The concept of immediate payments may date back to the 1970s, but the rollout of real-time payment (RTP) systems has only begun to accelerate over the last 15 years or so. Their progress across the world now appears unstoppable, driven by strong consumer demand, with Kingdom Saudi Arabia (KSA) and the United Arab Emirates (UAE) now making enormous strides in moving to real-time payments.
A region moving forward
In fact, both KSA and the UAE are in the process of moving from aging infrastructure to a system built on modern technology. KSA’s national bill payment system, SADAD, has been running for about 15 years, while real-time gross settlement (RTGS) system, SARIE – designed to process relatively small volumes of very large transactions, similar to CHAPS in the UK or FedWire in the US – dates back to 1990.
The UAE’s main payment system, UAEFTS, was created in 2001 and the latest edition, version 3.0, has been running since 2012. While these systems weren’t designed to handle real-time payments, both countries have an opportunity to leapfrog the automated clearing house stage and move straight to instant or real-time payments.
To that end, in April 2019, Saudi Arabia announced plans to launch a real-time payment system built by Vocalink, a subsidiary of Mastercard. The new system will be run by Saudi Payments, a subsidiary of Saudi Arabian Monetary Authority, and will enable account-to-account transfers to be conducted instantly between consumers, businesses and banks. The new system is expected to have e-invoicing and billing, credit transfers, real-time payment acknowledgement, remittances and bulk payment features added in phases. It is currently scheduled to go live in the fourth quarter of 2020 with a group of up to four banks, with remaining banks coming on board in the first quarter of 2021.
In July 2019, the UAE Central Bank launched an interim RTP solution called Immediate Payment Instruction/Interface (IPI), built on the existing UAEFTS infrastructure, which enables domestic transfers up to AED 10,000 to be settled in real time. It is now looking to develop a fully-fledged RTP system called Instant Payments Platform (IPP) and is in a phase of vendor evaluation.
Open APIs driving shift towards real-time payments
Behind the development of these systems is strong consumer and business demand for RTP. Both bank and non-bank businesses are keen on the potential of new services enabled by RTP and open APIs, or Open Banking. The region’s young, aspiring population is demanding payment services that are faster, cheaper and more frictionless, supported by standardization and interoperability across the region and beyond.
As the UAE and KSA’s national RTP schemes gear up, demand for instant payments is being underlined by rising usage of services like Samsung Pay and Apple Pay, which are already available in the region. A recent survey conducted by VISA and the UAE Department of Economic Development (DED) found that UAE consumers increasingly prefer digital payments over cash.
As in other regions of the world, RTP brings a wide range of benefits for banks in KSA and the UAE. At a general level, it helps to future-proof a bank by positioning it to participate in the global move towards Open Banking. Immediate payment is a key aspect of many Open Banking services that enable customers to share their transaction data with third parties through application programming interfaces (APIs). As Open Banking services develop in the Middle East in the coming years, banks with RTP capabilities will be well-placed to benefit.
As with any technology shift, the introduction of RTP creates both upside opportunities and downside risks for banks. Banks that embrace it have the opportunity to stand out from the crowd by offering new services and delivering better customer experiences. Those that do not risk being left behind and potentially losing relevance and market share.
Adding value with platform models
For banks, the potential upside of RTP is clear, although there are factors they must clearly bear in mind. They will have to take decisive steps to update their aging systems, rethink their product offerings and be careful that the embrace of RTP and Open Banking does not cannibalize existing revenues. The speed and convenience of RTP services means that once customers experience them, they tend to shift from existing payments methods that may actually be more profitable for the bank. To counteract this, banks will need to re-visit and update their customer journeys to make them as compelling as possible, building loyalty and propensity to buy other services.
Revenues from RTP can be further boosted by providing value-added services targeted at specific customer use cases. These might involve helping customers manage their cash better, perhaps through virtual accounts or simple addressing, such as that based on a mobile number.
Banks must also understand that the sheer speed and volume of RTP transactions and systems can bring challenges around fraud. With existing immediate payment schemes around the world, a particular focus for criminals has been using request-to-pay ‘push’ transactions to defraud customers. Banks should educate customers of these risks while developing automated safeguards.
Simply offering immediate payments to customers may not generate a huge amount of direct revenue for a bank. The fees for real-time payments are usually kept low, with some governments mandating them to be free. The real value will be derived from services built on RTP and Open Banking, thus enhancing customer loyalty with additional innovative services.