Will Instant Payments be more popular than coffee in Italy?
The benefits of being an early-adopter of Instant Payments
Even though EBA Clearing launched SEPA Instant Payments in November 2017 via RT1, so far only a handful of banks (early-adopters) have decided to offer the Instant Payment service (SCT Inst) to their customers. The prime reason for the delay in adoption of SCT Inst is the baggage of legacy systems that are preventing banks from offering 24×7, real-time services. However, the ‘early-adopter’ banks that are connected to RT1 now stand to gain on account of their foresightedness and technical prowess.
Buongiorno early adopters
Let’s look at the Italian market. Three Italian banks – Gruppo Banca Sella, Intesa Sanpaolo and UniCredit went live with SCT Inst by connecting to EBA Clearing’s RT1 system last year. This achievement gathered a lot of attention and publicity for these banks – a fact that was reflected in almost all discussions at Payvolution 2017 in Milan.
Additionally, due to limited competition, these banks can gain back a sizeable portion of their investments in Instant Payments by charging a small premium to consumers on a per payment basis. This fee ranges from a few cents to up to €3.00 depending upon the type of customer, value of payment, etc. Also, to drive customer adoption of Instant Payments, banks have decided to postpone the application of fees until April 2018. Take for example Banca Sella – it will start charging its customers a standard fee of €2.30 per payment from this April. Until then, instant credit transfers are free of charge.
It pays to be an early adopter
The above examples are particularly important as they lay out a clear path for banks to position themselves as modern and millennial focused. Instant Payments form the very basis of an API economy and will become ‘the new normal’ in the next few years. It is therefore very important to be an early adopter of Instant Payments and cash-in on the opportunity before the fees evaporate on account of competition and new customer-centric regulations like PSD2.
Another cause of concern for the central banks of Europe is the high usage of cash for transactions both big and small. For example, Italy being a cash heavy society, has an average number of card transactions made by a customer of just around 25 per year whereas it is 114 in France. Cash is susceptible to theft, damage and incurs a significant maintenance cost. To reduce cash usage, central banks have identified Instant Payments as a viable and convenient tactic.
Our recent study on ‘Instant Payments in the post PSD2 landscape’ showed that even for a cash heavy economy with little e-commerce usage such as Italy there would be substantial e-commerce growth over the next few years. Further highlighted in the following figure.
Boosted by increased consumer convenience, Instant Payments will overtake cards by 2025 and become one of the main online payment tools in Europe, accounting for roughly €338bn of direct online expenditure. This is probably the strongest business case for adoption of Instant Payments at the earliest.
If I was running an Italian bank, I would be pressing the button on going live with Instant Payments at the earliest. I would be looking at solutions that are quick and effective to implement and provide on-line channels to compete with the internet payment providers like Google, PayPal, Alipay, etc. A ‘Wait & Watch’ approach will deny your customers the chance to use Instant Payments service and thus incur a significant risk of losing their business.
Banks must now start formulating their implementation strategies and choose the right solution for addressing their Instant Payment needs. They should consider that once Instant Payments become embedded in the end-to-end customer journey of an app-based economy, then even for currently cash heavy societies there could be a massive shift of payments moving away from cash. Being an early adopter of Instant Payments is a potent solution to meet these digitisation challenges head-on.
While the decrease in the costs of cash handling for banks and the wider benefits to society could be interesting, being an early adopter means that with the right technology solutions, banks can start small, adapt to market needs and respond effectively to the ever-changing consumer demands.