The evolution of the payments industry: Instant payments
Will the business model of the traditional bank continue to be viable?
Banking alert | 26 April 2016 | The evolution of the payments industry: Instant payments
- The ECB’s initiative
- Solution development
- What are instant payments?
- Payments as a threat to banks’ business models
- How can we help?
Banks should not maintain the status quo and hope the fintech storm will pass. Rather, business models should be re-designed and transformed.
The ECB’s initiative
Rapid developments in technology and new customer requirements have driven major innovations in the payments industry. The European Central Bank (ECB) through the Euro Retail Payments Board (ERPB) proposed that at least one instant payment solution in euro be available to all payment service providers in Europe.
Last week, EBA Clearing, a bank-owned provider of pan-European payment infrastructure solutions, announced that close to 40 financial institutions have committed to supporting and funding the development and installation of its instant payments platform for transactions in the Single Euro Payments Area. Based on this support, the EBA Clearing Board has formally kicked off the development and implementation of their instant payment solution, which is planned to be in line with ISO 20022 messaging standards and fully compliant with the SCTInst Scheme that is currently being created by the European Payments Council. The instant payments service will be available to payment service providers (PSP) across the EU.
What are instant payments?
Instant payments will significantly increase the speed at which payments are made and received, thus certainly acting as a service enhancement in all payment situations. Today it normally takes 1 business day between the time when the payer dispatches the payment instruction and the time the recipient will be able to re-use the transferred amount of money. With instant payments this will happen in real time, 24 hours a day, 365 days a year, with the funds being available immediately for use by the recipient. It should be possible for an instant payment transaction to be completed in less than five seconds.
Payments as a threat to banks’ business models
New regulation and technology are combining to open up the payments market to competition. In particular, the Payment Services Directive 2 (PSD2) extends the original scope of PSD and increases the number of new entrants into the payments market. In general, banks face the danger of becoming merely the providers of accounts that feed the payment accounts which their customers maintain at other payment service providers.
Banks engaging in payments services will have to upgrade or substitute existing infrastructure in order to offer instant payment services. Given the low profitability of the banking sector in the light of the low interest rate environment, heavy investment in revamping infrastructure may be challenging.
At the same time, focusing investment on a centralised instant payment services system may not be the right move as technology continues to evolve. Blockchain technology, a decentralised payment network, also offers a way to pay in real time, without the need of an intermediary. Bitcoin is the most prominent example among decentralised peer-to-peer networks using blockchain technology to transfer funds. Although still in its infancy, blockchain technology might revolutionalise the financial industry.
Thus, the question remains: how viable is the business model of the traditional bank? Banks should not maintain the status quo and hope the fintech storm will pass. Rather, business models should be re-designed and transformed, allowing banks to ride the fintech wave.
How can we help?
Pillar II of the Basel framework has been implemented in Europe via the Supervisory Review and Evaluation Process (SREP), in which the Regulator scores the bank on a number of elements, including the viability and sustainability of the bank’s business model and strategy. Business model and profitability risk has also been announced as the number one 2016 priority for the Single Supervisory Mechanism (SSM) of the ECB. Thus, how well a bank can compete against new fintech players will surely be factored in the Regulator’s SREP.
Our holistic SREP approach ensures that your business model and strategy are viable and sustainable, and closely interlinked to the ICAAP and ILAAP, while our tailored training solutions ensure that board members are up to date with the latest risk and regulatory developments.
Furthermore, our team will continue to track developments in instant payments and blockchain technology in order to assist you in innovating your business model to ride the fintech wave.