The Power of Real-Time Payments on a Global Scale

The PaymentsJournal Podcast

The United States employs multiple real-time payment schemes; however, unlike those in many emerging markets, these methods are not driven by a central government or central bank. In the absence of a centralized entity to organize payment processes, other stakeholders must take the lead in enabling instant, cross-border transactions.

In a recent PaymentsJournal podcast, Alex Johnson, Chief Payments Officer at Nium and Albert Bodine, Director of Commercial and Enterprise Payments at Javelin Strategy & Research, discussed the latest efforts aimed at integrating the U.S. into the realm of international real-time payments.

The U.S Plays Catch-Up

In many ways, the U.S. economic landscape lags behind some emerging economies in payments innovation. This is partly because emerging markets have faced more pressing challenges, driving them to harness technological advancements to help solve specific, regionally unique use cases.

“Compared to networks like UPI in India and Pix in Brazil, our level of maturity and sophistication in the United States is not quite there yet,” Bodine said. “As most people know, RTP and FedNow are not even interoperable now.”

But, it’s time for the U.S. to catch up. One of the key drivers of payments innovation in the U.S. is the global supply chain. Even small and medium-sized businesses are starting to source goods and services from regions like India. In India, real-time payments are the most widely used payment method for both citizens and businesses. Extending the supply chain to India therefore requires developing systems that can facilitate real-time payments effectively in that market.

A significant advantage of real-time payments is their efficiency. They always provide complete visibility into the payment’s status, letting buyers optimize their working capital for a longer period. However, sellers may prefer traditional payment methods, as they often receive their funds slightly earlier.

“CFOs don’t want to see money go out of their account in 20 seconds,” said Bodine. “We have to look at the strategic coexistence of all the pay types and not assume that any one is going to be applicable to all situations.”

Fraud Concerns

With the rise of real-time payments, there has been an increase in account-to-account fraud for those sending payments. But, real-time payments are not inherently riskier than traditional methods. Since the money moves instantly, there is never any question about its status at any point in time.

Account verification plays a big role in boosting confidence in the global adoption of real-time payments. For example, if someone is completing a transaction to Nigeria or Thailand, it’s now possible to verify the ownership of the receiving account.

“You can put in an account number and name, ping our API, and within seconds you get a response to say, ‘Yep, that matches’ or ‘No, it doesn’t,’” said Johnson. “In some jurisdictions, we can also pass back the actual name on the account. You can be absolutely certain that the money’s going to exactly who you think it’s going to, separate from and prior to a transaction. That’s a huge prevention of fraud, giving people more comfort in using real time payments. We’ve seen a 58% reduction in return transactions just by the use of this tool.”

A Partnering Plan

The global cross-border payments network is led by Swift, run by a consortium of international banks. What many may not realize is that a Swift transaction is not the payment itself, but rather the messaging service.

Swift acts as a tool that creates interoperability between different payment systems. Most financial institutions have already completed the integration with Swift, allowing them to use its functionality to send wires globally.

“At Nium, we can now accept transactions via Swift messages from financial institutions,” said Johnson. “They can make Nium an intermediary on those transactions, and we can route those payments into mostly real time. About 85% of the transactions we handle are delivered within 15 minutes or less.”

Because the differing global payment systems don’t speak to each other, a third-party like Nium is needed to bridge these connections. With the connections that have been made, these third parties are now beginning to create locally interoperable systems.

“Fortune 1,000 companies absolutely need to partner in these situations,” said Bodine. “They simply don’t have the resources or funding to support and maintain legacy systems while they’re branching out of these areas. Partnering with organizations like Nium is incredibly important.”

The Promise of ISO 20022

Despite the challenges of implementing it as a new messaging standard, ISO 20022 has been a boon to the world of instant payments.

“If we could get every scheme, SWIFT and otherwise, to ISO 20022, then interoperability becomes so easy,” said Johnson. “But a lot of the local schemes aren’t there yet. Once everyone is talking the same language, the translation between a SWIFT message to whatever that local scheme is becomes a lot easier.

“Interoperability will be a theme that we’ll continue to ride on in the next few years as we explore what that looks like,” she said. “There’s so much experimentation happening right now that I really look forward to seeing in the next couple years how this evolves.”

Bodine added: “We can communicate pretty much with every human being on earth. There is absolutely no reason we shouldn’t be able to transact funds between every human being and every business on Earth.”

The post The Power of Real-Time Payments on a Global Scale appeared first on PaymentsJournal.