Why are instant payments still an opportunity for businesses?

3-minute masterclass

Transferring money to your recipient’s account within seconds, at any time and on any day of the week: this is Instant Payments. For the consumer, Instant Payments (also referred to as real-time payments or faster payments) have become indispensable in the current payment landscape.

Since the concept was introduced in the spring of 2019, its use has grown enormously. For example, in the UK over £2.6 trillion was transferred via Instant Payments in 2021, and this figure is expected to increase in 2022¹. In the Netherlands, around 25% of all payments made in 2021 were Instant Payments², and this figure jumps up to 90% if we only look at single payments (i.e., from one individual to another)³. For businesses, on the other hand, the use of Instant Payments is significantly lower. So why is this the case? Can we expect it to accelerate in the coming years? And does this have an impact on financial institutions that offer payment transactions? Let’s find out.

Lack of Batch Instant Payments

The main reason why adoption among business customers is so low is due to the unavailability of ‘Batch Instant Payments’, which refers to sending bulk payments instantly at any time of day or week. Whilst individual payments can arrive in the payee’s account within seconds, bulk payments are not yet always delivered on the same day. In response to customer demand, a number of the major banks are now working to deliver Batch Instant Payments and it is expected that the first will begin delivery this year. The advantage for business customers is that they can set up a batch payment at any time of their choosing, but the processing is instant for the day it is paid out. An example is that salaries and wages can be scheduled for payment during the week, then can be instantly delivered to staff at the weekend.

Interoperability

The second reason for low adoption among businesses is that interoperability across Europe is not yet optimal. The European Central Bank (ECB) gave banks a choice of which Clearing and Settlement Mechanism (CSM) they wanted to use to connect to the Instant Payment Network. The choice was between Worldline’s CSM (which only facilitates internal reachability) and TIPS and EBA (parties that facilitate reachability within Europe). As a result, this created a lack of uniformity as some banks are affiliated with all CSMs and others with only one. The problem this created is that a bank affiliated only with Worldline cannot exchange payments with a bank affiliated only with EBA or TIPS. This is an issue that has occurred throughout Europe.

The EU’s aim is to enable European citizens to make real-time cashless payments in Euros to and from any country, which cannot be achieved with this limited interoperability. As a result, the ECB has taken action by insisting that all European banks are fully accessible at a European level. Banks must therefore now be reachable at least through the TIPS CSM, meaning they can receive Instant Payments from any European bank. The ECB has not yet mandated that banks must be able to initiate Instant Payments via TIPS, so the question remains as to which banks are able to do so at this time. In Q4 of this year, legislation is expected from the European Commission that will require banks to offer Instant Payments if they also offer regular payment transactions. This will ensure that Instant Payments become available to more businesses, so the expectation is that the use of Instant Payments will only increase for corporate customers.

Lack of Use Cases

A final factor in the low adoption of Instant Payments by businesses is the relative unfamiliarity about how they are used. There are few well-known examples in the market and their application in the value chain is too isolated, as Instant Payments are only applied in business processes to a limited extent (e.g., digital invoicing and instant payments of claims).

Nevertheless, there is demand for Instant Payments in some sectors, but it is not always met yet. For example, consider the automotive industry, where dealers want payment and transfer of the car to take place over the weekend. If the bank has not yet set up Instant Payments, this transfer can only take place via traditional payment methods prior to the weekend. In the broader context of service delivery, banks want to keep their customers happy by meeting this demand, but it becomes difficult to get a business case if customer satisfaction is the only thing keeping it going.

Impact for Financial Institutions

As mentioned, some banks have not yet set up Instant Payments in their landscape. For this group of banks, it is becoming more and more difficult to explain to their customers why their payments are not in the payee’s account within seconds. If these banks do not comply with the ‘new normal’, the expectation is that it will eventually cost them their customers. However, meeting this customer demand will require a substantial investment because technical and process adjustments must be made throughout the transaction chain. In doing so, the scope (to European accounts) as well as the way in which that scope is created (via which CSM) must be considered, and this must also be available 24/7 including weekends. In addition, for the time being, the old infrastructure must be maintained for regular European payments and direct debits.

Conclusion

Due to the relative unfamiliarity of Instant Payments, its absence from some banks, the unavailability of Batch Instant Payments, and the lack of uniformity in the Instant Payment landscape, few corporates have yet decided to implement and embrace Instant Payments.

However, the landscape is sure to evolve in the future as changes are expected on several fronts. For example, banks will soon allow Batch Instant Payments in addition to single payments, and interoperability will improve in the near future. Our expectation is that Instant Payments will become the norm for businesses and migration to it will increase in the coming years.