Bitesize Payments
Payments are one of things that we do every day - they just happen, really they are just like magic!!!! But we don't wake up and think today I want to make a payment - we just want to pay a bill or buy a coffee but payments make them happen.
Paradoxically we both know more about them than we think and yet at the same time very little about what they are and how they work.
I have spent a lot of time in our industry doing education and training sessions on Payments and I kinda thought it would be useful to record it. So, here we go.... In Bitesize Payments I try and explain the History of Payments, how they work and who does what. Also who get paid for what....that might surprise you!
Anyway hopefully in less than 20 mins, week after week you can become a payment experts....... or at the very least someone who can ask the tough questions :-)
Please let me have your feedback, input or question at bitesizepayments@gmail.com
Thanks for listening.......
Bitesize Payments
Immediate Payments - the new kid on the block......
today we are going to discuss one of the newer payment rails – real time payments or immediate payments. But wait aren’t all payments real time well turns out no so much. However, they are probably going to be one of the unifying payment rails.
Right now Immediate payments are growing compound, 30 % in Spain , 37% of all transaction is the UK are now Faster Payments and 61 countries and 72% of the world population have access to them but hey what’s the fuss…..
Today I am super pleased to be joined by Erika Baumann.
Buckle up were are going immediate, well pretty quick anyway…..
Payments Industry Insights
History of Payments
Payment System Explained
Corporate Payments Strategy
Payment Regulations Impact
ISO20022 Standard
Digital Payments Evolution
CBDC Advancements
Cryptocurrency in Payments
Financial Technology Education
Welcome back there listeners to Byte-sized Payments. Today we're going to discuss a new kid on the block. You know, a payment methodology that was designed and implemented after you were born. Yeah, let that sink in for a second. Anyway, these methodologies, whether they're known as real-time payments, immediate payments, or faster payments, or they're known by the brand name tips, Zelle, FedNow, they're all kind of the same. Subtle differences, but mostly the same. But wait, hold on a second. You're saying, well, hold on, Paul. Aren't payments all real-time? No. Turns out, in fact, very few of them are. However, this new payment methodology is probably going to be a very, very key one for the future. And we're going to discuss why. Right now, immediate payments are growing compound, 30% in Spain. 30% of all the transactions in the UK are now faster payments. 61 countries around the world have implemented real-time or immediate payments, which means that 72%, 72% of the world's population have access to them. But you know... Hey, what's the fuss? So, buckle up. We're going to go immediate. Well, pretty darn quick anyway. Here we go. Here we go. Today, I'm super pleased to be joined by Erica Baumann again. Welcome, Erica. It's great to have you back.
SPEAKER_00:Thanks so much, Paul. I'm very happy you've asked me back while I enjoy discussions about payments. As you know, I'm particularly passionate about immediate payments.
SPEAKER_01:Oh, yes. And immediate payments have been around for a little time now. But let's just go back a little bit because while they're new, they do have a history. Immediate payments, as we understand them today, was effectively launched in 2008 in the UK. And at the time, they were called faster payments. Now, whether it's an immediate payment, a real-time payment, or a faster payment, Or you know them, as I said, by their brand name, FedNow, Zelle, Tips, what have you. They are all the same. And in fact, they're extraordinarily similar payment methodologies. But why were they launched? They were launched because in the UK, the Office of Fair Training had turned around and said, hey, look, we're really concerned over the time it takes to settle and clear, especially checks. It could be up to 10 days. And during that time, people just didn't know where their funds were now this could be a lot shorter five days if it was between high street banks but during that time nobody knew where their funds were now i'll go through checks in a separate podcast but look this was only a few years ago so effectively in 2006 the uk came under pressure and the uk banking systems were brought together and said hey we you need to start to address this. We need to understand the speed and the clarity. And hey, if you don't do this, then we will regulate it for you. So as a preemptive strength, the industry, payments industry, got together and we built Faster Payments. Now, this has a few key elements in it. It's fast. Typically, it's two to three seconds. Once you click on the payment, it's committed. It's what we call final. And typically they are free or neo-free. They're also 24 hours a day, seven days a week, 365 days a year. Now, into context, this was a time when previously you could only really make a payment during banking hours, which weren't very long. And the settle and clearing cycle was done afterwards. So this is quite a change. Now, this model has been replicated all over the world. And as I said, 31 countries have implemented or are about to implement their own immediate payment rails. And therefore, three quarters of the world have access to them. So before we get into the next level of details, we need to discuss some context and how fast is fast. Cash is immediate. When they pay by card, it feels immediate. What's the difference?
SPEAKER_00:Yeah, so cash is definitely immediate, but it really is an efficient and situations, you aren't face to face with someone, right? And when it comes to businesses, I know it sounds funny, but cash can be really expensive. Ordering cash, getting change orders, storing the cash in a vault, having to go to a branch and make deposits. There's so many components to that. So there's a lot more to cash from a business perspective. And I don't know about you, but it's pretty rare that I have cash on me these days anyway. But then you have credit cards. They can be 30 to 40 days before you see transactions. Let's say you're owed a refund. That takes a really long time. And again, from the business perspective, interchange and fees that go along with credit cards can be really expensive and not efficient as well. Then we have debit cards, which as you mentioned, they can seem immediate. But of course, you know, when you look at your, you go into online banking, you see your pending transactions. Sometimes it can take days or even a week to actually clear. And the debit card rails are really focused on consumers purchasing goods or services rather than, you know, the account to account transfers or, you know, something in the business world. We talked about ACHs last time we were together. An ACH transaction, you know, that can take a few days. And then, of course, checks. Where I am in the U.S., we still have a lot of checks and we all know the saying, the check's in the mail. And it really is a waiting game. Once received, you then have the dependencies on what is the person who received the check? What do they do with it? Do they go to the bank? If it's a large amount, the bank may put a hold on the funds. So there's so many variables and the person or business that's sending the check has costs, the cost of ordering and actually having the check, the postage, and sometimes just the time that it takes to be able to go to the branch or do whatever you need to do. So there's just so many variables within that. So it's really obvious that with every payment method, there's some pros and cons, right? But none of the legacy payment methods that we've just mentioned here, outside of if I happen to be standing right in front of you and have cash on me, none of them are instant. And with instant payment, there's so much opportunity and efficiency that's created that you avoid a lot of these things we just talked about. You know, you're not waiting on the postal service or in a line or for your statement or trying to meet with somebody to exchange funds. There are some absolute efficiencies just outside of that speed to be able to gain from immediate payments.
SPEAKER_01:Yeah, and that's absolutely true. And by the way, I've I don't carry much cash either right now. And of course, we have problems with taxis and what have you. But nevertheless, one of the key changes here with immediate payments is that once you've clicked, then the payment is actually committed. It is what we call finality. It's happened. So banks have to pre-fund their accounts so that there is no settlement risk. And this is really the opposite way around with every other rail other than cash, I only becomes final after that transaction has been sorted out in the background.
SPEAKER_00:Yeah, so finality, sometimes we like to refer to it as irrevocability. I think that sounds scarier. It's certainly one of the features of immediate payments. And there was some fear around that when the rails first became available. It does mean that if you have made a mistake in who you've sent the money to, while you could ask for the funds back, they don't have to give it back, right? That transaction, it's a done deal. So making sure we are double and triple checking that the money is going to the right person is really essential. If you have gone into any digital platform, Zelle, PayPal, Venmo, Cash App, there's versions of these digital wallets all around the world, right? There's several checks along the way to make sure that you are really paying who you want to pay. There's confirmation after confirmation. Is this the last four digits of the phone number? Are you sure you want to make this payment? Be aware that this payment cannot be taken back. So as an industry, the solutions that we utilize both as individuals and as businesses, we have, we have checks in place, but ultimately it's the individual's responsibility to utilize those, those checks and balances to make sure you're sending it to the right person. But, you know, another feature that's really important to talk about, and you mentioned it before that, you know, these immediate payments are 24 seven. So 24 hours a day, seven days a week, every day of the year, there's no cutoffs. If you think, you know, way, way, way back the end of the bank day with 2pm. So if your deposit wasn't in by 2pm, it was going to go on the next day's work. And with legacy payment types, there's still some restrictions, although we're not quite as archaic as we used to be. There's still restrictions as to banking hours. When can I send this wire? When is this ACH going to be processed? When can I log on to online banking and have something actually happen in real time? But with immediate payments, there's no restrictions on when you can transact. So if I send you, Paul,$10 for a pizza, within seconds you have access to use those funds for something else. My debt to you is settled and then you're free to use those funds. So there's a lot more efficiency built in there. Finality, yes, but a huge amount of efficiency. We just have to make sure we're taking the right steps to make sure the money is going to the right person.
SPEAKER_01:Yeah. And I think that's, you know, in the earlier days of faster payments here in the UK, there was no check. You were literally putting your sort code, account code in, hoping you'd put the right numbers in and hoping that related to Erica.
SPEAKER_00:Yeah, thanks for that. We all learn lessons from that.
SPEAKER_01:But, you know, now we've kind of moved on from that and confirmation of PA kind of works really pretty well. But over the last, I don't know, 15, 16 years, Erica, we've traveled all over the world, whether it's Europe, USA, Australia, Asia, wherever it is, disgusting media pains. And everywhere that I've been, I've had the same conversations. It's like, you know, wherever it is, you know, there's no business case here for IP. Nobody needs real time. And the even more direct, hey, Paul, you know, I make money from payments. Why would I want to do it for free? You know, a wire can cost 25 bucks upwards, ACH, half a dollar, cards, it's 2.5%. But, you know, with immediate payments, it's pretty much free or not. Yeah,
SPEAKER_00:so really the only ones saying this and complaining about it are the ones in the industry that are making the money off of the payments, right? The recipients and those of us that are realizing the benefits, we're not complaining about that piece of it. So we consumers and individuals aren't saying that. But the business model has to change. That's kind of the lesson in this. So I'll speak more directly to the businesses and the FIs first. I would say my response is, is that nobody needs it has really become pretty tired, right? The business case is undeniable. About half of businesses are already making real-time payments. Many more than that have the ability to at least receive a real-time payment. Over 60% of businesses say that they're making payment choices based on use case or who it is that they're paying. So when businesses are not receiving real-time payments, don't have those capabilities from their financial services provider, those providers are really doing a disservice to their customers. And when the customers, the businesses aren't taking advantage of those, they're really doing a disservice to their cash position management, right? When businesses are not sending real-time payments, they're quickly finding themselves at a competitive disadvantage. And when banks aren't facilitating this, they're also losing business. Like at this point, this has become undeniable. They may not realize in the moment due to the overall market expansion, but it's for sure happening. So the number of payments total in the industry continues to expand. And so, you know, some of these entities and individuals that are trying to hold on to saying there's just not a use case, this just doesn't need to happen, they're faring okay at the moment because the overall number of payments is expanding. I will add in this other bit of research and fact, though, is that about half of banks globally say that they have already lost 10% or more of their payments volume to a fintech. So what that means is that the businesses who historically have been facilitating all of their payments and transactions at a financial institution, they are finding alternatives, and not just with other financial institutions, but with service providers who are not a bank. And a large component, in fact, the largest component of why businesses say that they're doing that is because of their immediate payment needs. So when we go back and tie this into the fees for sure there's going to be some shifting but even bigger than that there's an opportunity cost to not offering immediate payments and not taking advantage of the efficiencies of immediate payments so what's at stake is even more it's whole relationships it's business relationships it's customers it's relationships with the businesses and their customers and then of course for the financial institutions it's all the deposits and everything that goes along with that so for for businesses they could lose their business to to competitors There's all kinds of volatility and risk to not embracing the efficiencies and the capabilities of immediate payments. And they're very real threats that we're seeing play out in the industry right now.
SPEAKER_01:Yeah. You know, I think that relationship thing is absolutely key. But to be clear, this will put a lot of pressure on some of the more expensive rails. And one of the things that we've already seen in the last 25 years or so is that banks have actually made– substantial profit from payments. And, you know, they have had a business model that was based upon payments when before that, effectively, it was based upon banking services. And now we're seeing that come under a lot of pressure. And I think the business model will have to change away from payment fees, but perhaps more on that another day. But one of the other pivots I wanted to get to was it's serendipitous, if you you know people forget this issue that nearly all of the current payment rails were built and designed in an analog world in an analog way the cards in this 1961 I think RTGSs in the 70s etc but immediate payments were built in an age of the digital age and effectively immediate payments therefore are the digital driver for the payments world
SPEAKER_00:yeah so just one comment about that pressure on other rails that ties into this but you know for the foreseeable future it is a truth that one size does not fit all when it comes to payment rails right so going back to my point about use cases there are times when different factors are important and you're absolutely right the legacy payment rails were designed to work in a very different world our expectations were different what you need to do to be competitive was different the technology available to us was different and so the landscape today requires us to evolve but that is a process and that process takes time part of the reason that that takes time is because it's very hard to integrate the analog payments world within digital practices right and then you have you have the fractured you know, global landscape, which is, you know, you mentioned with faster payments in the UK, there were regulations put in place, right? Things happened that made things move along faster. In the US, you have no regulations, right? And so it's really driven by end user demand. And sometimes that takes time to be able to catch up with those who are making the money in the current model to recognize the need for the shift and how they're going to monitor because it has to look different in the future world. When we think about the business's role in this and their infrastructure and their operations in an analog world, businesses have ERP systems, they have account payable processes, and even if not the most efficient, they work and they're established, right? So this is an important factor when we're thinking about adoption and the hurdles to creating a more ubiquitous ubiquitous type of environment that starts to rely less on the legacy way of doing things is that there's this big chain reaction in the market. The businesses have to be able to change their procedures and have a justification for that. They need the leaders in the industry, the providers, to be able to educate them on how to do that. And then we have to live in this world of duality for a little bit, where we are still utilizing the analog infrastructure and ways of doing things, mixing with the digital ways of doing things, When you think about it that way, then you realize this has to evolve and how we're making money and the whole business model is changing. And that's a process that just takes some time.
SPEAKER_01:Yeah, I think that's absolutely spot on. I really think that change takes time. And while we might think that these things change overnight, they typically do take a 10-year period. But effectively, immediate payments are domestic right now. Every, well, 61 countries have that own for their own country. But that's changing. We're seeing the Bank of International Settlement coming out with standards and processes, and we're seeing IXB with EBA clearing and the Fed working to have international IPs. But effectively, they intend to move money immediately and irrevocably, and they're designed with the digital world technologies already built in. But as we've already teased a little bit Let's discuss the what and what are the use cases. The original use cases were effectively around citizens moving money to friends and family because that was the easiest thing to do in many ways. But they are an account to account based payment. And that is to say that money moves directly from one person's account to another person's account. And they are used by corporates and governments. And it's a separate use case to cards, for instance, which move from card to card as opposed to account to account. But there's a lot of use cases here, Erica, aren't
SPEAKER_00:there? Yeah, absolutely. And as you alluded to, the trends really start with the consumers, the you and I as individuals, really. I mentioned earlier paying you$10 for a pizza. That is how all this started. Digital wallets allowed us to pay each other, and we began to expect this instant gratification and settlement. We knew it was possible, right? So we started to see the use cases expand. in business to consumer payments it became an expectation as well an example that i like to use and allude to is online marketplaces so when i buy something and i either have you know buyers regret after it arrives or i don't like the way that it looks or i thought it was going to work different i want to do business with an online marketplace that can provide funds back to me instantly not wait for that credit card statement that can take a full statement to come through and i'm watching to make sure that it's really landed and i'm going to have access to those those funds it's is very inefficient and my expectations are different now with with those that I do business with insurance is another great example if I have a sensitive claim with my home insurance or my auto insurance something has happened I don't just want but I need my funds ASAP and this has become a market expectation so you know going back to all those that say that there's not a use case for this there's very strong use cases for this that can really cost a a business its core user base. Now, we're also seeing a use case become really important that at one point there were a lot of people saying would never be important, and that is payroll. So thanks to the gig economy, it has become an employer benefit to be able to offer non-traditional payroll. And in a really tough labor market, we have seen this play out. An example that I saw here in the US, I saw a row of several fast food restaurants near an airport, and one of them had a sign out front that said, work here today, get paid here today. That one restaurant can be much more selective on who they're going to hire. They're going to have the top choice of those that are coming in to apply versus the other restaurants nearby, and they're going to have higher retention, right? I also have actually seen payroll companies go to their customers, which are the businesses, and give them a list of banks here in the U.S. and say, hey, have your employees bank at one of these banks because they will be able to benefit from immediate payments and you can do things like spot bonuses and non-traditional payroll. When we look more at, you know, the business side from small businesses all the way on up for these business to business payments, there's impacts on liquidity. We alluded to that a little bit before the break that being able to receive an immediate payment can be quite impactful, particularly for small businesses. If you think about the struggle of small businesses, the sensitivity to a lot of the economic conditions that small businesses have to be able to receive a payment in real time can really mean the the opportunity to open the doors the next day then you have the just-in-time payments for so paying for something at the exact moment that you that you can or that you want to versus having to send something days ahead of time hoping that these other transactions or checks will clear ACHs will come in and then and then you have the the human aspect of it where it strengthens strengthens the business relationship. So think about a contractor paying a subcontractor, right? In a labor market that's so hard to attract and retain, this really makes a difference. The subcontractors don't have to wait for the contractors to pay them, you know, on Friday. They can pay them for a day's work after a day's work. So all of these use cases are really important. But then you start to think about some of the other efficiencies. That's just speed. But then you have data and access to the data. So businesses need this information to be able to make actionable decisions. So there's just so many benefits. And like I said before, older payment rails, they aren't going away quite yet. So now businesses and individuals, they have choices. And they're really looking for solutions to help them with those choices, to decide what's most important. When I'm making this payment, is speed most important? Is cost most important? What information do I have for the recipient? Do I have their account number? Do I have their email address? It gets a little bit complex right? When you think about the efficiencies that you can get with the immediate payments and once you have incorporated into your processes and procedures, again, we can think about the example of us as individuals. How easy is it for me to send you that$10 and you see that it's in your account? This is the same type of efficiencies that businesses have to gain once they have incorporated immediate payments into their procedures as well.
SPEAKER_01:I I think that's a great point because right now, if you're a corporate, then actually you've got integration in your side of the world, but you haven't got integration into the payment side of the world and the banking side of the world. And we know that corporates would like to have a lot more integration there. And it's also true that banks would like to have this digital integration into their clients to get them tighter and be sticky. But you can't do that with Android. Yeah, I completely
SPEAKER_00:agree. But it's, it's hard to do in the legacy world with the legacy infrastructure. And when I talked to many of the, you know, industry folks and financial institutions, and I asked them about, you know, what, what is impeding your progress to have this tighter integration to be able to provide that tight integration to your businesses with their ERP systems? It's the analog. infrastructure, the pieces of the analog infrastructure that we're left with that make that part so hard. And so now, now we have some choices, right? Especially when we're looking from the business perspective, how do we, how do we move forward, overcome some of that legacy and create that integration? Because, you know, I know some of what I've said has sounded a little bit doom and gloom that, you know, this is really hard and, you know, people are losing business and, but there's a silver lining to all of this is that those that have been able to do this and do this well, there's just almost an unlimited market opportunity out there for them right now.
SPEAKER_01:Yeah. And I think, you know, important aspect really to focus on is really that they are digital, they're cheap, they're quick. And in my opinion, they are likely to be the unifying way that payments will move. They're huge as growth. And while, as you say, the other rails won't go away, you know, immediately. But if it's cheap, digital and quick, I think they are the way the payments will move.
SPEAKER_00:Yeah, absolutely. But again, you know, these things take time. And while legacy payment types like ACH and checks may be expensive and efficient, we have just learned as an industry to deal with those challenges and make them work, right? So anytime you have change, it takes time, particularly when you're dependent on businesses for those changes. I think many of us as individuals just got accustomed to digital wallets so quickly. We just, we knew we were able to do it and it just became a part of everything that we do. It's fast, it's cheap, it's easy. That same adoption is absolutely going to happen in business payments. It just takes a little bit more time. And I do think down the line, I don't know when exactly, but immediate payments will be just payments, right? We're going to become ubiquitous. We're going to become more efficient. We're going to create these connectors between the system between the countries and they're just going to be payments.
SPEAKER_01:Yeah, I think that's right. Nobody wakes up in the morning and thinks, I want to make a payment. But if I want to make a payment, I'd rather have it done quickly and efficiently. Okay, so let's kind of try and summarize this a little bit. Immediate payments are the new rail on the block. Compared to the other payment rails, they are very, very simple processes and they're pretty easy to implement. Effectively, they are fire and forget. You just send it. It's done. They are free or neo-free. They are 24-7, 365 days a year. They're designed in the digital age. And in my opinion, to kind of misquote the Lord of the Rings, I believe they are the payment rail that binds them all together. So I guess I've been watching too many films. Erica, have you got any more sort of closing thoughts here about immediate payments Because it's a big topic and it's an important topic, I think.
SPEAKER_00:Yeah, absolutely. And we've just gotten to the point that to say there is no business case or there are no use cases for immediate payments just sounds a bit silly, honestly. So all the things we've discussed here today about the benefits, the efficiencies, the speed, the data, all of these things, to say that there's really no need for it, it's beginning to just not make sense. The volumes are proving otherwise. The voice of the industry says something quite different. but it's just going to take time but the good news is that change is well on its way and those that that are taking advantage of of immediate payments in whatever capacity as an individual as a business there's absolutely benefits that have already been been realized and so that train has left the station and I'm really excited to see how quickly this expands and and how the impact on our economies both individually as as as countries but also as the global economy will continue you to benefit from you know the immediate payments technology
SPEAKER_01:yeah I couldn't agree with you more I think there's you know there are waves of this and you know one of the stats that got me was three quarters of the people around the world now have access to immediate payments I don't think there'll be any going back but Erica as always it's an absolute pleasure to work with you to listen to your insights and help us through this huge topic immediate payments thank you so very much for being here today with me.
SPEAKER_00:Thanks for having me, Paul. Always a pleasure.
SPEAKER_01:Well, there we go. Faster payments, immediate payments. A big shout out again to Erica for being so helpful, so insightful, and of course, so kind with her thoughts. The truth of the matter is that immediate payments or real-time payments, they are the new kid on the block. They are very quick, two to three seconds. They do give you extreme clarity of exactly where your funds are. And they are growing like crazy all over the world. And it's the same model, a very, very simple payment model. And like an ACH, it's a very simple model and very simple to implement. But, and I think it's a big but, the most important thing is they were designed and built in a digital time. And the people who were designing and thinking about integrating them are of that digital world so up and down the food chain or the ecosystem of payments or where you want to be an integrator or you want to add value you can do so because they were designed and built in a digital age for me that's why they will be so very successful thanks for listening oh just before I go if I could ask a favour hey if you've enjoyed the podcast perhaps you'd be so kind as to tell a friend recommend it I think it's by far the best way to get the message out. Personal recommendation from you. Thanks very much indeed. Cheers.