In a world where customers expect their banks to deliver the 24/7 services that they get from other industries, Rabobank’s Erik Kwakkel explains why it pays to be an early mover in the latest iteration of SEPA, which will make the promise of instant payments a reality.
Customers now inhabit a world of convenience and immediacy in many areas of their lives, so it is no surprise that they want their banks to process their financial transactions with the same speed as other service providers. The ability to make instant payments between individuals, and between merchants and their customers is, therefore, greatly anticipated.
Customer demand is certainly a key driver behind the plans that many European countries were making to launch instant payment solutions, but a potential lack of interoperability and move to a landscape of fragmented solutions would have been contrary to the broader move towards harmonisation of electronic payments. As a result, the European Payments Council (EPC) created a pan-European instant payment solution in the form of the Single Euro Payments Area (SEPA) Instant Credit Transfer scheme, which was published in November 2016.
Instant – or real-time – payments represent a new frontier in the harmonisation of payments in SEPA now that migration to its credit transfers and direct debits is almost completed.
Rabobank in the Netherlands is among the first banks to implement a new system to support instant payments and has, therefore, cemented its place as a front runner in the SEPA Instant Credit Transfer space.
“We are keen to be an early mover, and the main reason is that clients are asking us about instant payments more. In general, there is a desire for 24/7 banking. There have been many discussions over the years about non-banking days in the Netherlands and, now, card payments in shops are credited on banking and non-banking days in the merchants’ accounts. We were the first to solve that problem, and we pleased our customers by giving them what they asked for. We have a 24/7 culture now, which is why we have iDEAL for ecommerce transactions, which guarantees payment and credits the merchant’s account the next day,” says Erik Kwakkel, executive vice-president of payment services at Rabobank.
“Now, with instant payment, the funds are received in five seconds. That is becoming the new normal, but it takes time to implement the infrastructure, which is why we have to start early. There are risks when you are innovative because the first mover always finds the obstacles, but the risks for instant payments are limited. At the other end, there is a clean slate, so you can play a part in creating the new standard. I don’t believe in creating the standard before going to market because standards come to life after you have launched something new,” he explains.
Tried and tested infrastructure
There is a clear definition of what instant payments mean, according to the Euro Retail Payments Board (ERPB), the body chaired by the European Central Bank that brings together the supply and demand sides of the industry to address strategic retail payments issues. The ERPB definition states that instant payments are electronic retail payment solutions available 24 hours a day, 365 days a year that result in the immediate or close to immediate interbank clearing of the transaction and crediting of the payee’s account with confirmation to the payer within seconds of payment initiation.
Instant payments have the potential to become widespread in the person-to- person and person-to-business segments, where they could largely replace cash and cheques. This would not only be more cost-efficient, but would also facilitate electronic and mobile-commerce payments and, therefore, mark another step towards the broader goal of a digital Europe. For customers, the appeal is obvious and there is no doubt that a significant advantage is to be gained for any bank that comes to market first, with the right infrastructure and the right products.
In January, Rabobank announced that it is implementing ACI Worldwide’s UP Immediate Payments solution to support SEPA instant payments. The solution seamlessly integrates with existing payments and back-office systems to provide real-time processing to one or more networks through a single platform.
“Choosing the right solution is always a long and intensive process. We did a normal RFP to see what the market would bring us, and we scored the different solutions. The most important criterion for us was to have infrastructure that was proven and robust. We use ACI for our card platform, and the performance from that solid and proven solution has always been very good. Pricing is important, too, and the ACI Immediate Payments solution also had all the functionality to meet our requirements,” remarks Kwakkel.
“At the moment, we are in the very early stages, as we have just chosen the system, but we promise to have the infrastructure ready in the Netherlands in 2019. There will be many challenges along the way so it is very important that we don’t run this project on our own,” he adds.
Working together to keep banks in the loop
As with so many other major developments in the Dutch banking market, Rabobank will not have to push this project forward in isolation. Between them, ING, Rabobank and ABN AMRO have the lion’s share of the domestic market for financial services, and they have proved over the years that cooperation between them helps drive forward any change in infrastructure faster and more efficiently.
“We have to run this project with the other Dutch banks and it is going well. We all have a good habit of working well together; we need each other. If we agree on a way forward, then that is good for all of us,” says Kwakkel.
The speed with which Rabobank has moved into the instant payments space suggests a need for urgency that often comes in response to threats posed by new competitors. It is no secret that financial services is being shaken up by new entrants offering innovative solutions and unencumbered by legacy systems, but Kwakkel makes it clear that Rabobank’s decision to move rapidly into this space is not primarily driven by the need to get ahead of new challengers in the market. While he admits that may be one catalyst, the priority is to look at how customers’ needs are changing and ensure that the bank can meet them.
“It is all about creating the best possible option for our customers. After 2019, when the infrastructure is in place, we will start adding services. For transferring funds to the receiver as soon as possible, one easy way could be peer-to-peer (P2P) solutions that will get customers used to instant payment services. Banks are already building those solutions on different infrastructures – every bank in the Netherlands is working on a P2P solution – but none of them will be the optimal one from an infrastructure perspective,” he says.
“With the development of mobile payments in shops, we will see banks and new entrants into the market develop new services around mobile payments, and I would not be surprised if these are built on the new instant payments infrastructure. We will certainly see banks looking at possibilities with mobile phones.”
Getting ahead of a rising demand curve
Demand for instant payments will be driven by two key factors. Firstly, customers will increasingly expect instant payment solutions from their banks. Secondly, banks will push new and existing products to the new, faster infrastructure.
“It could be more cost-efficient for banks to do that,” says Kwakkel, “but a lot depends on the environment. It may well be cheaper to use the new infrastructure so banks will see it as the better operational environment. Both will drive demand higher, which is one reason we chose ACI’s solution; it is very scalable.”
In general, Kwakkel is positive about the catalyst SEPA has provided for many new developments in financial services. Though the initial focus on cross-border payments may not, in his eyes, have been much of a revolution for his customers – the vast majority of whom were either unaffected by the change or could use existing solutions from Mastercard or Visa – he sees the move to instant payments as a significant step forward.
“SEPA was a ‘must-do’ and it laid the groundwork for more new developments.
SEPA took a long time to establish the standard for direct debit transactions and credit transfers, and got everyone to agree before implementation. I think it is better to move forward faster and to be more flexible. We learn by doing. We did the same for mobile payments and we learned a lot. It may cost money and time, but you can’t learn anything unless you do it.”
It is clear that Kwakkel believes in acting quickly. His approach is to avoid hesitation and instead take practical steps to bring innovative ideas to life. That is precisely what Rabobank and its fellow banks in the Netherlands are doing with instant payments, and, no doubt, they will drag others along in their wake.