Why Is It so Hard to Introduce Instant Payments?

One of the recent duh moments has brought up a thought of extremely high expectations modern consumers have for payments systems. The moment we are talking about is when Google Wallet was psyched to introduce instant money transfers with a phone number in minutes. For the industry and the company, it seemed like an outstanding accomplishment. However, the first thought some of us had was Duh. Didn’t they have this already?

It happens sometimes that breaking news for the industry doesn’t seem so breaking for us as consumers. Meanwhile, it actually took tremendous research, development and significant investments to be able to make an announcement. It is especially true when it comes to instant payments.

Just to give you an idea how much effort and work it actually requires, let’s look at the official draft of requirements FinTech companies have to meet to be able to introduce instant money transfer in Europe, for example, which has been explained by the European Savings and Retail Banking Group (ESBG).

Skyrocketing customer expectations

We have mentioned this before – modern customers have extremely high expectations. Front-end convenience, simplicity, appeal and speed are powered by the operational complexity at the back-end. Does an average customer care about that? Expectations may be a death pill for a new service launched by a well-known and previously successful company if they don’t correspond with the reality.

Once an amazing benefit, 24/7/365 real-time operation and support nowadays are something almost given when it comes to money.

We want to be able to access a person on the other side of the service at any moment, but at the same time, we expect that there will be no reason to do it. A reliable and secure process is an immense part of anything related to our money. Instant security when it comes to money transfer is no more a value proposition; it is a given reality we expect. Just like security is not something airlines can advertise anymore as it is a given that nobody would board you on a broken plane, instant payments providers by default have to provide an instant security that complies with EBA Guidelines (a requirement that must be met from August 2015).

Another tricky part is related to the value proposition we mentioned. Clarity of value proposition: either instant, final payment end-to-end, and/or instant confirmation of irrevocable payment are expected to be clear from the product offering.

In 2016, there is no tolerance for poor design. With Venmo, Square, Stripe and other leaders that set our expectations to convenience and clarity, any new entrant is expected to offer a convenient interface of instant payments system across screens and platforms with a sophisticated and speedy notifications system.

Speaking of the notification system and security, instant payments are also expected to provide a certain acknowledgement of the payment received by the beneficiary. Confirmation/reason for rejection messages from the receiver payment service provider to the sender’s payment service provider is an expected outcome of the service usage every time.

Needless to say, FinTech companies looking to introduce instant payments in Europe are expected to offer cross-border coverage or at least, gradually roll it out in the entire SEPA.

Complexity of requirements for payments service providers for instant retail payments

Customer expectations will look like a gift when getting into the formal business requirements of instant retail payments.

As expected, a payments service provider is supposed to guarantee the final settlement with existing funds/collateral.

Moreover, clearing and settlement must be implemented so that a 24/7 real-time operation is efficient in terms of liquidity use and does not cause uncontrollable liquidity management risks for the provider. In fact, providers have to use an existing payment infrastructure as much as ensuring a smooth interfacing with existing payment service provider applications. It means that financially powerful institutions can’t just pour endless funds into building new infrastructure and ensure all customer expectations are met. A sustainable, scalable, cost-effective business model and efficient utilization of existing infrastructure are an important part of the deal.

Instant payments service providers should be supporting any number of payment credentials (e.g. payment account number, mobile number, token, etc.). In addition, a federated converter capability would be considered as an asset.

Just like with consumer expectations, security is a non-negotiable point for the authorities as well. Payments providers must be able to instantly mobilize adequate fraud prevention, detection and remediation capabilities, and meet compliance requirements including AML and FATF obligations.

Broad reachability and seamless interconnection between different instant payment solutions available in the market are other complex features a payment provider has to build. The instant payments solutions should have the ambition and capability to serve originators and beneficiaries holding accounts in euro for transactions in euros without distinction of location throughout SEPA, as ESBG stated.

If all listed requirements didn’t seem enough, there is also an ISO20022 message standard between banks that has to be met by a payments service provider.

Government demands for instant retail payments solutions

While the mentioned barriers in the form of customer expectations and business requirements seem to be broad enough, authorities have something else to throw into that pile.

Compliance with CPSS-IOSCO 24 principles: E.g. management of credit, liquidity and operational rules, settlement finality, continuity and backup arrangements, efficiency and liability, the disclosure of governance, rules and procedures are some of the points authorities demand.

Service-level agreements (SLAs) compliance: Measures the service provider’s performance and quality in a number of ways, such as availability of the service, the number of concurrent users that can be served, specific performance benchmarks to which actual performance will be periodically compared, application response time, the schedule for notification in advance of network changes that may affect users, help desk response time for various classes of problems, usage statistics and others.

That’s not the end. Instant payments service providers are forbidden to prevent or restrict any competition and are expected to be able to report the activities upon demand.

Even though the European and global legal framework for payments has been substantially enhanced over the past years in various sectors, there is still a necessity to improve it in order to facilitate innovation. The list of requirements for instant payments solution introduction is certainly more detailed and complex, but even on this level, it is clear that obstacles to instant payments introduction can serve as inhibitors to implementation and experimentations. However, FinTech in 2016 will probably be even bolder and rebellious than it was and European FinTech might be able to make another step towards faster and more efficient payments.