Instant Payments: Overcoming Challenges for a Faster Tomorrow

Around the world, there are significant moves to transition from traditional electronic money transfers, which rely on batch settlement systems that can take several days for transactions to clear, to instant, or at least near real-time, payment systems. These new innovative payment systems ensure that beneficiaries receive their funds within seconds, regardless of the day or time.

Notably, developing countries are at the forefront of these efforts, while many developed nations are falling behind. Key success stories come from the BRICS nations, such as Brazil with its PIX system (launched in 2020), and India with the UPI initiative (launched in 2016), which now handles 46% of global instant payment volumes. Other significant initiatives include WeChat Pay and AliPay in China, SPEI in Mexico, PSE (Pagos Seguros en Línea) in Colombia, CVU Alias in Argentina, PromptPay in Thailand, PayNet in Malaysia, and PayShap in South Africa. All these initiatives are leapfrogging traditional banking systems and directly embracing instant payments, significantly boosting financial inclusion.

Conversely, the US, EU, and, to a lesser extent, the UK are trailing behind. For example, only 14% of credit transfers were instant payments in the EU during the first quarter of 2023. Nonetheless, substantial progress is being made:

• In the US, the Clearing House RTP network continually sets new records and last year, the Federal Reserve introduced FedNow, which is supported by several major US banks.

• In the UK, the existing UK FPS system, created in 2008 and managed by Pay.UK, has gained traction, particularly with the introduction of Paym, which allows fast payments using a mobile number as a proxy. Additionally, the development of the New Payment Architecture (NPA) has been initiated to make the payment infrastructure even faster, more secure, and more flexible.

• In the EU, the European Parliament passed an ambitious Instant Payment Regulation on February 7, 2024. This regulation establishes a comprehensive legal framework for Instant Credit Transfers among banks and Payment Service Providers (PSPs) within all EU member states. The implementation of the SEPA Instant Credit Transfer (SCT Inst) infrastructure will begin in January 2025, requiring all banks to receive instant payments, with a subsequent deadline in October 2025 for banks to enable sending instant payments. The regulation mandates that transactions be executed end-to-end within 10 seconds, be available 24/7, include notifications upon successful transfer and include necessary security measures (like "Verification of Payee") and compliance protocols (such as sanctions screening, fraud detection, and AML checks), all without additional costs compared to traditional credit transfers.

The challenges for banks to meet this new regulation are considerable, as many existing payment platforms cannot operate in real time or on a 24/7 basis. Simple upgrades will likely be inadequate; new architectures will be necessary to meet these stringent requirements. This is particularly challenging as payment volumes increase and regulatory demands intensify. Additionally, technical and operational challenges will need to be addressed, and issues such as interoperability, security, and regulatory compliance remain critical:

• Interoperability: Ensuring that different systems across the globe can work together is crucial for international transactions.

• Security Concerns: With increased speed and accessibility, robust security measures are more important than ever to combat new forms of cyber threats.

• Regulatory Compliance: Varying regulations across countries regarding financial transactions can complicate the implementation of a universal system.

Despite these challenges, the benefits for customers, governments, and banks are too important to ignore:

• Enhanced Liquidity: Instant access to funds improves cash flow for both businesses and consumers, enabling better financial planning and management. In the EU it is estimated that approximately 200 billion EUR is tied up in credit transfers daily. Instant payments could significantly reduce this amount, allowing for more efficient money management.

• Economic Inclusion: By making it easier and faster to transact, more people are brought into the financial system, helping to reduce the unbanked population.

• Reduced Fraud Risk: Faster settlement times reduce the exposure period for fraud, thereby lowering the risk of financial crimes.

• Cost Efficiency: While the setup might be costly, the operational costs of instant payments are generally lower than those of traditional systems.

The move towards instant payment systems is therefore inevitable. Although the path may be complex and challenging, the momentum towards Instant Payment has grown so strong that it cannot be stopped or significantly delayed. It is crucial that banks begin to adapt to this new real-time world.