Real-time: how fast is too fast?
By Emmanuel de Bouard, Head of Cash Clearing, Global Transaction Banking
While definitions of real-time payments differ, there is no doubt that 24x7, 365 day a year payments will become the norm around the world. But there are risks in real-time payments for banks in Europe that should be considered.
Europe does not currently have a real-time clearing system and therefore payments aren’t real-time. The information about a payment may be sent in real-time, but the actual funds are not transferred in real-time. Therefore, the beneficiary of a payment can reuse the funds from a real-time transaction immediately, but the bank will not yet have received those funds. If the initiator’s bank fails before the funds are moved, the beneficiary’s bank faces a loss.
This is not necessarily an issue between large banks but there are thousands of smaller banks, particularly in Europe, to which a guarantee of payment is not always attached. The initiator’s bank could insist that the beneficiary’s bank pre-funds the payment, but this raises issues about the cost and availability of liquidity. If there is a shortage of liquidity in the market, as was the case in the 2008 financial crisis, this becomes a major issue.
For banks in Europe, huge costs and risks are associated with real-time payments with very little return in terms of a business case. Real-time payments are coming, but more attention must be paid to the liquidity and risk issues if we are to have a successful Europe-wide real-time payments system.
There are also issues for consumers. In the real-time world, accounts are immediately debited when purchases are made. This may come as a surprise to consumers who are used to being debited at the end of the month when using their credit cards. Fraud is another potential problem in the real-time payments world. At present, cross-border transfers can be blocked between 24 - 48 hours and funds recalled if fraud is suspected. In the real-time world, there is no recourse to recall, again opening banks to potential losses due to fraud. One way to mitigate the impact of fraud would be to impose limits on the amount of a real-time transaction. This would reduce the exposure to fraud and also the liquidity requirements for banks.
Given the risks associated with real-time payments, it would be useful to ask exactly what people really want in the payments environment. Merchants are most concerned with obtaining a guarantee of payment and also an indication of the timing of that payment. For them, the credit card system is adequate because it guarantees payment if the transaction is legitimate.
In a real-time payment world the beneficiary account has to be immediately credited with the funds, but this is a significant burden for banks, which would need to invest significantly in real-time accounting systems. An alternative solution could be devised whereby the beneficiary receives a confirmation from the bank that the transaction was received, but is actually credited at the end of the day, rather than immediately. Nevertheless, he can re-use the funds upon the Bank’s confirmation.
Many of the existing immediate payments services are offered free of charge, but this doesn’t reflect the risk or cost of liquidity and processing associated with such payments. An option would be to impose differential pricing, with non-instant payments attracting a lower fee than immediate payments.