How platform development determines real-time payment success

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Speed stands at the forefront of any real-time payments deployment, but the real staying power in new payments innovation rides on the development philosophy of the platform itself.

As the number of real-time payments platforms grow globally, more players with new ideas and more services will enter the field, putting pressure on banks and "first mover" tech companies that have had products in the market for the past few years.

Much of what will ultimately make its way into the marketplace as faster payment options for merchants and consumers will depend greatly on the strategies that platform developers will embrace, said Mohanbir Sawhney, McCormick Tribune professor of technology at the Kellogg School of Management at Northwestern University.

"Providers are learning that the platform is not about the product and it's not about the device," Sawhney said Tuesday at the virtual Chicago Payments Symposium hosted by the Federal Reserve Bank of Chicago. "It's about addressing the challenges of platform innovation on how to handle the money side and subsidy side, and how much to share with partners."

It is essential that banks or new technology providers embrace platform development soon, as it becomes more difficult to overcome first movers like Apple, Google and others, Sawhney added.

A key part of that development is making sure the platform and its underlying services address something consumers or merchants actually want or need.

"Mobile payments came about years ago with no problem to solve," Sawhney noted. "That is why adoption has remained slow in the U.S. at only 8.8% (according to Statista)."

By contrast, China enjoys a 35.2% adoption rate because the country had such a fragmented payments ecosystem, and it was difficult for many consumers to get different types of accounts or access to payment vehicles, he added. "In that regard, the platform providers have to have something else to offer to solve a problem, and in the case of China, it would be an easy, frictionless payment method for underserved segments."

Examples of developing real-time payment platforms dot the globe, from The Clearing House Real-Time Payments in the U.S. to the Single Euro Payment Area model in Europe.

Europe has seen more interest in the development of new schemes and use of the SEPA Instant Credit Transfer, which launched in 2017. The U.K. also has the Faster Payments Service in operation to reduce payment times between member banks.

Australia has operated its New Payments Platform, an account-to-account faster payments platform between banks, for two years now whilePayments Canadais supporting a reliance on digital services to help fuel the pandemic recovery.

Ottawa-based Payments Canada, which has more than 100 members in financial services, payments and other industries, reports to the government and is responsible for clearing about $218 billion in transactions daily through digital channels and checks.

The various developments have a key aspect in common. Banks that hop on board with faster payments schemes have to be prepared to view themselves as a multi-channel provider.

"The larger multi-country, multi-channel banks have this experience of fragmentation when they operate across borders within Europe and on a global scale, as they are users of different ACH infrastructures, and owners of many of those as well," said Daniel Szmukler, director of the Euro Banking Association.

"They are fragmenting not only their payment flows; they fragment liquidity by currency and, as is the case in Europe, you can have 10 other currencies beside the euro," Szmukler added. "A bank that wants to operate across Europe has to have a multi-currency and multi-channel approach."

Most of the providers are offering services like lending or transaction-based credit programs that have long been the calling cards of banks.

"That is where we are seeing the next stage of growth for these non-banks that have used real-time payments as a way to create a good customer base, and now they are looking at ways to monetize that base," said Sushil Malhotra, managing director and partner with Boston Consulting Group. "That is the playbook we see playing out, at least in the emerging economies."

Another growing trend in the U.S. and other countries is account-to-account faster payments, Malhotra added. "Because these are based on real-time payments, what other types of services can you lump on top of those? We see those as lending and other features on top of on-demand pay and faster pay in the gig economy."

In the wider view of a payments ecosystem, content providers are increasingly playing an important role, said Chris Hamilton, CEO of BankServ Africa, operator of South Africa's payments infrastructure and Africa's largest clearinghouse.

"The nuancing in payments is very interesting because there is not just one type of content provider to the platform," Hamilton said. "In places like India, there are networks that sit on top of networks. You are starting to see that type of complexity."

India has seen Jio Money and Paytm lock in their digital payment market niches, while the country also launched the Unified Payments Interface real-time payments platform to get the banks also involved in a digital payment landscape. Jio Money and Paytm both essentially operate "on top" of the UPI network.

"It's all a good thing, because what we are managing to achieve here is a lot of interoperability while adding a lot of new content and services," Hamilton added. "Then you have the end user connecting to those platforms and using their banks as the stored value, and using the services of a Paytm or Jio, and all in the background it is all knitted together by a deep, underlying platform."

That kind of ecosystem is vital and the vision that banks "should try to get their heads around," Hamilton added. "If you get bogged down in what new service you want to provide, you are going to self-limit the opportunities here. This is a strategic play for the emerging digital economy."

Ultimately, payment platform developers have to be wary of their desire for revenue flow and not to let that lead to bad decisions.

"In the early stages of platform development you have to avoid being 'value greedy,'" Northwestern's Sawhney said. "You have to leave some money on the table for partners and provide incentives to others to join the platform."

Apple saw the potential to generate even more revenue by not being too greedy with certain technology products, Sawhney noted. The company went from being the content provider of its music services, to eventually sitting in the middle of a process with content providers on one side and music buyers on the other side — with revenue coming from both.

"You have to reduce the cost of the work involved in building the platform," he added. "Look at Android in offering a free platform without licensing fees and getting revenue from other sources to offset that."

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Real-time payments Payment processing Digital payments Cross border payments Federal Reserve Bank of Chicago
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