By Thomas Ramadan, Global Payment Strategy Lead, Oracle Financial Services
Real-time payments have been lauded as among the most important financial-services innovations in decades. The ability to perform account-to-account payments anytime, anywhere, to almost anyone and receive value immediately is proving its potential to transform commerce, especially in the Middle East and Africa.
The use cases for real-time payments are endless. And while you will find as many “flavors” as there are networks, several key elements are universal to all real-time payment services:
- They’re always on and ready for business, 24/7.
- They’re fast—executing payment cycles in seconds.
- They’re transparent—payers receive immediate notification when the funds are posted to the payees’ accounts.
- They speak a common language—ISO 20022, which transmits rich payment information.
We’ve enjoyed electronic payments in our consumer lives for more than 70 years—starting with just a plastic card, then a magnetic strip, a chip and, most recently, our smartphones.
While electronic payments remove friction at the points of transaction for consumers, they haven’t fundamentally changed the way payments are executed on the backend. Legacy systems remain siloed and pieced together with one-off integrations. And payments continue to run on decades-old “rails”—the infrastructure and processes that carry money between a payer and a payee. They often still rely on clunky batch and post-payment processes that can take days or weeks to complete.
Real-time payments introduced a complete overhaul of underlying payment processing in the backend—not just authorizing but executing payments in seconds at any time of the day and in any place in the real or virtual world, opening a whole new set of use cases. Vendors can provide goods and services with the assurance of the irrevocable availability of funds. Enterprises can put working capital to use immediately after completing a deal. And organizations can embed payment transactions directly into commerce flows to accelerate global trade.
We’re already on our way, with noteworthy and highly visible initiatives from leading financial governing bodies, including the Bank for International Settlements (BIS) and the U.S. Federal Reserve (the Fed), as well as commercial-bank-driven initiatives leveraging real-time payments across borders.
Experience the possibilities
Real-time payment systems represent a new infrastructure available to any financial institution within a geographical coverage area and provide account-to-account clearing and settlement immediately or on a deferred net basis. This contrasts “closed-loop” systems, such as credit- and debit-card networks and other third-party money-transfer services. In addition, they are cost-effective and efficient, enable irrevocable and immediate availability of funds, and—to the extent that they migrate payments off of older payment types—can help reduce liquidity risks.
This new infrastructure will continue to expand and evolve—enabling features such as a proxy service that maps other identifiers to an account number and supporting value-added programs, such as buy-now-pay-later (BNPL) and reward systems, to increase adoption. Request-to-pay arrangements, which allow the payee to invoke a transaction for various use cases, such as bill payments, e-commerce (electronic commerce) and m-commerce (mobile commerce), are other important elements. The European Payments Council (EPC), for example, has created a rulebook for request-to-pay across Europe, paving the way for standardized approaches for the demand and supply sides to leverage real-time payments.
When combined with an open-banking framework, the real-time payment infrastructure is easily accessible to non-banks and service providers. They can initiate payments conveniently through their apps and receive immediate confirmations when these payments are executed, thereby integrating payment execution seamlessly into the business transaction. And real-time payments can be used beyond domestic borders—a powerful business engine in our increasingly global economy.
Regional initiatives amplify impacts
We’re seeing several interesting regional real-time payment initiatives that promise to reduce transaction costs significantly, improve retail trade and foster financial inclusion.
One example is the Transactions Cleared on an Immediate Basis (TCIB) project in Sub-Saharan Africa, designed to transfer money rapidly, securely and cost-effectively. The system allows organizations to send real-time payments across participating countries, using multiple currencies, with deferred net settlement in the Southern African Development Community Real-Time Gross Settlement (SADC-RTGS) system. The service is open to banks and authorized non-banks. It also enables mobile network operators (MNOs) to link their wallet-based payment systems to send funds to bank accounts and vice versa. In a region like Africa, where there are more than 170 mobile transfer operators, this capability is essential to advancing payment ubiquity and financial inclusion.
Real-time payments bridge borders and speed commerce
Real-time payments offer a direct path to accelerating and simplifying international commerce because they can interconnect regional systems in a way that was impossible before. They’re up and running 24/7, removing the constraints of traditional business hours across time zones. In addition, both systems in the chain complete the transaction only after the final beneficiary confirms they can accept the payment, enabling synchronized and irrevocable clearing and settlement. Payments then complete in seconds, and parties receive immediate verifications. And because real-time payments typically use ISO 20022 as a messaging standard, both systems can exchange payment data cost-effectively and without friction or delays.
Interlinking two real-time payment systems enables cross-border payments but doesn’t necessarily include the capability to execute cross-currency payments. Switching the payment currency while in transit requires additional capabilities. These include the introduction of a party that provides the foreign-exchange function and the ability to include additional data elements in the message to document the currency-conversion process.
Interconnected payment systems are essential for scale, both locally and globally
Interconnected real-time payment systems hold great potential to improve cross-border payments—an important focus of the G20 (Group of Twenty) and its Financial Stability Board (FSB)-led working group. Cross-border payments are still largely dominated by correspondent-banking relationships and processes, which are considered slow, expensive and opaque.
The idea is to address these challenges, at least for the retail-payment sector, with interconnected real-time payment systems. The BIS, through its innovation hubs, evaluated this concept and published its recommendations in 2021. The resulting blueprint describes how multiple real-time payment systems can interconnect with the goal of enabling cross-border payments in less than 60 seconds.
The BIS recently published its report on the first working prototype of this interconnected real-time payment system. This collaboration included the Bank of Italy, Central Bank of Malaysia (BNM) and Monetary Authority of Singapore (MAS), plus the payment-system operators PayNet and Banking Computer Services (BCS). Test payments were initiated using only the mobile phone numbers or the recipients’ company registration numbers via the Eurosystem’s TARGET Instant Payment Settlement (TIPS) service, Malaysia’s Real-time Retail Payments Platform (RPP) and Singapore’s Fast and Secure Transfers (FAST) payment system.
Another example of enhancing the infrastructure for cross-border payments is the launch of real-time payments between Singapore and India. It enables customers of participating financial institutions in Singapore and India to send and receive funds between bank accounts and/or e-wallets across the two countries in real-time.
In some domesticities, customers can choose between running on-premises installations, such as using Oracle Banking’s software-as-a-service (SaaS), or subscribing to a localized payment-as-a-service (PaaS) model. For example, many financial institutions in the United Arab Emirates (UAE) are leveraging local payment services offered by Mercury Payments for domestic integration into the Central Bank of the UAE’s (CBUAE’s) real-time payment system.
Designed for disruption
Real-time payments are proving their potential to transform commerce in-country and around the globe. It is also a time of disruption as global organizations navigate the challenges that remain. Oracle is on the front lines of this transformation, with our suite of cloud-native financial-services applications designed to accelerate payment transformation. Oracle Banking Payments1 uses a single hub design to process any existing payment type—and for payment types yet to be invented.
1 Oracle: Oracle Banking Payments Cloud Service