In the UK, instant payments went live on May 27, 2008, some nine years ago. As a service brought about by regulation and the government’s desire to improve the efficiency of the country’s payment systems, little attention was paid to its potential uses and impact on the market. Standing orders (a UK payment instruction to make regular fixed transfers to a beneficiary) were converted at launch, but overall take up was gradual, and the service was embraced primarily by consumers and small businesses due to the convenience of moving money between accounts in near real time and for low or no fees.
Banks, however, were slow to use their new instant payment capability to innovate and develop new offerings for the corporate, business and consumer segments. Instead, others including non-banks became the early adopters. One unexpected and unfortunate example was pay-day lenders whose pay-day loans exploded onto the market through use of the new service but often with sky high interest rates of more than 3,000%. More desirable services and outcomes with wider benefits were left on the shelf.
Upside to instant payments – New “overlay” services
As instant payments spread worldwide, however, the benefits became clearer—the ability to pay instantly and directly from a current account can enable a whole range of new business offerings, or “overlay services,” for the benefit of banks and, in turn, their customers. Overlay services extend beyond traditional bank services, providing customers with new services bundled with the payment and thus additional ways to save money and time or otherwise improve quality of life. For banks, overlay services provide a means to allure and capture customers, generate new revenue streams and save internal processing costs.
Leading banks are now focused on the opportunities of instant payments, but challenges remain. One key challenge is the “disconnect” that can happen between a bank and its customers as a result of instant payments.
Downside to instant payments – Customer disintermediation
Take Uber, for example. The actual payment to the Uber driver is almost hidden from the customer. Once the customer sets up a payment method and pays via the Uber app, each subsequent payment is then processed using the same method. Customers don’t need to select how they want to pay again, or even enter pin numbers or CCV codes to complete their payments. This makes the experience of using the service easy and convenient, which is brilliant for the customer, but less so for a bank.
The one-off Uber registration process allows customers to add a payment method—usually a bank debit card, credit card or maybe PayPal—to their Uber account and authenticate it. From that point on, as long as the payment method continues to operate, the customer never needs to review his or her payment setup. The bank then becomes just a processor, completely removed from the customer interaction.
Of course this is at odds with a non-Uber taxi where, at the end of the journey, you take out your wallet and pay by cash or card. So, as the purchaser, you’re reviewing your decision on the payment method each time, the bank is still visible and the customer may select an alternative method, perhaps a card with a different fee.
With Uber, the customer is unlikely to review his or her original decision to register a particular card even if the original choice might be costing more. As a result, from a bank or payment provider perspective, embedding the payment instrument into the app results in the loss of a valuable customer touchpoint.
Planning a successful payments path forward
As the banking world moves to real-time everything, everywhere, and regulations continue to open up banking services to third parties, the risk of becoming disintermediated from the customer is real. It’s both a challenge and an opportunity for banks wanting to make the most of instant payments.
With the rise in instant payments, both banks and governments in countries implementing instant payments infrastructures can and must learn from the experiences of those countries that have already “been there, done that” and learned the pitfalls. Right now the battleground is set, but who will emerge owning the customer relationship? Will banks succeed in maintaining customer touchpoints and introducing new overlay services?
CGI has played a key role in the setup of national payment infrastructures in more than 20 countries over the past 15 years and delivers a wide range of payment solutions. If you’d like to discuss the challenges and opportunities of instant payments for your bank, feel free to contact me, or visit cgi.com/payments.