The real-time payments market has been growing rapidly. More than 118 billion real-time transactions were made in 2021, according to ACI Worldwide and GlobalData research – up from 70 billion in 2020. That number is expected to grow to more than 427 billion in 2026, equivalent to around a quarter of all global electronic payments.
Demand for real-time payments has also been growing among consumers and businesses alike as the macroeconomic backdrop sours and interest rates start to rise.
“When rates were low, nobody really cared if it took days to transfer their money to someone else, but now rates are rising, people are chasing interest rates,” says Peter Harmston, head of payments at KPMG UK. “Because of the macro climate, people are starting to ask questions: why isn’t my money moving quicker, and who is taking advantage in between? As consumers, that is a very different conversation than we would have had nine months ago.”
For businesses – be it large corporations or small and medium-sized enterprises (SMEs) – real-time payments are increasingly important for managing liquidity and working capital.
“For the SME segment in particular, with the current looming recession and the cost-of-living crisis, cash management is critical,” says Harmston. “If I’m a plumber, say, being able to do a ‘request to pay’ that allows me to request payment immediately will become even more important in this environment.”
Given that increased demand, the UK is currently developing the New Payments Architecture (NPA) – the next generation of real-time payments that will replace the current Faster Payments scheme, with migration starting in 2024.
“The UK was one of the first to adopt real-time payments in 2008, and was seen at the time as a world leader,” says Harmston. “Now, there are well over 50 countries that have real-time payments. So the UK is looking to leapfrog ahead again and introduce the next iteration of real-time payments infrastructure.”
One advantage of the new infrastructure is that it is designed to improve the quality and amount of data that can be sent with any payment message, using the so-called ISO 20022 payments standard.
“The richness and extent of data that ISO 20022 will transmit should allow banks to reduce their costs, because they can use that data to increase straight through processing and gain more insights about their customers,” says Harmston. “For corporates, it can help automate payment reconciliations, and for governments, it can help them better capture tax data and opens up the possibility of real-time tax collection in the future.”
The new payments architecture will also enable greater accessibility and simplified onboarding which we hope will increase the number of directly connected players and increase innovation and competition,” says Harmston.
The new infrastructure will bring world class levels of resilience, availability and security. These aspects are absolutely fundamental from the regulators’ perspective and vital to ensuring the UK remains at the forefront of real-time payments technology - that’s what the NPA brings.”
While the UK is seeking to remain at the cutting edge of real-time payments, the US has continued to lag due to its market-driven environment, although progress is being made.
“The difference in the US is nothing is ever mandated, it’s all market-driven compared to the industry mandates in the UK. The US will adopt things when we’re ready to and the market demands it,” says Courtney Trimble, global leader for payments at KPMG US. “Then there’s the fact that we have approximately 16,000 financial institutions. It’s an absolute behemoth, so the combination of sheer size and complexity coupled with a market-driven environment is the reason why the adoption of real-time payments has lagged.”
The US is starting to make progress, however. In 2017, it went live with real-time payments through The Clearing House, which caters to the country’s largest commercial banks such as Citibank, JPMorgan Chase, Wells Fargo and Bank of America.
“We still haven’t got that ubiquity, so usage is not where it needs to be,” says Trimble. To address that lack of ubiquity, the US Federal Reserve is developing a real-time payments network called FedNow, which is currently being piloted and is due to be rolled out by the end of next year. Once live, that will extend real-time payments capability to all other banks across the country. “That’s really going to be the game changer in the US in terms of traction and for usage when a larger number of banks have access,” says Trimble.
While individual countries are getting to grips with real-time payments, it remains a challenge to send money instantly across borders. “From a wholesale banking perspective, cross-border payments are still quite traditional and quite costly – true cross-border real-time payments are a long, long way off,” says Harmston. “While we are getting more standardisation with ISO 20022, each country has its own spin on that. So there’s still a lot of work to be done to get proper interoperability.”
Part of the problem is that rules and regulations vary according to jurisdiction. “If you look at governance, there’s no governing body for cross border,” says Trimble. “How do you properly roll out cross border without a governing body? So we need to figure out all the rules across the different jurisdictions, and banks in those different jurisdictions will also need to be collaborative. So when you talk about cross border, we need standardisation and synchronisation across governance, compliance and operating models, and there have to be some guardrails around it.”
There are also concerns about the impact of real-time cross-border payments on exchange rate stability. “From a macro perspective, if money can move in real-time cross border, then capital flows can occur very, very quickly,” says Joe Cassidy, head of financial services strategy at KPMG UK. If a country was under economic stress and people could transfer money instantly out of the country with no frictions or speed bumps, that velocity could be destabilising, he says.
“It could potentially result in systemic risk,” says Cassidy. “Real-time capital flows just whizzing around the world with finality and without any checks and balances in them is clearly not governable. And the consequences of that – nobody really knows.”
There are potential opportunities created by cross-border real-time payments. First, it can help reduce transaction costs. Also, if payments arrive instantly, it removes the need for clearing agents to hold as much capital against that exposure while the payment is in transit, Cassidy says. A third benefit is that it potentially widens the perimeter of trade by making it easier to transact across borders, boosting the real economy.
Harmston believes real-time cross-border payments are more likely to develop regionally first where trade is driving payments activity, such as in the Nordics. “They are aiming to get three countries initially live facilitating real time cross border payments which will encourage trade and growth in the region” he says. “if the bulk of your trade is with your neighbours, it kind of makes sense to do it regionally where you can get some real advantages, rather than trying to standardise payments between countries that don’t trade much with each other.”
Banks are also trying to figure out how to best make use of the data generated by the next generation of real-time payments. “Real-time payments are all about speed and data – you’re talking about 30% to 40% of additional contextual data with ISO 20022, so every bank we’re talking to is thinking about how to monetise the data and what the value proposition is for their clients,” says Trimble.
The growth in real-time payments and the potential impact that has on existing revenue streams means banks are also having to rethink how their business models might work in a world of instant transactions.
“If you make a real-time payment, the bank becomes more of a utility through which the payment passes,” says Cassidy. “In that scenario, the bank is moving away from interest-bearing income towards fee-based income and so the question becomes, what does it charge for payment transmission? That’s a real challenge for banks.”
The prospect of real-time payments and the acceleration of capital flows is reviving discussions about the potential for an intraday market for interest rates where banks could move money into higher interest-bearing markets for very short periods of time, says Cassidy.
Another area where banks could potentially try to create new revenue streams is by offering secondary services for trade-related payments, such as help with tariffs and duties or insurance.
“Banks are going to need to look at how they can extend and expand their offering into those value-added services areas that they don’t provide today,” says Cassidy.
Q&A: Faster payments, faster fraud
KPMG’s global forensic technology lead Paul Tombleson and co-lead of KPMG UK’s fintech team John Hallsworth discuss the new fraud risks of real-time payments and how financial institutions can mitigate them
What are the main fraud risks associated with an increase in real-time payments?
PT: The faster that payments are, the faster the fraud. That’s one of the biggest tensions and dilemmas that the industry is facing at the moment – to be better at preventing fraud, certain types of payments are probably going to have to be slowed down. But the single biggest fraud type in the UK over the past 12 months is APP – authorised push payment fraud, such as romance scams or investment scams.
Those are incredibly difficult to stop as the nature of an APP fraud is that someone is making a payment to the intended recipient because they’ve been socially engineered and duped through a scam to make the payment. This means that many of the various checks and balances that we have at the moment, like confirmation of payee, don’t work for APP because the payment is being made to the intended recipient.
What other risks are created by real-time payments?
JH: Financial institutions with legacy technology systems might struggle with upgraded real-time payments infrastructure, particularly around AML transaction monitoring. The faster the payments are, then the harder it is for banks to be able to monitor transactions and genuinely be able to stop fraud and financial crime from happening. It’s a huge challenge because most traditional banks have legacy systems and legacy data, which at the moment probably isn’t good enough to keep pace with the speed at which payments are now being made. The risk of payment errors is also greater as payments get faster.
How can financial institutions reduce the risk of fraud with real-time payments?
PT: The most effective way of fighting fraud and financial crime in real-time payments is through good quality data and looking for patterns and trends. However, the ‘kill chain’ for a fraud doesn’t start with the banks, it often starts with a text message (a smishing attack) or a bogus investment website. This means that financial institutions don’t have end-to-end visibility of the fraudulent activity and therefore it is vital that there are mechanisms in place for information and intelligence sharing between market participants and across sectors as well, not just banks.
There are several initiatives in the UK looking at the creation of a central utility of data that could spot potential fraud patterns. Once you start to aggregate and triangulate that data, you often see a very different picture than you would in just one bank. Even if you only had the top 10 banks in the UK doing it, that would have a meaningful effect on the amount of fraud that is detected.
What role is technology playing in tackling fraud and financial crime in real-time payments?
PT: Technology has always had a vital role to play in the fight against fraud, and now more so than ever. Many firms are already deploying supervised and unsupervised machine learning models, behavioural analytics and social network analysis to look for the known and unknown characteristics of fraud and financial crime in transactional data. This needs to be underpinned by good quality and reliable data.
That’s potentially an area where paytech firms are at an advantage because they’re not encumbered by the legacy systems that traditional banks have. When you’re starting with a blank sheet of paper and building an IT infrastructure that is cloud-based and embedded with advanced analytics, you can put all your investment in that rather than having to clean up legacy data.
How will the threat landscape evolve as real-time payments become more prevalent?
JH: The one thing about fraudsters is that they tend to be quite innovative, and so if you shut down one avenue, another one opens up. This is never a static set of risks, so while we don’t know what the biggest fraud will be in five years, it probably won’t be anything like the threat landscape that exists today. That means banks need good quality data so they can monitor trends to put themselves in the best possible position. If your data is poor quality and you don’t know what your fraud losses are, then you’ll always be on the back foot.
One interesting emerging area is crypto which, by its very nature, has a completely separate infrastructure to fiat currency. This introduces new threats, for example it will become increasingly difficult to understand a customer’s overall behavioural pattern to identify criminals without also looking at the payments they are making in crypto. As the whole payments system speeds up then this interface between fiat currency and crypto will evolve and present new threats.
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