As long as the different schemes’ clearing and settlement mechanisms (CSMs) can communicate with one another, the technology used is largely irrelevant. Crucially, the platforms also run 24-hours a day 365 days a year, so even on weekends and holidays payments are instantaneous.

The attractiveness and spread of instant payments

Being able to pay instantly has proved tremendously attractive to both consumers and merchants. For consumers, it simplifies money management. For merchants, it improves cash flow and it means they have the payment before they ship the product, reducing risk.

The popularity of instant payments is demonstrated by its expansion since first introduced in the UK, as Faster Payments, in 2008. The UK scheme now processes over GBP 100 billion worth of transactions a month.

In the EU, the SEPA Instant Credit Transfer (SCT Inst) scheme aims to foster the growth of a single market in instant-payments. SCT Inst supports both domestic and cross-border payments. It is used by over 1,000 payment service providers (PSPs) in thirteen European countries: Austria, Belgium, Bulgaria, Estonia, Germany, Italy, Latvia, Lithuania, the Netherlands, Portugal, Spain, Sweden, and the United Kingdom.

Elsewhere in the world, India, the US, China, Brazil and — after some delay — Australia are just some of the major markets in which consumers have access to real-time payments.

Why did instant payments take so long to arrive?

Given that banking has been computer-powered for some time, consumers can be forgiven for wondering why it took the finance industry so long to introduce instant payments. The answer is that technology had to catch up with consumer demand.

Banks must process millions of payments and the processing has to factor in security and compliance, overheads that simple communications don’t have to deal with. All of this demands a tremendous amount of computing power.

For this reason, until recently, most payment clearing was done overnight in batches, to cut processing overheads. Only recently have clearing systems become intelligent enough, sufficiently standardised, and powerful enough to allow each payment to be processed individually. That’s why instant payments are viable now when they weren’t before.

The next step is to drive a growth in user numbers and transaction volumes. In this, both the market and the state have a role to play. Governments, or regulators to which the role is delegated, can be seen pushing the industry towards instant payments often for other reasons such as the move away from cash and cheques.

The market, in the shape of banks and fintechs, must provide products and user-interfaces that make consumers want to use instant payments. We’ve already seen this work well in India with UPI. There is no reason to believe it cannot work at least as well in the EU, with SCT Inst.

The future of instant payments

The coming into force of the Second Payment Services Directive (PSD2) should give instant payments a welcome boost. Open banking gives fintechs access (with the consumers’ permission) to consumers’ account information to initiate payments. This will make it easier to develop an instant-payment product with which consumers can pay in real time, from the funds in their bank account.

There’s every reason for merchants to incentivise the use of such products. Not only do they get the funds before they ship the product, but they also don’t pay as much for transfer processing. Most instant-payment schemes will also cost less than other payment methods.

For all these reasons, instant payments have a bright future. Once the public is aware of these services, I predict that uptake will be rapid. However, to make that happen, the industry needs to get behind designing and marketing easy-to-use and attractive real-time payment products.

Make sure to check out this recent podcast by Niall Conn and Jack Ehlers on the topic of instant payments.

About Jack Ehlers

Jack Ehlers is Director for Payment Partnerships at PPRO S.A. in Luxembourg. He has worked in ecommerce and payments for the last 12 years. He has held roles in regulatory compliance, business development and management in the US, Europe and Asia. He lives with his family in Luxembourg.

About PPRO Group

Cross-border e-payment specialist, PPRO Group, (PPRO) removes the complexity of international ecommerce payments by acquiring, collecting and processing an extensive range of alternative payments methods for Payment Service Providers (PSPs) under one contract, through one platform and one single integration. PPRO supports international payment methods across more than 100 countries, allowing PSPs to expand their merchants’ ecommerce reach, arrange hassle-free collection and achieve higher conversion rates.