Instant Payments: A Critical View

In future, money transfers within Europe will function in real time, with instant payments [1] credited to accounts in a matter of seconds. Achieving this aim, however, will be no easy feat. A quicker and cheaper alternative would be guaranteeing payments, which might yield the same results.

SEPA has long dominated the European payment industry, but instant payments are now just around the corner. Leading the field are the European Central Bank (EZB) and the European Retail Payments Board (ERPB), who are driving the development of a real-time payment system. In doing so, they are undertaking a massive construction project which will whip the banking infrastructure and its networks into shape.

Although SEPA has reduced the money transfer time within the European economic area to one business day, that’s still a long way from real time. Transfers are currently forwarded to the central banks, where a daily cut-off point is used to reconcile payments between the various institutions. This is when payments are credited to customers’ accounts. Instant payments are set to change that. Instead of being performed once a day, postings will be processed in real time, with transfers taking just seconds.

Instant payments don’t come cheap

Money in your account immediately? Sounds great, doesn’t it. However, instant payments place high demands on the banking system and its networks. The UK Faster Payments Service[2], an accelerated posting system for Britain’s banks, processes a billion transactions annually, each of which normally takes between 15 minutes and two hours. Although this is fast, it’s not instant. Instant payments require immediate reconciliation, something which will require a complete overhaul of the banks IT systems. This will cost a tremendous amount of money—precisely how much, no-one currently knows, which raises the following question:do instant payments really bring such enormous benefitsas to outweight the return on investment?

Are instant payments counterproductive for retailers?

Instant payments should prove advantageous for one large group in particular: retailers. While some would certainly appreciate this concept, online shopping requires only that the customer’s payment is immediately confirmed and guaranteed to the retailer, as opposed to the money immediately being paid into the account. These guarantees are particularly important for digital goods, which are instantly released to customers, as well as for fast shipping services, as they enable goods to be dispatched the moment payment is confirmed. The effect for the retailer is therefore similar, except that real-time guarantees do not incur the enormous additional costs involved with instant payments. This becomes even clearer when you consider that retailers nowadays often work with payment targets of between 30 and 90 days. In such cases, payment services with real-time guarantees, like the German giropay or Dutch iDEAL, represent a dramatic advancement. Retailers leveraging these services receive instant payment guarantees and their accounts are credited just a day or two later.

For many retailers, receiving real-time credits to their accounts could even be counterproductive, as daily auditing and consolidation takes time and effort. Many find weekly or monthly reconciliation perfectly adequate.

Instant payments already exist

The retailer’s perspective is, however, not the only one. What about the consumer? When private individuals are on the receiving end, there is certainly a great need for instant payments, as they allow the funds to be accessed immediately. However, these are not the only way to provide this service. Some e-money providers, including the PPRO Group, already offer instant payments. When a VIABUY prepaid credit card is loaded using InstantTransfer, for example, the money is immediately available for spending or withdrawal. In such cases, the e-money provider—in this case, the PPRO Group—bears the risk that the transfer may not go through the next day, as well as the costs of the making the credit available early. In principle, banks could handle this amongst themselves. Whether each bank would then bear the risk for its own customers or whether the institutions involved would share the risk has yet to be decided; a number of different models are possible.

A great deal could therefore be achieved simply by guaranteeing payments as opposed to offering instant payments, and the high infrastructure investment required to implement instant payments could, for the time being, be saved.

[1] https://www.ecb.europa.eu/press/pr/date/2014/html/pr141209.en.html

[2] http://www.fasterpayments.org.uk/