Daniel Otto-Schleicher, Analyst, Instant Payments Product Management, Deutsche Bank
In this “Instant payments demystified” series, we offer insights into what can be expected from the next major evolution in the payments sector, and keep you up to speed with recent developments around Instant Payments.
In the first article, we took a rather holistic approach – exploring why Instant Payments are so different and why this payment method has the potential to change the way we think about making payments. In the second article, we discussed the already fairly developed instant payments market in India and tried to identify areas we see as further evolutionary steps in other markets, such as the SEPA zone. In this article, we want to give an idea of what can be achieved with the solutions already available to us today.
The mere existence of real-time payments is not interesting for corporates, unless they are able to initiate payments on a real-time basis, or if the payment initiation process is devoid of unnecessary latency. With this in mind, we want to explore the potential of the latest technology trend in banking – Application Programming Interfaces, or APIs. These standardised interfaces can be used to ensure safe, real-time connectivity and interactive collaboration between different entities.
Consider, for instance, the example below, which demonstrates how APIs can facilitate an interactive relationship between an online marketplace and a bank.
Example 1: Rapid refunds to suit changing customer behaviour
We begin with a retail customer – let’s call her Christine. Looking for a new shirt to take on holiday, Christine searches an online marketplace, before finding three articles she likes. Unsure which to buy, she orders all three. Naturally, Christine has to pay upfront, and decides to use her mobile banking app to initiate the payment. Within seconds she receives confirmation from the merchant that the payment has been processed, and the goods are delivered to her house.
The diagram below depicts each step that must occur, in order for the process to be completed. These steps are invisible to Christine.
Source & Copyright©2019 - Deutsche Bank
However, this is not the end of the story. As we know, Christine does not want to keep all three shirts, and chooses to return two.
The returned goods trigger another series of events, enabled through APIs, which ensure Christine receives the refund before she departs for her holiday. These steps are shown below.
Source & Copyright©2019 - Deutsche Bank
This example goes some way to explaining the rising demand for always-faster services. Online marketplaces have clearly altered customers’ buying habits, creating the need for payments and refunds to be completed in real time, or at least within a few seconds.
This example is far from futuristic. Today, faster refunds, enabled by API technology, are reasonably commonplace – the only downside for the retail customer being the fact that it is typically only offered with credit cards. Following the introduction of instant payments, however, customers will benefit from an even faster service, and at a lower cost, as card transaction fees could fall away.
The beauty of this solution is that, by combining instant payments with APIs and integrating these directly into the corporate’s own business processes, the corporate is able to interact with their bank in real time, 24/7/365 – without downtimes, and cut-off times. The bank, in turn, can offer a better service to clients (and at a lower cost compared to credit cards), improving liquidity and potentially gaining a competitive advantage over peers.
Technical developments like this foster new ways for corporates and banks can collaborate. Thanks to the interactive nature of APIs, it is now possible to integrate banking services within a corporate’s business and sales processes. To realise the full potential of real-time transactions, corporates must also consume and process the information and messages shared with their banks in real time – allowing business actions follow seamlessly. With this in mind, information about payments, sent or received, is no longer just intended for treasury and accounting departments, it is also of use to sales and other business areas.
The use of instant payments in combination with API technology, is part of a wider digital transformation taking place in all areas of the economy. Without a doubt, this transformation is a challenging exercise for banks and corporates, alike – one in which established processes will need to be questioned and, in some areas, revised. Yet it is surely worthwhile. Digital transformation allows customers to execute transactions within seconds, in a safe and secure manner, and allows corporates to explore new business models and stand out in the new competitive environment.
In pursuit of this new efficiency – which will generate new business processes and new opportunities – corporates must form stronger relationships with their banks, relying on them to provide not just banking services, but also advice and creativity as they look to find the right solutions to new market demands.
To make the implementation process as easy as possible for clients, forward-thinking banks will offer solutions that are supported by already-established client access channels, utilising existing infrastructures, while simultaneously paving the way for new technology.
Deutsche Bank’s collaboration with treasury software companies like Serrala or FIS demonstrates how API implementation can be made simple. Some corporates, for instance, are reluctant to develop direct API connectivity in house, because they prefer to apply only minimal changes to their current set-up and do not want to spend the time building their own API environment. But, if those corporates were to use the treasury software, the interface and the technical requirements to support a bank’s APIs would already be pre-equipped – dramatically reducing the amount of time it takes to set up. What’s more, the treasury software will provide continuous updates on incoming and outgoing payments – a pre-requisite for effective real-time treasury management.
A number of banks already provide clients with the opportunity to directly connect via API, or use API connectivity through software companies, like Serrala and FIS. This approach is proving highly attractive to corporates, and further collaborations will be announced soon.
Example 2: Instant authorisation
With the array of use cases for real-time client interaction always expanding, it is not unreasonable to expect more innovative ideas to surface in the coming months and years. This interactive use of instant payments stands to improve and accelerate many business processes. Consider the following example. Our retail customer, Christine, decides to rent a bike while on holiday, and goes to the rental company’s website to register. The bike company wants to collect the rental fees by direct debit, so, to prove Christine’s account exists, and that she is an authorized user of that account, the company asks Christine to enter her bank account details. After entering the details into an online application, Christine clicks the “verify my account” button, which triggers an automated, real-time transfer of a few cents to Christine’s account. In the payment details, a reference number is included, which Christine is asked to plug into the online registration form. Once accepted, the registration process is complete and Christine is ready to rent a bike.
This process typically lasts no longer than it took to read the last paragraph. And, since Christine has successfully demonstrated that her account is valid and she is authorised to use it, the bike company does not have to worry about falsified or misused account numbers – sometimes resulting in their direct debits being disputed.
As these examples show, the potential uses of instant payments go well beyond the mere payment itself – we expect even more innovative solutions to arrive in the coming years and look forward to collaborating with corporates as we continue to push the payments landscape forward.
Instant Payments demystified part 2 – what can we learn from UPI in India?
How the “new normal” instant payments are spreading worldwide
Instant Payments de-mystified – part 1
How the “new normal” in payments is starting to transform corporate treasury
Instant payments top of treasury wish list
Real-time payments in online banking is the innovation that will have the greatest positive impact on corporate treasury