In a recent podcast, PaymentsJournal talked with experts from different parts of the payments world to discuss how real-time payments are proceeding throughout the world, and particularly in the United States and Australia. It featured Elisa Tavilla, Director of Debit Payments, Javelin Strategy; Adrian Lovney, Chief Payments & Schemes Officer, Australian Payments Plus; Nathan Churchward, Payments Domain Lead, Cuscal; and Kate Knudsen, Senior Program Director, BHMI.
With the launch of FedNow, the United States has fully embarked on its journey toward real-time payments. Across the globe, real-time payments are creating not only competition among payment methods but also new use cases, making previously unattainable services accessible to businesses and consumers.
Yet the road to global ubiquity in real-time payments has challenges. Technical hurdles, legacy systems, and the imperative of interoperability need to be overcome. In a world with seventy-nine countries operating real-time payment systems, achieving cross-border real-time payments requires diplomacy and meticulous planning. Furthermore, the modernization of outdated back-office systems is imperative to keep pace with the exponential growth in real-time transactions. The good news is that businesses recognize this urgency and are upgrading technology infrastructures and streamlining processes.
Real-Time Payments in U.S. and Australia
Real-time payments are quickly becoming more widely available throughout the world. In the United States, FedNow’s launch in July is starting to increase traffic and demand for real-time payments.
“In the U.S., the FedNow service recently launched with 35 financial institutions,16 service providers, the Department of the Treasury, and more set to join,” Tavilla said. “The RTP network, run by The Clearing House, hit 500 million transactions with over 370 participating institutions. With two real-time gross settlement systems live in the U.S. now, I’m optimistic that it will help accelerate the growth and adoption of instant payments here [in the U.S.].”
In many cases, real-time payments are much more developed abroad. For example, Australia in 2018 launched its New Payments Platform (NPP) for real-time payments, and it has taken off ever since.
“Around 30% of the volume that was previously processed through the bulk Electronic Clearing System in Australia has now transitioned to NPP in the past six years,” Lovney said.
Initially, purchases on the platform were mostly P2P, but now, it is increasingly used by businesses and corporations. Some examples include paying taxi or Uber drivers at the end of their shifts and making insurance or emergency payments.
According to Lovney, the next phase of use cases will involve recurring (bulk) debit payments, such as subscriptions or utility payments.
“We expect to see bulk payments coming from businesses, corporations, and government entities, such as salary or dividend payments,” Lovney said. “Australia has set a goal to potentially phase out the ACH system by around 2030, approximately 12 years after the launch of NPP.”
As Churchward hinted, all of this is slowly creating significant competition among payment methods.
“During the pandemic, as cash usage declined and electronic payment methods increased, including ACH, we saw significant growth in account-to-account payments, especially person-to-person credits, accounting for 38% of the total payment volume growth,” Churchward said. “However, NPP’s growth has outpaced that of ACH. Currently, real-time payments represent 37% of all account-to-account credit transfers among our clients, which include banks and payment service providers.”
But real-time payments are creating new use cases, not just the substitution of existing ones.
“Payment service providers, in particular, are offering receivables management services to businesses using account-to-account payments that weren’t available before NPP,” Churchward said. “Customers love using Pay ID, a feature that links their mobile number or email address to their bank account—80% of payments received by our payment service providers from business customers use this feature.”
Challenges in Implementing Real-Time Payments
The United States has over 11,000 financial institutions, and many of them, especially the smaller ones, rely on legacy systems.
“Transitioning to a payment system that operates 24/7, 365 days a year will take time, and ensuring everything works seamlessly together (interoperability) is another task at hand,” Tavilla said.
Adding to the overall complication is the fact that the United States has two operational systems in place, FedNow and RTP. As they were designed independently, interoperability is a concern.
“Both FedNow and RTP are using ISO 20022 messages, which should facilitate interoperability not only within the U.S. but also with international real-time payment systems,” Tavilla said. “Both systems are continually introducing new features, with FedNow exploring cross-border capabilities and directory services.”
And that is just in the United States.
Seventy-nine countries have at least one real-time payment system in operation, and integrating them all for real-time cross-border payments will be a real challenge. This will take diplomacy and careful planning by individual countries.
For example, the NPP in Australia is in the final stages of launching a dedicated real-time international payments business service to process cross-border transactions. The service clearly differentiates international payments from domestic ones and attaches information about the sender, including name and date of birth.
“This international payments business service is designed to accommodate various types of international payments, be it through SWIFT, TransferWise, Western Union, or others, and ensures that the domestic leg of these payments is instantly available,” Lovney said.
Dusty Back Offices Are an Impediment
Amid the technical and diplomatic challenges in implementing real-time payments, other challenges are much more mundane.
“The most significant challenge we’ve observed for companies aiming to support real-time payments is their outdated back-office systems,” Knudsen said. “While they invest in modernizing their payment front ends, the back office often lags behind. This is a big issue because the back office is where payment processing happens after authorization by the front end.”
“Many of these back-office systems were created decades ago and weren’t designed for real-time payments, making it difficult for them to keep up with the speed and increasing volume of real-time transactions,” Knudsen added.
Another problem: Because legacy systems were initially designed exclusively for card-based transactions (ISO 8583), they lack the flexibility to handle new kinds of transactions, such as person-to-person (P2P) payments.
“The good news is that many companies are recognizing the urgency of modernizing both their front-end and back-end systems to keep pace with the rapid growth of real-time payments,” Knudsen said. “We’re seeing progress in terms of upgrading technology infrastructure and implementing APIs to enable real-time processing. Additionally, companies are streamlining back-office processes, simplifying workflows, and automating manual tasks to align better with the speed of real-time payments.”
How Leading Countries are Driving Real-Time Payment Adoption
In 2022, India led the world with a total real-time transaction volume of 89.5 billion, representing 46% of global real-time transactions. In the same year, Australia processed 1.2 billion real-time payments, which is obviously far less in absolute terms but only 25% less than India on a per-capita basis. The United States recorded a real-time transaction volume of only 1.8 billion in 2022, way less per capita than India or Australia. But it seems more than likely that this will change with the advent of FedNow this year.
According to Churchward, making real-time capabilities open to non-banks and focusing on P2P payments to address customer needs is key. These steps can foster adoption and drive higher use of real-time payment systems in countries that are lagging. At least that has been Australia’s experience.
“One noteworthy feature in both the Indian and Australian markets is a focus on peer-to-peer payments and facilitating access for payment service providers that are non-bank entities,” Churchward said. “This approach has led to substantial transaction volumes.”
“Enabling P2P payment platforms that address common pain points for consumers and businesses is a fundamental use case. These pain points include ensuring interoperability between P2P platforms and providing real-time notifications and reconciliations for businesses,” Churchward added.
As more real-time payment schemes come into play, focusing on interoperability will be key.
“Payment systems moving toward ISO 20022 is a strong foundation for cooperation,” Lovney said. “Additionally, frameworks like the Open Wallet Coalition can underpin efforts to create interoperability with other systems worldwide.”
Some companies still have skepticism about real-time payments. Churchward indicated that companies need to keep up with their clients’ demands.
“Real-time payments can be challenging but highly rewarding,” Churchward said. “They offer significant value to your clients and help them stay competitive in a rapidly evolving landscape.”
And a big part of getting real-time payments right is having the appropriate back-office software. “Software plays a crucial role in enabling real-time payments,” Knudsen said. “It needs to support any transaction type and provide connectivity for processing payments in real time, both domestically and internationally. Automation is key. Automating settlement and reconciliation processes streamlines real-time payments.”
Real-time payments have evolved from a budding concept to a transformative force. The industry’s focus on interoperability, adoption of standardized frameworks, and investments in modernization indicate that real-time payments are here to stay. As skepticism wanes and adoption grows, the future of payments has a real-time bent, offering immense value to clients and ensuring competitiveness in a rapidly evolving landscape.
With software playing a pivotal role in enabling such transactions, the stage is set for real-time payments to revolutionize the way we transact, offering not just speed but also efficiency and convenience.