What will it take to implement real time payments/NPP?

This is part 2 of the 3 part series on the New Payments Platform (NPP). Subscribe via email or get added to Google Circles to receive an update on future posts. 

The focus of the New Payments Platform is to provide an infrastructure for a versatile and data rich, real time payments infrastructure for low value everyday payments. But few organisations understand the challenges in the implementation of real time payments system, so, I attempt to uncover the key considerations - functional and technical for the program. NPP will also facilitate an enhanced customer experience through the introduction of an Addressing Service which will allow payments (particularly mobile payments) to be “addressed” or “routed” by using an Alias which will enable payments to be directed to a specific account using either a mobile phone number or an email address. The email account option will be particularly important to businesses and people with multiple accounts. 

The introduction of the NPP will create many opportunities for participating financial institutions (ADIs) as well as their customers through provision of overlay or value-added services, particularly if the introduction of the NPP is viewed as more that a “simple” compliance exercise. There are some important considerations ADIs need to meet to be ready for NPP.

Functional Considerations

There are a number of key requirements to be considered as a consequence of the introduction of the NPP.

1. Message standardization, transformation and acknowledgment into a format compatible with the central message format. The rigor associated with payment enrichment and repair for incomplete or missing information will be much higher with NPP. Even the clearing process with acknowledgement of messages between gateway/clearing house/bank, including handling and integration of settlement messages needs to be robust.
2. Payments reversal – For rejected payments, given the real time nature of clearing & settlement, the reversal and transaction research and reconciliation process will need to be drastically streamlined. Impact on payments and GL balances for unhappy path situations will be extensive and the resultant changes will need to be comprehensive.
3. Payment routing – based on least cost and load balancing of the payment processing access to an alternate option and gateway will need to be automatic, instantaneous and dynamic.
4. Audit trail of transactions along with journalizing – Tracing the payment transactions through various platforms, interfaces will be extremely critical in not only ensuring compliance but also for AML/CTF purposes. The provision of a single comprehensive view of payments and hence, the ability to do a drill down of transactions and fees will be a critical feature and differentiator.
5. Liquidity management and settlement will, given the real-time nature of the NPP, need to be examined closely to ensure that from a participant and participant customer perspective a very clear real-time understanding of their position at any point in time. This will also need to include the ESA position for Participants, particularly when acting on behalf of other participants.
6. Comprehensive configuration, fee management and reporting will need to be NPP specific and will be critical to ensuring accurate product pricing can occur and correct cost allocation can be done. Fee and Billing – at a minimum, the break-up of the charges by product/customer/segment/account/channel.

Architectural Considerations

There are a number of architectural implications that need to be considered as a consequence of introduction of the NPP.

• What aspects of payments enrichment, scheduling and monitoring should stay in the channel or product systems and what should be centralized? This will particularly have an impact around recurring and future-dated payments and consideration should be given to a centralized data store which would facilitate processing as well providing both the Participant and its customers with a complete view of upcoming payments, it will also help facilitate liquidity management.
• What non-functional requirements should the Participant build towards? Having a clear and unambiguous understanding the payments flow becomes even more critical with the NPP as it will run 24*7 and its availability (or lack thereof) will have high visibility not only with the participant’s customers but also with regulatory authorities and other Government agencies. This requires a good understanding of expected volumes, response and repair times within and outside the enterprise boundary.
• Business Activity Monitoring capability – abstraction of the processing and idle times for various sub-segments of the business process; real-time payments dashboard and reporting; real-time fraud monitoring will significantly improve an ADI’s ability to meet and exceed their customers’ expectations as well as providing a firm baseline of performance across the payment systems of the ADI..
• Supporting Rich Data through a centralized payments data store to facilitate comprehensive reporting and transactional research as well as providing a foundation for enhanced reconciliation capabilities across product and channel streams.
• Real-time Fraud monitoring will be an essential component of any NPP implementation particularly due to the non-reputable nature of NPP payments once the payment is complete. AML capabilities will also need to be considered, again due to the finality of the payment.
•  Rich remittance data that will be present in NPP transactions will need additional consideration as it will create the potential need to interface new internal and external systems by allowing ADIs to introduce new value-added products and services particularly aimed at small-to-medium enterprises thus improving customer acquisition and retention as well as introducing new income streams through fee-for-service offerings.
  Some of these considerations would involve ADIs to progressively revamp their payments systems infrastructure necessary for them to guarantee higher levels of stability.
  Are you ready for it?

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NPP - More than just compliance

This is part 1 of a 3 part series on New Payments Platform (NPP). Please subscribe by email or get added to Google circles if you wish to get informed when future series are published.

The introduction of the New Payments Platform has seen some very diverse reactions from financial institutions. Some see it as a huge burden on them to comply with the regulations – an unnecessary cost which could be avoided especially in times when credit growth is slow and margins under pressure. Others see it as an erosion of their competitive advantage, built-up over the years through systematic and long term investments in the overhaul of their payments and core platforms. For these institutions, NPP threatens to level the playing field through lowering the barrier to entry via investment in central infrastructure ensuring greater competition in real time payments anytime, anywhere which, of course, is one of the RBA’s intentions with the NPP’s introduction.

However, worldwide experience has proven that there will be a select number of institutions which will convert this into a substantial business opportunity to consolidate and grow their revenue and market share. In the first installment of this three part series, I uncover some of the potential business opportunities stemming from the program.   

Improved Cash management and Liquidity: Overlay services can help improve cash management, liquidity and traceability of payments along with convenience through mobile initiation of payments.  – An example of overlay service could be e-invoicing coupled with end-to-end payments manager, providing corporates with the ability to schedule, prioritize, authorize, track, get acknowledgement and reconcile payments in real time through a single interface leveraging the central payment infrastructure. This service integrated with an expense manager to help corporates, SMEs and consumers with better cash-flow and liquidity management. Through better spend analytics and traceability there is a significant opportunity to improve cash-flow & liquidity management and better integrate these capabilities with external customer platforms.

 

Reduce costs and improve operational efficiency:

·        Rich data flow can enable the payments flow and transactional data to be directly entered into the accounting system, increasing visibility and accuracy of payments data. A lot of small merchants today, expend significant time and costs in manually entering the payments transactions into their accounting system. This can also result in inaccurate data due to manual entry hence incurring further costs. The richer payments data will be an opportunity for standard accounting packages to build pre-fabricated interfaces with payments systems to ensure straight through flow right from payments initiation through to the accounting system.

 

·        Real-time payments should be cheaper for merchants, since they can reduce or eliminate higher cards transaction fees in favor of a direct money transfer between bank accounts at real time, whilst eliminating the credit risk normally prevalent in a non-real time environment. Though the exact savings will depend on the pricing structure for NPP payments.
 

·        Richer payment data can help in quicker and cheaper reconciling through itemized invoicing and enabling greater control over expense management. This can help in reducing the number of errors in payment processing as well as reduced exceptions optimizing back office operations costs. A good example of the value this can bring to a business is by having additional information relating to the purpose of the payment in the payment transaction itself which will then allow a business to understand which invoices are being paid, without requiring manual reference back to the payer, by a single payment and / or which specific line items of an invoice are being paid which will substantially improve the efficiency of the accounts receivable function of a business.
 

·       SME and Corporates will have the ability to generate real time cash flow statements and balance sheets.
 

Improved budgeting and traceability: Greater visibility of cash positions and control on spend management through rich data for both consumers and enterprises. PayPal for example, used the real time payments implementation in the UK to provide their merchants with real-time payments when consumers are buying online or in bricks-and-mortar storefronts. Additionally, retail consumers could find splitting bills much easier if ADIs were to provide overlay services around itemized invoicing, particularly when associated with smartphone apps on top of a faster, quicker real-time settlement. The ability for SMEs in particular to receive both funds and enriched data in real-time and to have the enriched data directly integrated with their accounting solution will of significant benefit. As an example being able to receive settled funds 24*7 will allow SMEs the ability to better ensure they are getting maximum benefit from allocating their cash to a high interest account as an example particularly those businesses that have significant cash receipts after traditional hours or over the weekend. This should also help ensure suppliers are paid more promptly.

Greater customer convenience

·       Cheaper, instantaneous international remittances at least for customers of multi-national banks who wish to transfer money between accounts in different countries. For businesses, this could eliminate the need for keeping idle ‘float’ or ‘liquid’ money, for better liquidity management.
 

·        Buying processes could be significantly simplified. E.g. The private car buying process which is quite cumbersome and time consuming today - involves either an electronic or bank cheque based money transfer into the vendor’s account which has an inherent level of risk associated with it, transferring and paying for the registration and post that at least third-party insurance and possibly additional insurance coverage. There is an opportunity to provide a car buying payment transaction service which could integrate these discrete sequential processes and complete the end-to-end transaction within minutes leveraging the irrevocable central NPP infrastructure for an enhanced customer experience.
 

·        Real time mobile payments – One of the biggest use cases for real-time payments is a flexible medium for mobile pay-anyone payments. As an example the UK Zapp payments allows customers to make real time payments from their mobile through a service integrated with their banking applications. The service doesn’t expose details of the bank accounts and allows consumers to select the banking accounts from which to make payment.
 

Supply chain efficiencies: Consider a scenario where an apparel manufacturer places an order for a weaving machine. It has to wait for a few days till the payment is cleared into the supplier account before the supplier ships the equipment. The advent of real time payments could help improve productivity of the apparel manufacturer and reduce working capital & storage requirements through quicker receivables management for the supplier.  In a real life consumer scenario, the consumer can electronically transfer funds to the supplier and the supplier can then ship the goods immediately and with the non-reputable aspect of the payment the supplier can be assured the chargeback risk is significantly lower or eliminated altogether.

Person-to-person payments: The ability to make a real time payment through aliases – mobile number or email, offers a transaction medium to the non-banked or under-banked sections of society. Immediacy and non-revocability of payment will reduce the credit risk and improve funds availability.

Can our banks counter the new entrants by leveraging the true benefits of NPP? Only time will tell.

 

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