Global Trends and Developments in Instant Payments

Merchant Payments Ecosystem, Berlin

14th February, 2017

© Edgar, Dunn & Company, 2017

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What are instant payments?

Real-time payments

Near real-time payments

Faster payments

Instant Payments

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“…electronic retail payment solutions available 24/7/365 and resulting in

the immediateor close-to-immediate interbank clearing of the

transaction and crediting of the payee’s account with

confirmation to the payer (within seconds of payment initiation).”*

Instant payments are …

* Definition from the Euro Retail Payments Board (ERPB)

How do instant payments differ from traditional ACH payments

Instant Payments

Funds are cleared (posted on beneficiary’s account) in real or near real-time

Funds are available for use immediately

Settlement can vary depending on the system, but can take place at the same time as clearing or several times a day

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Traditional ACH Payments

Funds are typically cleared after settlement occurs

Beneficiary may have to wait several days to use funds

Settlement can take 1-3 days depending on the system

There are over 20 established instant payment systems across the world with several more planned in the near future

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Established SystemPlanned System

Planned ImplementationArgentina

Australia (2017)

Belgium

Canada

Germany

Finland

France (2017)

Hong Kong

Hungary

Italy

Ireland

Kenya

Luxembourg

Malaysia

Sources: Instapay, EDC

Netherlands

New Zealand

Norway

Peru

Philippines

Portugal

Saudi Arabia

Spain

Thailand

United States (2017)

Europe/SEPA (2017)

Regulation, competition and market demand is driving instant payment implementations in various European markets…

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United Kingdom

¡ Launched: 2008¡ Transfer limit: £250K¡ Transactions completed

within 1 second¡ 3 settlement cycles/day¡ Steps being taken to map

existing ISO 8583 message protocol to ISO 20022

Denmark

¡ Launched in 2014¡ Based on ISO 20022¡ Transaction processing of

less than 40 milliseconds per transaction

¡ 6 settlement cycles a day¡ Transaction limit: DKr

500,000

France

¡ Driven by need to be SCTInst compatible

¡ Planned launch in 2017¡ 24/7/365 availably¡ Less than 1 second for C&S

processing – 10 seconds for end-to-end processing

¡ Multilateral net settlement

…and in other markets across the world

USA

¡ Initiative from The Clearing House (2017) –Real Time Payments (RTP)

¡ 24/7/365 ¡ Multiple settlement cycles per day¡ Based on ISO 20022¡ Vocalink providing payment switch

technology

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Australia

¡ New Payments Platform (NPP Australia) planned launch 2017

¡ NPP is industry response to the Reserve Bank of Australia’s Payment Systems Board Strategic Review (2012)

¡ The system will be 24/7/365 ¡ Instant settlement – at time of transaction ¡ Based on ISO 20022

Typical payment flow for an instant payment transaction

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Instant Payment System

Execution of payment

Confirmation of Payment

1Sending

CustomerReceiving Customer

Sending Bank

Receiving Bank

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2

3

Sending customer authenticates themselves and provides instructions to their bank for transfer of funds

Sending bank checks if there are sufficient funds in the account and validates payment request

Sending bank submits payment to the instant payment system; at this point transaction can not be cancelled

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6

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4 The instant payment system validates transaction and sends the payment to the receiving bank

5 Receiving bank checks account number is valid & sends a message to the system accepting/rejecting the transaction; system sends a message to sending bank letting them know transaction is successful

6 Receiving bank credits receiving customer’s account

7 Sending bank marks the transaction as complete

8 Sending bank confirms status of transaction to sending customer

Settlement of Funds

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ISO20022 enables a data rich environment

Not a standardised message format – the 140 message characters are flexible in character lengths and types

Enables overlay services such as Paym or Zapp in the UK and various add on services provided by Payment Initiation Services (PIS) providers

Systems on ISO 20022 standards are not interoperable but have the potential to be

ISO Real-Time Payments Group (RTPG) – define a common approach to using ISO20022 for real-time payment messages and processing rules

So what is the role of ISO 20022 in instant payments?

What will be the impact of instant payments on key stakeholders

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¡ Convenience¡Real-time access to funds¡ Secure access to a trusted funding

source (bank account)¡ Leverages existing infrastructure

(e.g. online banking)

Consumers¡ Lower costs¡ Immediate access to funds¡ “Fast & Final”¡No need for authorization

Merchants

¡ Efficient and relatively inexpensive payment processing

¡ Less transaction risk¡Brand recognition for consumers¡… however, risk of

commoditisation and customer disintermediation

Banks¡ Potential loss of revenue¡ Schemes are anticipating rise of

instant payments and are investing in infrastructure

¡Need to refocus on card specific added values

Card Schemes

What are the advantages of instant payments relative to card payments – particularly from a merchant’s perspective

AdvantagesFaster settlement timesMerchants have access to funds immediately – helps with cash flowCheaper acceptance costs than payment cards (online)

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AdvantagesGlobal interoperability using international card schemes Defined set of rules for exception handling/dispute resolutionPayment guarantee, reserves, open amountsOmni-channel capabilities

Instant Payments Card Payments

Disadvantages Not yet globally interoperable – may lead to market fragmentationNo defined common set of rules for exception handling/dispute resolutionNo real-time fraud detectionCurrently viable for online transactions only – not omni-channel

DisadvantagesSlower settlement times for merchantsRelatively expensive acceptance costs

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…places where consumers have instant gratification (of purchase)…

Who will be early adopters of instant payments?

Grocery stores Digital content¡ Consumers typically have

their meals prior to payment

¡ Customers have access to goods as soon as payments is made

Restaurants¡ Small value transactions ¡ Content (e.g. music) is

available as soon as payment is made

…as customers are less likely to request a return or raise issues that may result in refunds/exceptions/disputes

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Merchants that are categorised as higher risk merchants or require additional payment services (e.g. pre-authorization), which can lead to friction at POS

Who are likely to adopt at instant payments at later stages?

Airlines Online Gambling¡Hotels often require pre-

authorization of payment in the event of use of additional services (e.g. mini-bar) or damages

¡Higher chance to non-delivery of goods (e.g. airline goes out of business prior to flight)

Hotels¡High risk merchant with

typically higher fraud and chargeback rates

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Exception/dispute resolution

Who will be responsible for developing exception/dispute resolution rules

How will these be uniform across multiple markets – will there be a need for an ‘Instant Payment Scheme’?

Whilst instant payments enable innovative and potentially cheaper payment options – there are still outstanding questions

Real-time fraud detection and online security

What will be the impact of 2-factor authentication on instant payments

What fraud detection tools will be available

How do merchants operate globally with multiple domestic schemes?

How to avoid market fragmentation?

How will merchants/customers know what the payment limit is in each market?

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THANK YOU

For further information please refer to Edgar, Dunn & Company’s white paper on Instant Payments