Overlay services for instant and real-time payments

Why the need for overlay services?

Overlay services augment a payment service by building on existing basic infrastructure and delivering enhanced value to the participants of a payment network. With the launch of various instant payment services, financial institutions (FIs) want to connect to more than one network and switch between them based on payment volume, pricing, transaction limits, and reach to depository accounts. As networks determine interoperability aspects, their participants can benefit from certain overlay services, such as liquidity management, tokenization, biller directory, fraud prevention services, and customer directory.

These overlay services would benefit all participants in the ecosystem and significantly help expand the reach and ubiquity of instant payments services, aiding interoperability efforts between multiple networks to ensure seamless processing (both sending and receiving of payment instructions across payment solutions and optimizing investments). Interoperability, coupled with overlay services, would promote competition, reach, and scale.

The many benefits of overlay services

Overlay services provide numerous advantages to networks and FIs and even help drive interoperability. Here’s a look at their benefits:

Benefits for networks

Building a ubiquitous, safe, and fair system requires cooperation between different networks (both public and private sector services) to identify common overlay services. This collaboration stands to benefit all parties in different ways:

• Faster adoption and ubiquity: Overlay services aim to fulfill expectations regarding user experience, rights, and obligations, regardless of the underlying clearing and settlement networks.
  
• Increased efficiencies by leveraging common capabilities: Overlay services allow each network to leverage each other’s capabilities and solutions.
  
• Scope of innovation: Sharing a common goal and widely accepted industry best practices to build overlay services promotes interoperability, which can act as a foundation for creating a cohesive instant payments ecosystem upon which new disruptive capabilities can be developed.
  

Benefits for financial institutions

From FIs’ perspective, participants of one network shouldn’t have to duplicate their investment of time and resources to build instant payment processing services. This can be counterintuitive to developing a large-scale global network with the aim of speeding up payment processing. Building common overlay services from the beginning can offer a multitude of benefits to FIs of different scale:

• Flexibility of use: Overlay services based on a predefined interoperability model allows FIs to have the ability to either operate multiple services or switch seamlessly between them, with no impact on customer experience.
  
• Reduction in overhead and better customer experience: Identifying common capabilities and designing services on top of it will help FIs avoid the need to build similar products on different rails. Instead, they can focus on routing logic based on costs, time, and other considerations.
  
• Greater innovation: Interoperability facilitated by common overlay services between multiple instant payment systems provides FIs and fintechs seamless access to different systems and encourage open banking and instant payments product innovation.
  

Instant payment networks can leverage their capabilities for greater efficiencies

Overlay services built using the same underlying messaging standard can help drive interoperability between multiple networks. This can be further supported by building a consistent set of guidelines that help institutions connect to these networks; each network builds its host of primary capabilities, with some secondary capabilities on the road map. Networks can work together to identify a set of unique capabilities to leverage. Some of the overlay services and capabilities that instant payment networks can employ to serve all customers without duplicating efforts follow:

• Liquidity management: A common liquidity management tool allows participating FIs to pool funds to cover outflows and support funds availability for 24/7 payments when intraday overdrafts cannot be covered by account transfers.
• Tokenization: With current fraud prevention strategies believed to be insufficient to identify fraudulent transactions in real time, tokenization aims to reduce the risk and impact of demand deposit account-based fraud by setting up fast and secure automated controls to provide additional assurance.
  
• Biller directory: As more FIs become instant payments-enabled and start driving volumes, networks may want to provide customers access to a biller directory solution or define common standards that allow them to make stand-alone instant payments to billers.
  
• Fraud prevention services: To contain fraud risks associated with instant, irreversible payments, FIs are able to define and set certain parameters that limit transaction activity in a network. This would be based on FIs’ knowledge of their own customers.
  
• Customer directory: A centralized directory that stores a receiver’s public identifier and alias data (e.g., mobile number or email ID) mapped to banking information acts as a single source of truth for participating banks (both senders and receivers) to retrieve the required information and originate payments or receive instant payments. Directories already available in the market can be leveraged.
  
• Regulatory framework for transaction monitoring and fraud prevention: A consistent regulatory framework ensures efficient transaction monitoring over networks and makes it easier for regulators to approve the approaches taken by FIs. A common framework also makes it easier for FIs to standardize customer onboarding processes such as know your customer (KYC) and switch between networks seamlessly.
  

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Call to action for instant payments networks

Drive interoperability as a prerequisite: Instant payments networks need to work together to develop standards for translation across different message specifications so that different clearing and settlement networks can exchange transactions (e.g., allowing a payment message initiated on one network to be delivered to a receiver on another network). This model is currently leveraged to allow FIs to choose between FedACH and EPN to connect to the US ACH.

Design overlay services over minimally viable instant payments services: Instant payments networks should go to market with a minimally viable payments service. Once these networks are interoperable, overlay services can be designed by working closely with each other. This will enable FIs to use those overlay services irrespective of the underlying network being used to process transactions.

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