Steve Percy
President, Diolkos Commerce Solutions
June 2023
"Old keys won’t open new doors" – Willy Wonka
So now that the world has seen many independently implemented variations of real-time payment solutions rolled out in many jurisdictions. Where do we stand on actual user capabilities ? Who has seen success and why ? What important issues have not been resolved ?
Experts have weighed in with many observations at conferences and through published papers and podcasts. Solutions that have seen huge volume successes tend to be those that operate in markets that had significant unbanked populations. Provision of an omnibus DDA payment capability with mobile phone access was a completely new product for a market with massive numbers of un-served customers. Low Friction to both join and execute through the use of aliases and other account-based identification pointers created a groundswell of huge domestic volume growth. A lot to brag about.
In countries with very few unbanked citizens however, these volume successes are not realistic for many reasons. The experts agree, well-established historical tools, methods, thinking and a natural resistance to change create a different set of challenges. And resistance is not limited to consumer’s, it rolls through all stakeholders in the payment delivery hierarchy.
Real-Time exchange with immediate liquidity is great but where can I use it that is not reasonably served already ? Were any of the other significant payment issues resolved ? How about fraud, or costs or use in cross-border ?
Here is a brief state-of-the-union that applies as much to the recent launches of RTP solutions as it does to those that have been around for 5 years or more.
1. Use-Cases
Each jurisdiction has chosen one but not all because of the overall switching costs. What existing payment scenarios could be transferred that will capitalize on real-time liquidity ?
Lets look at the list:
1. The largest retail payment volumes by count are consistently in POS.
2. The largest retail dollar volumes are B2B to continue cheque volume reductions (EFT, CCIN, Virtual Card, eTransfer).
3. C2B solutions for CCIN Bill Payment or Pre-Authorized Debit Collections (PADD).
4. The largest growing payment solution is P2P-eTransfers (most likely the first system up for replacement) but what about e-Commerce purchases ?
5. What about mass payment distribution solutions like Payroll and Government Disbursements ?
Is there any ability to address Multi-Party payment/deposit splits, 3rd-party Approvals, or mixing in Reward Programs within an individual payment ?
Not that Prepaid requires real-time FI-FI, Account-to-Account exchange but is it on any list for improvements ?
Do some investigation to what the Experts are saying. There are disagreements. POS is huge but complex with the current infrastructure. Corporate Bill Payments has high dollar volume impact and collections advantages, and P2P is probably the simplest fit.
What is certain is that every existing RTP project coexists with a former batch solution to handle use-cases that are deemed too challenging in some manner to support. There is no roadmap as yet to transfer them either.
2. Fraud
Most Experts identify that RT exchange is a concern as the same fraud issues intensify due to the “no recourse” requirement. Hence authentication and authorization need rock-solid solutions. But if the same core routing mentality and ISO20022 exchange data design are used in all RT implementations then how can improvements really exist ?
Experts already identify that some of these solutions will remain challenged from a regulatory KYC/AML/ATF/Sanctions Screening perspective and will never be connected for cross-border exchange without an additional intermediary solution that forces compliance.
The standard payment fraud list:
1. Stolen Card and Card Not Present
2. Corporate PII Hacking
3. Technology specific: POS Readers (skimmers) and NFC Fly-by Readers, Malware, website impersonation
4. Account Number Theft/Compromise incl. MITM – Man-in-the-middle, PADD Remittances, Account Takeovers
5. Chargeback/Refund
6. Cheque Image Theft and Deposit
7. Prepaid Card
What individual payment design issue consistently supports 90%+ of the above fraud successes ? And with zero recourse, how is the risk managed ?
3. Financial Risk
Fraud and Theft issues play a huge role in payment size limitations in relation to FI’s managing their financial risk. Different solutions use both amount and recourse time (24/48 hours) limits on individual payment exchanges. Industry applied Recourse Rules impact the level of risk they will accept.
So how are FI’s managing their risk on these new RT solutions ? Regulatory bodies and Industry participants all have different opinions but in general they are managing it with some type of cash collateral. Costs ? Rising and/or high Interest Rate environment ? FI Balance Sheet impact ? Bank Treasury Groups are pushing back.
4. Operating Costs
Outside of any additional Collateral costs from point 3, does the new core RT Exchange infrastructure provide a roadmap to the sunsetting of old internal payment platforms ? No FI shares a common end-user payment platform behind their firewall so each needs to manage independently in integrating existing payment offerings with the new RT exchange. Is there a target date to sunset any of these internal platforms ?
Here is the internal platform list:
1. Cheque Processing/Cheque Image Capture and Archive
2. EFT
3. EFT-PADD (file management)
4. EFT-Payroll (file management)
5. CCIN Bill Payment (Industry Shared Exchange)
6. P2P e-Transfer
7. Credit Card
8. Debit Card
9. Prepaid Card (as supported and if applicable to FI)
10. Merchant Settlement (if an issue with new RT platform)
Is this new RT Core exchange reducing any other Fixed and Variable Operating Costs ? Support costs, Compliance/Regulatory costs, Systems costs, Training, Legal, …
5. Future: International Real-Time Integration
Realistically, Real-Time solutions are targeted to service Domestic needs because that is where the mass majority of payment volumes arise. And that is why there are individual instances implemented in each jurisdiction.
ISO20022 does not guarantee that systems can easily connect to provide cross-border real-time exchange, particularly if each jurisdiction is using different configurations of the standard. Experts agree and state that there is more complexity on all fronts in integrating these systems. Cross-border solutions such as Project Nexus in Singapore is one instance that demonstrates the inter-jurisdiction challenges (60 seconds to exchange and settle ?).
Carpenters in my grandfather’s generation did not have power tools. They used their arms and hands to swing a hammer, turn a “slotted screw”, bore a hole and cut a board. They were a hardworking, skilled, and tough generation and they got the job done. They snickered at our generation of power tool users even though we get the job done as well. While we have become more efficient with technology, have we made a significant leapfrog in moving towards a better world for payments ?
I think that everyone needs to look at a different way of exchanging payments if we want to really improve our world for commerce. Time to read and think with a little more effort about what is offered, and why all of the above remains on the table for discussion.
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