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.