Over the next five years, instant payments are expected to catalyze a complete transformation of payments and banking, paving the way for a truly digital service model. This shift will present significant challenges for banks, forcing them to reinvent their operations and update their systems to handle skyrocketing transaction volumes, according to a new report from banking technology provider FIS. However, it will also open doors to new opportunities through innovation and product development.
In a new report released October 9 and produced in collaboration with Payments Cards and Mobile, FIS examine the instant payments revolution, exploring how it will lead to true digital transformation, as well as the challenges and opportunities banks will face over the next five years as they strive to remain competitive, grow revenue and increase their profitability.
According to the report, the last decade has seen internet and mobile banking, as well as digital wallets, become widely used around the world. While these changes may seem transformative, they have often been achieved through fixes or additions to existing systems that are increasingly costly to maintain and unfit for purpose.
The coming phase of digital transformation, however, will be marked by the rise of instant payments during the second half of this decade. This shift will herald an era of fully digital banking and will be supported by the emergence of new products and services based on the ISO 20022 data standard, updated regulatory frameworks and safer, faster and frictionless payments, says the report.
The “second digital finance revolution”
This new era, considered the “second digital finance revolution,” will see the banking sector undergo changes similar to those expected in sectors such as media and healthcare. These changes are driven by a number of factors, the report says. On the one hand, regulators in most emerging and developed markets have taken steps to enable instant payments, recognizing both consumer demand and the economic benefits of instant payments.
In Europe, for example, the Instant Payment Regulation (IRP), which was adopted in March 2024, requires all banks, financial institutions and payment service providers in the European Union (EU) to offer their customers instant payments around the clock, at no additional cost.
The rule change led to a substantial increase in instant payments, with daily transaction volumes surpassing 2.8 million by April 2024, an increase of more than 20% year-on-year, according to Banking Authority data. European. to show.
The FIS predicts that significant changes will begin to emerge in December 2024, as banks will need to demonstrate their ability to handle processing, fraud, sanctions screening and other tasks in less than ten seconds.
Data standardization is another trend marking this new era. In 2004, the International Organization for Standardization (ISO) introduced Data Standard 20022 provide the financial sector with a common platform for sending payment messages and exchanging payment data. As the successor to ISO 15022, ISO 20022 has been widely adopted globally, gradually becoming the standard.
This means that banks are now facing unprecedented demands on processing capacity, and must handle higher transaction volumes and speed than ever before.
In addition, the European Digital Operational Resilience Act (DORA), which will apply from January 17, 2025, it will impose strict cybersecurity requirements on EU banks, their suppliers and third-party partners, highlighting the need for advanced cybersecurity tools and infrastructure upgrades.
This combination of consumer demand, regulatory pressure, evolving international standards and competition from digitally native challengers has put significant pressure on banks to modernize their operations.
New opportunities
FIS warns that over the next five years, banks that have not yet undertaken a complete transformation of their payment software architectures will struggle to handle the high volume and high speed of instant payments.
Conversely, banks that take steps now to modernize their systems will unlock rich opportunities in new products and services, reduced maintenance costs and other benefits, including being first to market. innovative products based on the ISO 20022 standard.
According to the report, the ISO 20022 standard itself offers a rich opportunity because it integrates rich transaction and customer data. This allows banks to analyze their product usage patterns, refine their fraud prevention strategies, and identify new product and service opportunities.
Instant payment rails also provide opportunities for innovative new services. Request-to-pay (RTP), for example, is a digital payment solution that allows a payee to send a payment request to a payer.
The European Payments Council (EPC), which first released its Regulation on the RTP system for the Single European Payments Area (SEPA) of November 2020 is currently pushing for the adoption of RTP across the bloc.
Beneficiary Verification (VoP) is another service expected to be launched by the EPC by April 2025. This service, which has existed in the UK under the name Confirmation of Payee since 2019, will help reduce fraud and scams by allowing payers to verify the identity of the party they are paying.
Instant payments have grown significantly in recent years. According to According to ACI Worldwide, a payment technology provider, real-time payment transactions reached a new record of 266.2 billion transactions in 2023, representing a substantial year-over-year growth of 42.3%.
Countries like India and Thailand are already leading the instant payment revolution, with real-time payments being the primary payment method. By 2023, real-time payments accounted for 53.4% of domestic transactions in India and 43.2% in Thailand, highlighting their rise in emerging markets.
The World Bank predicts real-time payments growth will continue globally, with instant payments expected grow at a compound annual growth rate of 35.5% until 2030.
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