The move to real-time starts with our payment senses. What do I mean by this, well I’ll start with an assumption that everyone reading this is a human being ,which means that we typically interact with the world through our five, well-documented, senses. This is the main reason that cash remains so pervasive in society. You can feel cash, you can smell it, hear it (crinkle of the notes, chink of coins, ka-ching of a cash register), if you really want to, you can taste it – but most of all you can see it. A cash movement is visible and instant, a true real-time exchange of value.
There is a clear lag between retail payments needs and the underpinning schemes that is being further reinforced as the world we live in becomes more immediate. Have you ever had that frustration when your post to a social network doesn’t appear immediately (and you subsequently post it three times in a button-pressing frenzy)? What about the colleague that doesn’t immediately open your email and answer back? A few years ago these things weren’t a problem, but today in our hyper-connected world, we need feedback now, now, now.
According to a recent Microsoft futurology report, Being Human, the bottom line is that technologies are not neutral – they are laden with human, cultural and social values. Which in reality means that in order for an innovation to be taken to heart, it must feel natural to the user. Which means that although we already know what the immediate future holds, we need to do something different to keep regulated payments growing in the longer term. According to Microsoft, this will include a fundamental change in the product development process – the addition of a fifth step, beyond what will work, to understanding why something works and how it gels with the way that human beings naturally interface with electronic systems – the job that our piece of plastic, online banking or QR code do today.
This means that our own evolution is driving the payments industry towards real-time. In the words of enigmatic French pop duo, Daft Punk, Work It Harder, Make It Better, Do It Faster, Makes Us stronger – which is a modernisation of the Darwinian theories regarding evolutionary change. However, evolution is usually driven by a catalyst – a game changer which makes the next evolution possible or necessary.
The advent of our social media-driven world has become that catalyst. Facebook and Paypal will not dominate the payments world in the coming years, but the ideas that they have bought to the mass market are the catalyst that requires payments to change. Here in Europe, SEPA has mandated that credit transfer transactions happen in D+1 at the latest, so I can send money to any account in any country in the SEPA zone and it should be off my account and on theirs by tomorrow at the latest. When SEPA was first being drawn up in mid-noughties, D+1 was already quite ambitious, but it seems like a leap to yesterday rather than an aspiration for tomorrow. Which, given that I can withdraw cash from an ATM and go to a Western Union agent (other remittance companies are available!), fill in the form and perform an immediate transfer to most places in the world (and have been able to for quite a few years). The difference between these two, of course, is that my D+1 SEPA Credit Transfer doesn’t cost me anything to make so I can pay for immediacy or wait a day.
As the SEPA migration continues making fee-free D+1 ubiquitous for Euro currency transactions, domestic schemes are now pushing into the real-time and near-real-time space (such as UK Faster Payments, Singapore G3 and Nigeria’s NIP) driven by an over-riding need for payments now! But at what cost? Typically there was great fiscal liquidity for a bank in the +X time delay between acceptance and movement in a payment. This liquidity allowed the model to work and in part funded it – so now that it is taken away, is it necessarily in the interests of banks to continue being the bastions of payment traffic?
The European Union doesn’t think so. It is currently working on legislation that will allow third party payment companies to directly and ‘freely’ access current accounts to facilitate payments. Nick-named XS2A, the European Commission proposes that I, as an account holder, can allow non-bank organisations to act on my behalf as a payments agent, directly accessing my account balance, looking at my transactions and triggering transactions on my behalf. Basically, I can choose my own payments out-sourcer! It means that funding wallets and virtual accounts becomes a thing of the past. I can grant my new payments provider access to all my accounts and get an immediate picture of my real-time balance. My payments provider can then allow me to make transactions from any of my accounts by using their privileges – and potentially make a single transaction from multiple accounts so I don’t have to move money around myself. Imagine if this payments provider were Amazon (other multi-national internet merchants are available) – I spy what I want to buy on their website, click ‘pay’ and immediately get an overview of my accounts whether cash, credit, prepaid or virtual currency. I pick the amounts from each account I want to use – and hey presto! all of my balances are immediately updated.
But if Banks are to remain the bastions of payment traffic, what will it take for you to push the real-time Bank’s button? With real-time payments comes a great deal of change in the relationship between the payment facilitator and the customer. The first issue is the irrevocability of real-time payments – for years we’ve been used to the fact that when a real-time payment is gone, it’s gone – cash, international remittance, web payment providers – for each of these the consumer expects it unlikely that they can get their money back except in cases of fraud. This isn’t typically what they expect from a Bank payment – and in most cases can’t be done due to legislation such as the PSD.
Which means that going real-time will typically cost money for the provider if they are a regulated organisation. However, when things are being done in real-time you have immediate knowledge of a transaction and typically an open conduit to your customer at the moment of decision. Retailers have been exploiting this for years with the impulse buy items located next to the checkout and the cross-sell questions ‘would you like the extended warranty?’
For Banks to make real-time pay, they are going to have to think differently about their relationship with their customers. Understand what makes them fall in love with a payment method above all others – look back to the outcry over the proposed UK cheque deadline in 2018 – where cheque usage has fallen from 1.15bn in 2005 to 545m in 2012 (or less than 8 cheques per capita) – they don’t make sense for banks any more, but people feel strongly about them. Even people that never use cheques fought to stop them going away. Is any real-time solution going to generate that kind of affinity?
Thankfully the Regulators are not keeping up with the pace of change in the payments industry – imagine them as a snail trying to keep up with Usain Bolt. But thankfully for Banks, Regulators are also making it particularly difficult for new entrants to obtain the licensing that they need. This puts the brakes on new payment providers once they reach critical mass. Payments is profitable, but it’s hard to enter new markets and harder to get REALLY big.
Even players like Google, who HAVE a banking license, have found this a difficult playground. With the revamped PSD2 on its way and further increasing the burdens on a payments facilitator there is a very small bit of breathing space. The regulations for real-time mass payments haven’t been thought about yet – and even thinking time will take years…but expect something in the third update of the PSD.
So assuming PSD3 is around five years away (and understanding how long it takes to do something in a big bank) perhaps now is the time to start thinking how to tackle the issues presented by real-time and third-party access head on – redefine what a Bank is actually for by looking back at it’s original purpose. Historically a Bank has always been a place for securely storing the things that we value – previously in safes, but more often now in secure data storage. I’ve talked to many Banks about them becoming the location for a store of different types of value – whether that be financial value such as cash, stocks, bonds, virtual currency – or non-financial value such as loyalty points or discount vouchers. However, in the new social media world, perhaps my most valuable asset, above all others, is my identity. A Government can issue me with identity materials, but they seldom want to play in the validation space – whereas Banks are now facing new regulation and greater scrutiny in the KYC space. Why not let my Bank become the trusted holder of my issued identity, and an authority against which it can be checked but not revealed. Many card-based cross-overs with national ID have been tried – there are even good examples of Bank-managed digital signatures such as in Sweden, and in my current location in Belgium, the Government will begin using Bank-issued EMV-CAP readers to generate one-time passcodes using national eID to access government services. KYC gives Banks an advantage over any other market player.
In short, it may be time for Banks to begin looking at where they can bring value to my life and offer services that I can’t get elsewhere – and probably wouldn’t trust anyone else to deliver. That’s what I want now, and if that can be delivered by in support of real-time payments it really doesn’t matter who my payments provider is, as long as my identity credentials are kept safe and secure – that my human sense of identity is protected, but still you’ll need to ensure that your solution tantalizes my other five senses so that I’ll not just use it, but love it.