Suddenly, it’s Olympic season for instant retail payments: there’s hardly a central bank in a developed country that doesn’t have at least ambition for retail payments to go instant; a few already boast a live system. Not to be outdone, the Eurosystem joined the fray last December by placing instant payments on the agenda of the newly formed European Retail Payments Board. Instant payments are those that are credited to the beneficiary within a few seconds – no more than five – of being originated by the payer.
Meeting demand for instant payment capabilities
In an ever-more interconnected, always-on environment – with the promise of the Internet-of-Things – payments providers need to meet demand for instant payment capabilities. A number of service providers have already responded with proprietary solutions; a few European countries have proposed national solutions; and e-money solutions have emerged. The deployment of a pan-European instant payment infrastructure would enhance the efficiency of payment systems, by reducing the friction between the different market and regulatory layers that have developed for card, internet, and mobile payments. To optimise the societal value of instant payments, stakeholders need to reconcile the longer-term vision with a near-term approach that uses existing settlement infrastructure and messaging standards, and that balances customer requirements with business case imperatives and a strong business model.
Regulation and infrastructure
Agreement on a few guiding principles would be a good starting point for a European instant payments initiative. These should acknowledge that the European legal framework for payments does not need further adjustment, as it has already been substantially enhanced over the past decade, particulary in terms of consumer information and protection, and participation by non-credit institutions. The European payment system is underpinned by a proven, well-functioning real-time gross settlement payment infrastructure, the Trans-European Automated Real-Time Gross Settlement Express Transfer system (TARGET). This is gradually being complemented by the upcoming T2S infrastructure – a central platform for payments settlement that will link national payment systems across Europe, allowing even more efficient movement of collateral. Policy work on instant payments should therefore remain agnostic with respect to the supporting clearing arrangements – provided that supervisors and overseers are satisfied that operational, liquidity, and settlement risks are adequately controlled. The Eurosystem – in its role as catalyst – should support the mobilisation of market players by upgrading TARGET through a first phase that enables it to operate seven days a week.
Instant payments solutions need to serve payment originators and beneficiaries holding accounts in Euro for transactions in Euros throughout the Single Euro Payments Area (SEPA). The choice of what payment architecture to use to achieve this goal must be left to market participants. It is useful to remember that TARGET began as a bridge to link national real-time gross settlement systems prior to migration to a single, integrated platform (T2S). Instant payment solutions must appeal to both originating and receiving payment service providers, as opposed to any legislated mandate to send and receive.
Designing and implementing instant payent systems
Convenience for customers will also play a key role in the acceptance of instant payent systems. Payers must be able to designate payees in a simple and secure way, with app-to-app payments the benchmark for user-friendliness. Payers should be able to choose an "address" for payess from options such as a mobile phone number, an email address, a card number, or a bank account number (conversion from these options to the recipient’s account should take place at the payee’s bank). This calls for a "distributed, standardized look-up service." Design and operating rules need to be developed, and tenders need to be launched for the building of an interoperable infrastructure. Participating payment service providers will ask payees to register at least one "address" option to receive instant payments or P2P mobile payments, and these providers should have direct access to the standardized look-up service.
Although instant payments can be instructed by any type of push or pull payment instrument, they should initially be based on credit transfer (push) instruments. This is because pull instruments generate legal and operational risks for both end users and payment service providers, and increase costs. Ultimately, the market will decide the use cases for instant payments. Certainly, in an initial phase, it is appropriate to set rules that allow payment service providers to gain experience in this field and manage risks, notably those related to counterparty, liquidity, and compliance (including AML and FATF obligations, for which regulatory guidance is needed to minimize divergence between EU Member States). One such rule could be a per-transaction cap, which would allow a wide range of use cases to develop, and enable risk to be managed. The transaction cap could change depending on the use case, for example being much lower for P2P payments.
Stakeholders should acknowledge that the technologies that are beginning to be tested in the market could lead to a novel payment system architecture at some point in future. Stakeholders should make use of existing components as much as possible to optimise investment and minimise costs to end users.