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Real Time Is Now Getting Real

April 30, 2018
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By Geri Westphal

The pace of change in banking and technology is faster than ever before, and banks like HSBC and fintechs are teaming up to create operational efficiencies and maximize value for clients across all lines of business. 

In late 2016, we sat down with Thomas Halpin, executive vice president and global head of payment products at HSBC, to discuss the rapid innovation in payment strategies. We learned that real-time payments were expected to have a very large impact on how businesses settled accounts payable (AP) and accounts receivable (AR). At that time, technology advances were making it possible for real-time payments to be executed, but there was more work to be done across the entire payment chain to achieve the intended efficiencies.

Here we are nearly 18 months later and the pace of change is faster than ever before. Banks no longer view fintech as a disrupter, but instead as an enabler. Fintech did not and will not put banks out of business with their technology solutions. "Fintech is really exciting for us," said Joanne Towers, head of payments product for Europe, global liquidity and cash management at HSBC. "At HSBC, we partner with fintech to allow us to strengthen our solutions with more integrated propositions."

HSBC has a multifaceted fintech strategy that utilizes a mix of collaborations, strategic partnerships and venture investments, along with a global strategic investment fund that has invested in fintech across data and artificial intelligence, open banking, client networks, security, crime prevention and identity protection.

Digital and emerging technologies are as important to HSBC as they are to its clients. This is demonstrated by the fact that HSBC has committed to spending over $2 billion on digital transformation between 2015–2020 to enhance customer propositions, improve operational efficiencies and maximize value for its clients across all lines of business.

The European Commission's commitment to unify the European markets for financial services is strong, and the work it is doing with several initiatives is expected to greatly harmonize the domestic regulations.

According to Ms. Towers, "I can't remember a time when there was so much change across Europe, all coming at once, from Brexit, the rollout of real-time payments, increased regulatory changes, for example, General Data Protection Regulation (GDPR), Wire Transfer Regulation 2 (WTR2), UK Cheque Imaging, Second Payment Service Directive (PSD2), UK Competition and Markets Authority (CMA) and Open Banking, and the new UK payments architecture, to name a few." European corporates have many concurrent challenges that are complex, hold varying degrees of risk and require a lot of juggling to decide the proper prioritization and how to implement. What needs to be done now and what can wait?

In line with the options that this new digital environment is bringing, customers' business models are changing as they develop new and adjacent services to their customers. This also enables them to optimize even further their working capital, but requires equally that they put in place the right support and a secure operational model.

Working Better Together

Based on interactions with the bank's clients, Michèle Zaquine, head of payments advisory for Europe, global liquidity and cash management at HSBC, says that corporates are embracing technology advancements quicker than ever before. "They see the potential gains with implementing SEPA Instant Credit Transfer (SCT Inst) because of the richness of the XML formats as well as the overlay services down the line with proxies and aliases."

According to Ms. Towers, there are around 48 RTP infrastructures in place around the world, with more than 16 implemented in 2017. Although these infrastructures are country-specific, there is a need for consistent technology and propositions to allow a seamless interface to the customer.

"Interoperability is very powerful and will need to play a pivotal role in future technologies if their full potential is to be realized. Many clients are not purely domestic in how they operate and they need a seamless payment proposition that is cross-border or at least regional in nature," said Ms. Towers. "This will require greater use of APIs [application programming interface], which are one of the key building blocks supporting interoperability."

Interoperability is defined as the ability of products or systems to work with other products or systems without friction, which enables users to make electronic payment transactions with any other user in a convenient, affordable, fast, seamless and secure way.

According to Deloitte's Insight report, Technology Trends 2018, in early 2017 the number of public APIs available surpassed 18,000, representing nearly 12% growth over the previous year. Interoperability represents both an important feature of payment system efficiency and, at the same time, an important source of risk.

HSBC expects to offer multiple services through APIs in the near future, including but not limited to, payments and account information (from HSBC and third-party banks) as both a provider and a receiver of information and instructions. The advent of open banking is also bringing an industrywide shift to the adoption of APIs across the various channels that banks use to interact with customers. In the near future, APIs will enable seamless integration with different banks, third-party payment providers and merchant service providers.

Open Banking—Real or Illusion?

Open banking is a global trend that involves different initiatives across the globe. In Europe there is both the Open Banking Regulation in the UK and PSD2 (Second Payment Service Directive). These initiatives, or regulations as the case may be, are emphasizing security, innovation and open market competition. In the case of Europe, compliance with PSD2 is required in two phases: Pillar 1 (transparency) became effective on Jan. 13, 2018, and Pillars 2 (security) and 3 (access to accounts) are effective in Q3 2019.

With PSD2, a number of important changes will take place in Europe. It is expected to be a game changer going forward. The new EU directive will enable bank customers, both consumers and businesses, to use third-party providers to manage their finances, including bill payments, P2P transfers and spending analysis. Banks are obligated to provide these third-party providers access to their customers' accounts through open APIs. Through the directive, the European Commission seeks to improve innovation, reinforce consumer protection and improve the security of internet payments and account access with the EU and EEA.

There are two types of providers: AISPs (Account Information Service Providers) and PISPs (Payment Initiation Service Providers). AISPs are service providers with access to the account information of bank customers, so they could analyze a user's spending behavior or aggregate a user's account information from several banks into one overview. PISPs are providers that can initiate a payment on behalf of a user.

New entrants can now focus on offering just a single proposition and connect to other service providers through APIs to offer additional services. With consumers becoming more digital and mobile in their approach to commerce and corporates now demanding the same, banks and nonbanks will need to follow the trend. Tech-savvy customers are asking for financial services that are faster, more personalized, easily accessible and less costly. They are getting used to using nonbanks for financial tasks that complement their broader payment experience or processes. Competition for the customer touchpoints and secure access to customer data is fiercer than ever, and players in this space will be required to not only think of specific transactions but to look more broadly at the full customer journey. For consumers, this might mean providing services that support their buying decisions. For corporates, this could mean a robust, integrated view of the full supply-chain management program, or how banks support them in the integrated payments experience they provide for their customers.

Sepa Batch Sepa Instant PaymentsTHE RISE OF REAL-TIME PAYMENTS

Not only will the rise of open banking and APIs transform the payments experience, but further adoption of real-time payments, such as SEPA Instant Credit Transfer (SCT Inst) in Europe, will take us further in meeting the needs and demands of consumers and corporates alike.

Europe spent 14 years and billions of euros implementing SEPA, which was touted as a cheaper way for consumers and companies to make and receive ACH payments across Europe. Although SEPA was a very important improvement in standardizing payments across Europe, many banks did not realize the cost savings they forecast at the start of this new program.

Often seen as a solution for consumers only in peer to peer (P2P) payments, increasingly, with real-time payments taking center stage, corporates are looking to see if the existing systems can be reused to enable real-time payments and faster, cheaper, more effective AP and AR with request for pay solutions (pull payments). SCT Inst defines euro real-time payment flows using ISO XML 20022, which with SEPA has become the standard since the SEPA end date.

While the traditional SEPA batch will still be useful after SCT Inst is implemented, since it will focus on high-volume settlement of non-urgent payments, real-time payments offer great promise going forward. Corporates have noted that real-time payments are useful in several scenarios, such as emergency payout payments, salary payments, for example, for contingency or seasonal workers, and emergency payroll, and in supplier payments where certainty of goods received is required before payment. With the growth seen in adoption of real-time payments in the UK, and further afield in Singapore, India and China, real time will become the norm.

Since real-time payments are irrevocable and there is little or no recourse if a payment is sent in error or fraudulently, there does need to be consideration given (as has been done in the UK) to allowing customers to receive recalled funds back in the event of misdirected payments. The security around real-time payments must also be very secure. There can be no compromise. There is expected to be continued use of cards though, especially in mature markets where cards are king, and at point of sale, where buyers are looking for immediacy of payment, which cards will continue to provide. Over time, the introduction of request for pay services via real-time payments as a means to collect funds instantly, with customer authority at point of payment, is also expected to further drive customer behavior, and new innovative ecosystems will evolve.

Let's Go Virtual

With real-time payments becoming more acceptable, the need for instant clearing and availability of funds will require an instant reconciliation mechanism, which virtual account solutions are well-positioned to address. In addition, as corporate clients mature in their cash management journey, treasurers continue to streamline processing and centralize their global operations. Sustained by ongoing cost reduction goals and digitization programs, the appetite for treasury centralization has increased. Virtual accounts are seen as a complement to the digital agenda for transaction banking and as enabling corporates to achieve their objectives around real time, visibility and working capital optimization. It is from this perspective that there is an increased demand for virtual accounts in the marketplace.

A virtual account is fundamentally a ledger record linked to a physical bank account that can be used by treasurers to more effectively manage working capital, while at the same time significantly reducing bank account fees. A virtual account offers similar functionalities as a traditional bank account but without the associated administrative burden and costs.

Virtual accounts have been prevalent in Asia for over a decade, but more in a receivables context. The reemergence of virtual accounts in Europe is largely due to the sophistication the product offers and the variety of business structures it can support in both the payables and receivables context.

Many believe virtual account structures will be a convenient solution to address some of the pressures currently in the market. Virtual accounts could provide a viable alternative to notional pooling and allow banks to save on regulatory capital costs. Virtual accounts also facilitate a variety of POBO and ROBO structures.

HSBC is now working with vendors to build a comprehensive next generation virtual account solution that will cover a much wider scope, providing organizations with a cost-effective means of centralizing AP and AR. The next generation virtual account structure (ngVA) will become increasingly important as a way to view and mobilize liquidity, building on the traditional advantages of virtual accounts with an additional self-service element.

This self-service component will enable clients to open and close virtual accounts quickly to suit their business needs. Under the virtual account structure, liquidity is automatically concentrated in real time into the physical account that acts as the header for the virtual structure. This replaces the traditional notional pooling structure and adds greater flexibility with improved transparency, visibility and forecast accuracy.

With this solution, clients will have greater flexibility to design and open complex virtual account hierarchies, while maintaining full control of the structure. Clients could theoretically run their entire operations with just one physical bank account per currency, thereby enabling them to transform their approach to cash management while improving automation and reducing costs.

How can treasurers prepare for the changes that are coming?

Are You Ready for Real-Time Treasury?

We have now entered the age of real-time treasury and many of the new innovations are likely to significantly change how we do business. Looking back at the progress in the past 18 months leaves us to ponder what the next 18 months will bring. Will we even recognize the days of old when we didn't process payments in real time? The mantra "better, smarter, faster, cheaper" has taken on a whole new meaning. Climb aboard, the world of real-time treasury is an exciting place to be!

HSBC's Technology Advisory Board

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