Instant payments provide a convenient and inexpensive effective approach to payments and may also offer the foundations for new overlay services, predicts David Andrieux

Customers want instant access to information and services. Everything needs to be digital, real time, or forget about it. Welcome to the era of instant payment.

The benefits of instant transactions are many. The wider economy gets value as consumers and businesses are able to carry out monetary exchanges quicker and more easily, which increases market liquidity, while faster payments also reduces settlement risk. And with the increase in availability of fast and easy-to-use payment instruments, use even of cash will decline. The cheque’s already part of distant history, remember. That will cut the cost of payment processing but from the consumer’s vantage point of view, instant payments are patently a better experience and a more convenient way to look after their personal finances – so they want them. Now!

But to realise all this, banks will need to invest. We cannot evade the fact that there will be significant cost in moving to these speedy, mobile-based payment environments. (Even if payment costs fall, the Federal Reserve Bank claims that the return on such an investment would at best be neutral.) Are the less tangible based benefits of increased customer satisfaction, increased market liquidity, reduced risks enough to justify the investment? Ultimately, it has to be seen about grabbing long-term, strategic advantage.

Instant Payments are the sine qua non when it comes to competing with third party providers and non-bank payment services providers (think, PayPal); plus they will allow banks to offer a host of new services, which will be their real value.

Chasing the ‘overlay services’ revenue stream

How well do you really know your competitors?

Access the most comprehensive Company Profiles on the market, powered by GlobalData. Save hours of research. Gain competitive edge.

Company Profile – free sample

Thank you!

Your download email will arrive shortly

Not ready to buy yet? Download a free sample

We are confident about the unique quality of our Company Profiles. However, we want you to make the most beneficial decision for your business, so we offer a free sample that you can download by submitting the below form

By GlobalData
Visit our Privacy Policy for more information about our services, how we may use, process and share your personal data, including information of your rights in respect of your personal data and how you can unsubscribe from future marketing communications. Our services are intended for corporate subscribers and you warrant that the email address submitted is your corporate email address.

Of course, banks will not be the only service provider seeking to provide such appealing new services. There will be a whole new thriving ecosystem of different payment service providers, retailers, tech companies – all moving with great speed into the payment space.

The reason for the intense competition: the battle over the payment space is actually a struggle about the customer relationship, as securing that means gaining control of personal data and the ability to then sell in high-margin services within the payments area, and beyond.
Banks – and their non-bank payment service provider competitors – are in response creating new services such as optimisation of loyalty schemes, budgeting or receipt management.

Such new overlay services go beyond the payment to span the whole transaction, e.g. automated matching of purchase orders to invoices or in-store promotions are triggered by geographical location, combined with in-depth customer profile and purchase history.

Many of these services leverage instant payment. The issue is that our payment infrastructure has, on the whole, not kept up with innovation emerging so swiftly in cyberspace and on our smartphones. Physical goods customarily get delivered faster than the corresponding payment transaction is processed – Amazon Prime now offers a one-hour delivery service in major metropolitan areas like Manhattan and Central London, after all.

As this immediacy becomes the expected norm, consumers and merchants will naturally respectively expect and need digital payments to offer the same level of speed of response.

The challenge and enormous opportunities of modernisation

Moving to real-time is what we need to do. That doesn’t mean it’s a weekend upgrade. True modernisation of core banking IT systems will finally have to happen: batch legacy systems cannot cope. Integration with other systems and services, such as cash management, is also needed to support the new services. Internal processes also have to be more transparent and agile, or banks will end up with an imbalance of too many idle funds or not enough funds, risking liquidity issues.

In addition, banks must have the infrastructure in place to support a fully 24/7 service. That’s because near-real-time payment systems slash the time we have to check for fraud, so radically enhanced fraud detection and payment interdiction processes need to be developed. At a minimum, banks will need better authentication checks and tighter encryption for mobile and Web.

In conclusion, it seems that there is a circle emerging where the development of new high-value ‘overlay’ services within and beyond payments is simultaneously starting to accelerate the development of instant payment solutions – while the development of instant payment solutions, in turn, speeds up the development of these new services.

These overlay services will be income generators in and of themselves – but more importantly, they need to remain at the centre of the customer relationship. This is critical, especially as the upcoming Payment Service Directive 2 (PSD2) reform will give third-party providers access to bank accounts for payment initiations.

In fact, that legislation and instant payments will inaugurate a fresh wave of dynamism across the whole European retail banking space. That’s because instant payments will be key to controlling the flow of all payments and will fund intense competition with non-traditional competitors like mobile network operators and non-banks.

Without doubt, the providers of the most timely (read: instant) and relevant services will be the winner of this coming race. Banks that don’t grasp this, or don’t grasp it quickly enough, risk losing everything to the non-traditional entrant.

Times are a changing – and swiftly. Or should we say ‘instantly’?

Dr David Andrieux is Market Intelligence Manager at Sopra