Nothing is harder to break than an established habit.
But even the most entrenched behaviors often shift or evolve. Just look at the movement of money, which has undergone many transmutations throughout its long history.
Now, the landscape of digital payments is undergoing a new shift, and at its forefront is the rise of instant payments for both consumers and businesses. But can the innovative transaction method scale?
“The levers that need to be pulled to move [instant payment] services forward on the consumer side really come down to a reduction in service fees,” Ryan Dew, global head of product at i2c, told PYMNTS for the series “What’s Next in Payments — Instant Payments: What Will Turbocharge Instant Payments Growth in 2024?”
Positioning instant payment services as personal finance management tools can incentivize consumers by minimizing late charges on bill payments, Dew said, noting that the integration of cost-effective, near-real-time payment services by major card networks like Visa and MasterCard can further propel consumer adoption.
“On the business side or the commercial side in general, I see a lot of opportunities for instant payments — and it comes down to positioning instant payment services as a working capital tool,” Dew explained.
After all, the ability for businesses to delay payments until the last moment without tying up funds in lengthy processes inherently helps facilitate efficient financial management.
“Instant payments become a tool for businesses to keep access to funds in the interim when they would normally be tying them up through some of the slower moving payment rails,” Dew said.
Still, instant payments aren’t a plug-and-play innovation.
Dew noted that it is essential to navigate the challenge of adapting existing enterprise resource planning (ERP) systems to handle instant payment rails, ensuring a smooth transition for businesses.
“One thing that we need to be careful and monitor closely is that a lot of existing ERP systems that manage vendor payables have been pre-wired to handle traditional payment methods. So, as those systems are upgraded to handle instant payment rails, you’ll see the business side of instant payments take off accordingly,” he said.
More broadly, interoperability stands out as a significant challenge in the instant payments landscape.
Standardizing messaging formats, such as the ISO 20022 native standard, are crucial for efficient integration among different payment systems and institutions. Addressing business process mapping and ensuring machine-readable syntax are essential components of overcoming interoperability challenges, Dew said.
It isn’t just infrastructure hang-ups that need to be addressed. With the irrevocable nature of instant transactions, robust security measures are imperative.
Holistic approaches involving stringent know-your-customer processes, monitoring activities from a customer-centric perspective, and implementing stepped-up authentication and artificial intelligence models are crucial to combating fraud and cybersecurity threats, Dew said.
“That can be a challenge for a lot of FIs [financial institutions] out there that have older technology stacks that weren’t built to handle these types of services that happen within seconds,” he said. “Platforms are not all created equal.”
Instant payments are expected to reshape the existing revenue models and operational structures of financial institutions.
And while there may be upfront investments required to update technology stacks, the long-term gains of taking those steps — including the reduction of manual processes and support costs — are anticipated to outweigh these expenses.
“Just simply taking paper out and removing manual processes will decrease the overall cost to support these types of transactions and will positively impact the P&L of financial institutions,” Dew said.
Those same FIs, Dew noted, will need to either build or partner with a provider that can help them support instant payment technologies, because their customers are going to demand them.
The impact of instant payments extends beyond traditional banking institutions. FinTechs, marketplaces and non-traditional players are leveraging real-time payment capabilities to introduce innovative business models and services. The combination of open banking standards and faster payment rails is driving innovation and sparking significant changes in the financial ecosystem, Dew said.
“Traditional FIs are going to need to adjust if they want to continue to serve their customers and grow their market share,” he added.
One way instant payments can help them do so is by playing a crucial role in promoting financial inclusion for underbanked and unbanked populations.
By eliminating the risks associated with delayed fund access, financial institutions can cater to these segments more effectively, Dew said. This inclusivity may extend to providing traditional services like mortgages and credit cards to newly banked customers.
As for what he sees the future of instant payments holding?
“Instant payments are here to stay. The challenge now is that the technology’s there, the customer demand is there, and it’s now in the hands of FIs that, if they want to compete and grow, they’re going to have to invest in modernizing their tech stacks and providing these types of services. Or they’re going to be left behind,” Dew said.
“For those FIs that are looking to cater to these new use cases, finding a platform provider that can support them and help them get there quickly and cost effectively is going to be critical,” he added.
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