The Coming Age of Real-Time Retail Payments Systems
The landscape of the contemporary payment systems is being profoundly shaped by disruptive technologies and innovative payment services. Among these innovations, the emergence of mobile technology and ubiquitous m-commerce has aroused the market’s longing for having in place payment services that offer safety, speed, and ubiquity for transfer of money. Simply put, people want funds transfer to be faster, intuitive, convenient, traceable, cheap, and reflected on their accounts in real-time (so the money can be re-used immediately for other purposes). Such needs gradually and inevitably call for a global adoption of real-time retail payment systems (RT-RPS), and a safe and cost-efficient way of carrying out the function of clearing and settlement.
According to a SWIFT white paper, there are 18 countries across the globe have RT-RPS in place. Around 29 countries are currently exploring or building a RI-RPS of their own. Australia is the latest country that joined the group of building a RI-RPS, and plans to adopt a new approach for clearing and settlement that merits our attention. The country’s initiative is called the New Payments Platform (NPP), and is now at the “build and internal test” stage and will be completed in mid-2017. The NPP is an industry initiative developed collaboratively by the country’s major deposit-taking institutions. It is the industry response to the Reserve Bank of Australia’s strategic objectives. The founding members of the NPP initiative include Reserve Bank of Australia, ANZ Banking Group, Australian Settlements Limited, Commonwealth Bank of Australia, ING Direct, National Australia Bank and Westpac Banking Group. SWFIT is now helping the industry to build up the underlying infrastructure. All Australian financial institutions are welcome to join the platform, either directly or via an agent.
How the NPP Works
Generally speaking, the NPP enables payments to be made instantly between financial institutions and their customers’ accounts. The platform allows funds to be accessible immediately after a transaction is made regardless of whether the payer and payee are with the same financial institutions. Different overlay services are allowed to join and use the NPP so that participating banks will be able to provide real-time payments services to their customers through various different channels, such as and online banking portals and mobile phone applications. It adopts a unique “distributed-clearing and centralised-settlement” approach under which the clearing (validation and confirmation of the payment instruction) are undertaken on a distributed peer-to-peer basis, and then the immediate settlement triggered was carried out in a central settlement mechanism operated by the Reserve Bank.
A real-life transaction under the NPP will look like this: The payer first initiates a payment via any of his banks’ channels. These bank channels, be it a mobile phone app or online banking portal, can access the “addressing database” to resolve alternative end-customer identifications into bank account numbers. The payer’s bank then sends a message together with all the payment details to the beneficiary’s bank via SWIFT’s messaging channel and payment gateway. The beneficiary’s bank in turn clears the payments by checking the payment details and sends a response back to the payer’s bank confirming it is able to credit the beneficiary. The payer’s bank payment gateway then initiates the settlement by sending a settlement request to the central bank. The central bank then returns a settlement confirmation to both banks and settles the value between the two banks’ Exchange Settlement Accounts. Depending on the different overlay requirements, the beneficiary’s bank credits the beneficiary customer’s account either after a valid clearing message or settlement confirmation has been received.
Implications of the NPP on the Australian Financial Landscape
The NPP may hold at least the following implications for the country’s banking and payments industry: First, faster and simple electronic transfer of funds will offer greater convenience to both the payers and payees and further change their payments behaviour and expectation toward banks in the long run. More payments are expected to be happening digitally as a payer can make a payment simply by using the payee’s mobile phone number or email address, and the funds paid will be immediately accessible on the payee’s account. Customers will expect banks to provide more personalized and specialized services to differentiate themselves since the standards and qualities of most payments services in the country won’t be too different. Second, the fact that the NPP allows different overlay services to communicate with one other means banks will be able to better meet specialized customer needs by developing different, competing channels. As banks adopts new channels, customer inputs will increase and further give banks advanced customer knowledge that enables them to create niche markets and offer greater values to customers. Third, the possibility that additional information (structured or unstructured) can be sent together with the payment transaction will provide greater flexibility to person-to-person payments and “facilitate an increased level of straight-through processing for businesses.” Lastly, the real-time nature of the NPP sees the importance of having in place an adequate and effective mechanism for erroneous payments recovery. Real-time and simple addressing payments often mean less room for transaction revocability and more room for erroneous payments as a result of disputable payee information.
As the world’s first RT-RPGS that adopts the pioneering “distributed-clearing and centralised-settlement” approach, Australia’s New Payments Platform indeed is well worth noticing. Although the potential benefits it promises to bring to the Australian payments landscape remains to be seen, the very ambition displayed by its planned design has opened a window for us to observe the face of the next-generation payments system. Going forward, aside from the question that how the platform is actually being implemented, it is also noteworthy to observe how it will be impacted (or upgraded) by emerging disruptive payments innovations such as the distributed ledger technology (or the blockchain technology). The platform’s distributed-clearing feature makes it potentially compatible to the blockchain infrastructure and therefore opens the possibility of turning the country’s payments system into the world’s first national Internet of Values.
By Cheng-Yun Tsang