How is Tieto supporting the introduction of instant payments?
Tieto has a long experience of delivering real-time payments infrastructure which started in the area of inter-bank card switches. Today, we are providing the national infrastructure for real-time payments in countries like Finland and Kenya. Internationally, Tieto is actively pursuing opportunities in the instant payments area in the Nordic, Europe, CIS and Africa regions.
Our experience of real-time payments goes beyond the central clearing infrastructure and includes solutions for connecting banks, e.g. for Sepa Inst, and also front-end apps, e.g. for P2P payments. Beyond technology, we are also helping our customers with “softer” but equally critical parts of instant payments, such as defining the rulebook and how to build an open payment ecosystem.
Who will benefit from the introduction of instant payments?
It has become more a question of staying in the market rather than making a profit. From that standpoint, first beneficiaries will be the bank`s customers - both private and corporate. Banks are making business and there are many opportunities to create business value atop of instant payments. Instant movement of funds 24/7/365 is a natural evolution of how we use and interact with digital services in the 21st century, just like email or messaging. In this respect, it is about making payment infrastructure relevant for the digital era.
On the other hand, it will have huge benefits for consumers, corporates and governments in terms of reducing risk between counterparties when settling funds immediately. From consumer transactions or a corporate that can improve working capital, to the reduction of systemic risks in the financial system when settling obligations between financial institutions immediately. Going forward, one could even think about what would be the effect on how we pay bills or pay out salaries - do we need to use bulk payouts of salaries at a certain date or could we choose more individual payout schemes?
At the core of all our developments is the value for the end customer and merchant. We see the near future beyond instant payments. Connected processes will be linked to the customer journey, as the customer seeks both flexibility and control - choose how to pay and even when to pay. The merchant, on the other hand, seeks to ensure a great experience independent of user channel and to optimise supply chain and cash management.
How are European banks responding to instant payments?
Banks are moving to instant payments as a means to deliver innovative services to end-customers and also stay relevant to digital challengers. Together with the opening up of payment infrastructures to third parties, following PSD2, the basic component of moving money from A to B in real-time will obviously be commoditised, so there is not a time for banks to be complacent with having implemented the new rails for instant payments. The question is what will happen with open payment rails when strong global brands like Facebook or WhatsApp could launch instant money transfers directly from the chat app. The battle for the customer interface will continue, but constant innovation is the only recipe for banks that want to stay in the forefront.
There are two types of approaches from banks. There are banks innovators - they want to take a lead in instant payment implementation. Another part is more passive, risk neutral banks, who are waiting for more mature market requirements and offerings. Banks innovators take more risks and potentially will spend more money as they will have to adopt new solutions. They can win a bigger market share by attracting customers from the passive counterparts. On the other hand, neutral banks can learn from the mistakes made by innovators and offer attractive solutions to their customers. They are mostly looking for add-on services, which could be provided on top of instant payment solutions.
How do you advise banks to approach the introduction of instant payments?
There are different ways to approach the movement to instant payments, depending on the central infrastructure of the country. We see instant payment infrastructures that have evolved from card switches and from ACH account-to-account rails. Some key considerations we have seen as global best practices and that we think are important as ‘design’ principles are:
use of open and global standards, such as ISO 20022
use a co-opetition model, meaning that collaboration should exist between main stakeholders in a country regarding rulebook and scheme, and the technical infrastructure (the rails). Competition is to be made on the customer facing parts of the propositions, where instant payments is a component of a larger service.
create a legal infrastructure for integrating both banks and non-banks. It is important to see instant payments as a basic rails infrastructure, where a lot of gains are to be had if existing rails are interconnected. For instance, in countries with successful mobile money networks (in Kenya or Uganda), there is a huge potential in interconnecting these infrastructures for the benefit of reaching more people (the unbanked, for instance)
consider the infrastructure for multiple use cases, not only for P2P payments, but as a next generation platform for both bill payments, merchant payments, etc.
learn how to work with the larger ecosystem, e.g. including multiple stakeholders (not only banks) when designing new services around instant payments. For example in Finland, Tieto helped the banks to drive in-store payments together with retailers, e-receipt operators and terminal vendors.
Banks need to decide if they seek a competitive or a cooperative relationship with the aggressive fintech companies. The focus needs to be on functional payment wallets rather than value-added services on top of the instant payments infrastructure. However, for cooperative relationships, the focus also needs to be on open APIs and ways how to earn money from this cooperation.
How will instant payments impact card transaction volumes?
In the markets where Tieto operates there is a constant growth in card transaction volumes, partly due to new features such as HCE or digitized cards, card wallets, and contactless cards. We can also recognize a trend in for legacy system upgrade - banks are indeed looking for a more performing, flexible and modern card solution. Even in the markets where instant payments are in place, card transaction volumes continue to grow. The card is still a very convenient payment method and there is little to no business rationale to replace it.
On the other hand, we have legacy payment forms such as cash and payments by checks which definitely could be replaced by modern and convenient payment methods. Instant payments are the P2P arena - currently cash and bank transfers dominate. For in-store or P2B payments- PoS terminals with card acceptance will stay for a quite long time as banks and retailers continue to invest in devices and thanks to the fast and convenient infrastructure. However, cash, checks or bank transfers could be potentially replaced by instant payments.
The only area where cards payments could be significantly impacted in near future are fast growing e-commerce payments. There are technological challenges for cards infrastructure in this area, mostly related to fraud protection. Maintaining PCI DSS compliance and 3D secure are quite costly for banks and e-commerce merchants. The basis of this technological issue is that card payments are debit requests, meaning that technically payment is initiated by beneficiary but actually payment has to be accepted by the cardholder.
In the next 3-5 years, ecommerce will gradually move from cards to instant payments. Banks have to consider modern payment solutions that allow switching between different payment methods. This may involve AI for payment routing, thus enabling faster and less costly payment execution for each of payment.
About Tieto
Tieto aims to capture the significant opportunities of the data-driven world and turn them into lifelong value for people, business and society. We aim to be customers’ first choice for business renewal by combining our software and services capabilities with a strong drive for co-innovation and ecosystems.
About Ilkka Korkiakoski
Ilkka has broad experience in IT and Financial Services sectors and has worked in many challenging roles during his 20+ year career from co-founding a successful software company GUI Systems Oy and management consulting for Tieto innovation (part of Tieto Corporation). Between 2001- 2006 Ilkka was in charge of Electronic Channels in OP Bank Group. During his time Internet Banking customer base doubled and reach 1,5 million and he led successfully one of the largest development programs in the Bank’s history.
In 2006 Ilkka rejoined TietoEnator and became a member of TietoEnator’s Extended Management Team. During the last 10 years Ilkka has had many roles in Tieto in areas of Strategy, Offering Development, Marketing, Corporate Planning and M&A and has lead and contributed to many of Tieto’s change and transformation programs. Currently Ilkka is working is responsible for Tieto’s global Transaction Banking business.
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