Payments Revolution

Blog: How Banks Can Compete in the Instant Payments Revolution

October 31, 2023  |  MICHAEL ENGEL

Instant payments, and the technology that enables it, have taken off in recent years. Nearly 60 countries already have real-time interbank payment systems, whether run by the central bank or a private entity, and this is poised to grow even further as instant payments drive financial institutions to innovate new services. Instant payments, defined by SEPA (Single Euro Payments Area) as “credit transfers that make funds available in a payee’s account within ten seconds of a payment order being made,” are available 24 hours a day, 365 days a year, and bring many benefits to all parties involved. Banks that offer instant payment services can remain competitive, create new products and meet the evolving needs of consumers.

As consumer demand for these always-on instant payment solutions increases, financial institutions are finding themselves lagging behind fintechs that burst onto the scene to create new technology that isn’t tied to the legacy systems and processes that historically hamper instant payments. However, while P2P applications like Venmo, PayPal and Joompay (Europe) allow users to “instantly” send one another money from their mobile device, they are normally linked to a bank card (credit or debit), and the money is not usually available immediately. But because transaction notifications are sent right away, they often give the illusion of instant payments (and in some cases, the money can be transferred to your account instantly for a fee).

Generally, consumers do not understand this difference in payment velocity, but because of the current climate of on-demand “everything,” the flaws in legacy payments systems have had a light shone on them. The reality is that these systems were not built to handle this type of consumer demand, and they often use technology designed to be processed in batches that runs at off hours as opposed to 24/7/365. This highlights the fact that getting the right structure in place is crucial. This payments shift will have an impact on the revenue structure of the bank, but modern solutions create a platform to take advantage of new revenue streams going forward, and the next wave of innovation and opportunity.

Meeting increasing consumer demand and new potential revenues streams are certainly enough of an incentive for financial institutions to invest in instant payment solutions, but the real benefit to financial institutions and their customers may actually be felt in the ripple effect of these technological advancements. The movement to revolutionize decades-old technology and processes that have been stuck in legacy batch mode/clearing house queues is long overdue. Gains in efficiency and improvements to cash flow promise to not only increase overall competitiveness, but also empower financial institutions to re-invest their gains and in turn, provide new, advanced services for both consumers and businesses.

Ultimately, there is no arguing that embracing instant payments and a modernized payments system will serve as an opportunity for financial institutions to engage with consumers looking for cutting-edge experiences. They can also benefit small-business merchants with limited or costly current electronic payment options, and corporations looking to digitize their supply chain. However, to do that, they must not only reckon with the legacy technology that impedes these types of innovations, but more importantly, come to terms with the greater acknowledgment that in order to grow they must also step out of their comfort zone. To remain competitive and relevant, it will be critical for financial institutions to modernize their payments system to leverage this quickly evolving space.

Originally published in Global Banking and Finance

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