In a world of decreasing size and rapidly increasing technological development, the financial sector needs to keep up at the same pace. While physical supply chains have improved to keep track of the digital world, the financial supply chain has not kept pace.
The race toward real-time financial services involves a wide array of stakeholders and possibilities, ranging from common standardization to re-engineering underlying processes and protocols through blockchain technology.
So far, much of the hype in fintech is concentrated around the front-end through P2P-payments like Venmo, Facebook Pay and Snapcash, as well as mobile payments like Apple Pay/Wallet and Android Pay. These solutions change the dynamics of the customer interface, but are mainly built on existing infrastructures (either the banks or the card networks). However, in a world where physical goods can be delivered within the same day, expectations for real-time payments are rising.
For companies like Amazon, which operates on a near zero-margin philosophy, efficient working-capital management is crucial for a well-oiled value chain. This applies to both large volumes of small- to medium-sized transactions, as well as clearing and settlement of large-value payments across global value chains.
However, not only the process of debiting one bank account and crediting another will benefit from increased speed in the overall payment process. Real-time accounting and reporting could potentially reduce fraud and money laundering, as well as give companies better control of their liquidity.
Speed in payments is not only a competitive advantage for traditional value chains, but will also have a great impact on the Internet economy, where time to market is essential. For instance, the delay in payouts from Apple’s app store is as long as 60 days. This time delay could mean the difference between life and death for an app developer, and that money should probably be used to acquire new users as soon as possible, instead of being stored on an intermediary bank account.
For emerging markets, real-time payments would enable a smooth transition from a cash-based economy to a digital-payment world by potentially leapfrogging the process of establishing centralized clearing and settlement functions.
With the rise of the sharing economy, or more precisely stated, an on-demand economy, it is likely that a larger proportion of the future work force will be freelancers. A transition to real-time payments would allow workers to get paid as they go; upon completion of a task, payment would be made directly to a bank account, with all the required tax reporting requirements in place. This could be done weekly, or even daily.
These are only a few examples of how real-time financial services would have an impact.
Today, 18 countries has implemented real-time payments, with another 18-30 underway. This is mainly done by upgrading existing infrastructure. For this to work, both the national payment infrastructure and a central real-time system, as well as core banking systems, need to make the transition to real time.
This is a costly process, with large up-front investments and increased operating costs for 24/7/365 operations. There also is the issue of cross-border payments, which is acknowledged as one of the harshest points of friction for international commerce, where the European Commission has launched a pan-European payment clearing and settlement project.
In addition to the incumbent-driven journey toward instant payment processing, blockchain technology provides multiple possibilities for real-time payments through the distributed ledger as well as the possibility to create smart contracts.
The latter would potentially enable real-time verification of pre-defined trade conditions through digitized smart contracts. In addition to solving the friction related to large-value payments for global value chains, blockchain technology would, in theory, make trade finance available to SMEs that would otherwise find it difficult to obtain credit approval.
These approaches are not necessarily mutually exclusive, but can easily co-exist by utilizing ISO 20022 as the message container combined with the blockchain technology as a ledger of ownership to confirm the change of ownership.
With a vast number of unknown variables related to this approach, banks like WestPac, ANZ and Commonwealth Bank of Australia have experimented with the Ripple protocol for real-time cross-border payments integrated with existing payment infrastructures. Australia is not alone on this; banking giant Barclays recently signed an agreement with Swedish blockchain-startup Safello for a proof of concept to explore how the blockchain could be used in traditional finance.
In a world where the banks are at risk of becoming a commodity, the ability to offer real-time financial services could strengthen the position of incumbents in an increasingly smaller world, where availability and speed are essential to stay ahead of the curve.