Payments, Easy, fast, secure – can instant payments solve the trilemma?
Ahead of participating in this year’s Sibos conference, Commerzbank’s Global Head of Payment Platforms Simone Loefgen shares her outlook on instant cross-border payments, digital money and the role of artificial intelligence.
The legacy payment systems that continue to be used by many banks today derive from the traditional, physical model of banking – when a bank was a network of branches with opening hours and cut-off times. That structure couldn’t be further removed from today’s payments landscape, where banks are expected to leverage cutting-edge platforms to process payments around the clock, 24/7, 365 days a year.
This desire for speed and convenience isn’t new per se. Clients – corporates and individuals alike – have long placed a premium on payments that are easy, fast and secure. Indeed, credit cards grew in popularity precisely because they offer the possibility of paying instantly online or in physical stores. Today, financial institutions (FIs) can provide great business value by placing the focus back on the bank account with instant payments.
Europe’s instant cross-border payments landscape: Supportive regulation is promoting adoption
When it comes to real-time transactions, domestic instant payments are now run of the mill for many. Widespread adoption of cross-border instant payments, however, is proving much harder to achieve. In Europe, this kind of payment still comes with a premium price tag. But in keeping with the broader G20 Roadmap, which aims to make cross-border payments frictionless and more accessible, regulators have been making efforts to promote adoption. The European Union’s Instant Payments Regulation, which came into force in April, requires that all banks across the single market offer instant payments – and at the same price point as regular SEPA payments. Banks will need to be able to receive SEPA instant payments (both domestic and cross-border) by January 2025 and send them by October of the same year.
Instant payments are, therefore, steadily becoming easier to use. Not only are such payments being facilitated within the SEPA region, but new European initiatives are facilitating opportunities for instant transactions to be made beyond the eurozone.
Leveraging existing payment rails, the European Payment Council’s One-leg Out Instant Credit Transfer (OCT Inst) scheme enables FIs within the eurozone to send and receive instant payments to participating banks outside the bloc – as long as one leg of the transaction uses the euro.
Given these developments, we anticipate that they could well account for around 50% of payments in Europe over the next five years, a big leap from the current 13%1.
The role of innovation in fraud prevention
Naturally, there are still some hurdles in the way of wider adoption. Large-scale IT transformations are costly and time-consuming. And instant payments are not perfect – by their very nature, the irreversibility of instant transactions makes them more susceptible to fraud. Initial assessments from Europe show that fraud rates within instant payments tend to be up to six or seven times higher than traditional payments. They are fast, and are becoming easier than ever – but are instant payments secure enough?
The growing role of artificial intelligence (AI) in finance is making the matter even more complex. There are two sides to this coin. With deepfakes, video and voice simulation, AI is making it much easier for fraudsters to operate. But equally, it can also be used to prevent cybercrime. Banks are investing heavily in staying ahead of the curve, using machine learning to develop new fraud detection models that use pattern and anomaly detection, for example.
The majority of the financial sector is aligned around the principle that fraud prevention should not be used as a competitive edge, and the industry is increasingly coming together in collaborative efforts. Indeed, the European Banking Association has developed a system together with Commerzbank and other pilot banks to use cross-industry data to train fraud prevention models, making them more targeted and effective.
This is by no means the only use for AI in payments, and banks are leveraging a whole suite of technologies to better analyse payments data – for example by creating more accurate cashflow projections and trend analyses to provide insights that can ultimately benefit corporate clients.
Digital money: a solution looking for a problem?
Other potential solutions to the payments trilemma exist. In recent years the industry has explored the possibilities of distributed ledger technology (DLT). Both central and commercial banks across the world went through an often rigorous process of evaluating the pros and cons of creating their own forms of digital money, e.g. via Central Bank Digital Currency (CBDC) or stablecoins. But while there are promising use cases, especially with regard to trade finance, it is becoming clear that digital money still needs to demonstrate that it can be as cost-efficient as existing payment rails.
If, for example, a supply chain finance solution is developed with assets represented digitally on a blockchain, is it necessary to also have money on chain to exchange them with? Or can the asset chain simply trigger a payment that is executed by other methods? Will the money be a stablecoin developed by commercial banks, or will it be pioneered by central banks?
Using digital money is fast, and it can potentially be very secure – but it is not, for the time being, easy. While digital currencies will undoubtedly continue to provide value within the context of specific applications, it appears that the momentum that had previously gathered behind this technology as a means of delivering payments is now subsiding. Both banks and corporates have tight IT budgets, and when investing in innovative projects of this scale, the business case needs to be amply clear.
Value for banks and corporates alike
The benefits of instant payments themselves are clear, however. Corporate treasurers will be able to optimise liquidity in real time and access intraday reporting. Salaries could be paid instantly on payday rather than being dispatched days in advance to ensure they arrive on time. APIs can be used in conjunction with instant payments to ensure that all related parties to a transaction receive notifications – without needing to call the accountant.
On the FI side, banks are increasingly using instant payments as building blocks for more advanced technological solutions. Commerzbank, for instance, is collaborating with T-Systems, the subsidiary of Deutsche Telekom, to develop internet-based automated finance that, using the internet of things, allows appliances or vehicles to trigger payments automatically. This could be used when goods are delivered, for example, or when an electric vehicle is being charged.
Ultimately, innovation in the payments space will continue to serve the requirements of users – making payments easier, faster and more secure. Widespread adoption of cross-border instant payments could solve the trilemma, bring bank accounts back in focus, and equip FIs for the opportunities of a rapidly evolving world.