For the foreseeable future, instant payment (IP) models will exist side by side with traditional payment schemes. Person-to-person (P2P) transactions constitute the most common and talked-about IP use case today. But with businesses recognizing the potential of IPs, further use cases for real-time payments have begun to blossom.
Consumer-oriented companies value the increased speed of funds transfer, especially in the retail business. In one worldwide survey, more than three-quarters of the merchants queried said they expect IPs to eventually replace physical credit and debit cards for person-to-business payments.  Apart from client payments, multinationals and big corporates have started to find in IPs a way to improve cash flows, budgeting, financial projections and overall cash management.
The emerging interest of corporates in IPs has uncovered another factor: Instant payments bring with them the chance to mutually support and accelerate other digital trends. With the delayed execution of traditional transfers, the inclusion of payments into digital workflows used to be difficult. But the speed of IPs and the immediate, irrevocable character of such real time payments allow for their seamless integration into digital business models. Let’s dive into a few digital trends and see how they relate to IPs.
The technologies likely to leverage IP’s advantages best
The environment will breathe a sigh of relief, along with personnel in payments departments worldwide, should IP make printed invoices obsolete, as is probable. Request-to-pay (R2P) is often mentioned together with IP and involves a beneficiary sending a request directly to the account of the payer, who receives a notification of it and, after validating the payment data, signs off on the debit amount.
This procedure effectively eliminates any errors a payer could make when entering payment data. By replacing printed invoices, it also carries ecological advantages with it. Some traditional payment methods involve procedures similar to R2P. What IP adds to them are speed and accuracy.
Walking out of a local retailer without stopping at the cash register to pay for the merchandise in your possession used to be called shoplifting. But not in the emerging realm of invisible payments, where you do in fact purchase the merchandise you are departing with as you glide out the shop’s glass doors.
Initial trials of shop concepts are being conducted. In them a gate at the exit automatically captures the prices of the goods customers have selected and directly debits their credit card.
From the customers’ perspective, the payment process vanishes even as the payment itself takes place and appears on their account. If an IP were to replace the credit card in the transaction, not only the notification but also the debit could take place in seconds as the customer exits the premises.
Internet of Things:
IP technology and the growing trend of the Internet of Things (IoT) are ideally suited to each other, a match made in tech heaven. Imagine all the situations where you repeat the same routine payment – shelling out for highway tolls or pulling plastic from your wallet to fill the gas tank of your vehicle. Shouldn’t these payments just automatically occur and erase you from the picture?
If your car has its own ID that allows it to debit your bank account, it can easily pay for the tolls and the fill-up. The permission to debit your account can also be extended to any device or connected object. If you ask Alexa or Siri to order you a pizza, why shouldn’t she just pay for it for you as well?
And business-to-business (B2B) applications are no exception. Think of a printer not just ordering new toner when it is empty, but also paying for it. Or a machine that detects the need for a replacement part, then orders and pays for it without anyone in the company lifting a finger.
A smart contract is a self-executing agreement concluded between two or more parties. It is secured on a blockchain and therefore cannot be changed by any one of the parties alone. While such distributed ledger technology (DLT) enables business processes or agreements to be organized, it has not yet extended its reach into the “real” world sufficiently to gain a workable hold.
How would DLT work? Think of sensors that report the arrival of a container to trigger the next step in a contract. Or messages sent from a manufacturing line when a contracted batch of products is finished. What would enhance the usefulness of a smart contract greatly is the ability to trigger IP, which would immediately verify the processing of a transfer and initiate subsequent contract steps.
Riding the IP wave
IPs simplify and speed up the transfer of money between persons, between businesses, between persons and businesses in both directions while lowering the costs of such transactions. The tech trends and innovations that fuel these various transfers will only continue to quicken, multiply and alter the payment landscape. To stay relevant to consumers and businesses alike, banks have to adapt to it.
It is time for banks to take stock and consider how quickly demand for real-time payments could increase in the coming years as more fintechs and neobanks offer IP payment capabilities. Investing in a cost-effective and future-proof connection to IP schemes makes good business sense. If a bank decides to wait, it may miss out. When it comes to client expectations, it is always advisable to keep pace with them rather than fall behind.
The Avaloq Payment Hub represents an ideal way to do so. It works with all core banking systems, handles IPs from originator to beneficiary, and ensures 24/7/365 access to clearing and settlement mechanisms. There is no need to invest in internal infrastructure, no requirement to forecast the redundant capacity necessary to handle peak transaction volumes. Linking to the public cloud through Avaloq enables you to cover them even as you lower your total cost of ownership via a pay-per-use plan. All your sensitive data is safely encrypted; all your compliance monitoring – embargo/sanctions screening, fraud checks and anti-money laundering (AML) and counter-terrorism financing (CTF) reviews – is built in.
Have we piqued your interest on this topic? Why not explore it in greater detail? Download our whitepaper, “Instant Payments: Changing the Way We Pay” or get in contact to learn more on our Avaloq Payment Hub offering.
Written by Matthias Schindler
As the Product Domain Owner for Avaloq’s Banking Transaction Products, Matthias takes responsibility for the development of a wide range of processes, such as securities trading, OTC derivatives, FX, cards, cash or payments. He is an industry expert in bank transactions of any kind and has a strong background in securities trading. Currently, Matthias is developing the Avaloq Payment Hub, a cloud-based payment processing service which enables banks to access instant payment schemes efficiently.
Learn more about:
How the processing of instant payments works
The effect instant payments will have on our day-to-day
The challenges banks will face on the way to a new payment experience
Why getting ready for real-time payments doesn't happen instantly