Instant Payments: Challenges and Considerations for its Implementation

Soniya Khanna

06 Jul, 2023

In a payment industry as dynamic as today, faster payments have become the norm, and it is no longer just an option for market participants and regulators. Instant payments have the potential to deliver payments in no time, and its 24*7 availability adds to its advantage.

Instant payments: Insights from India

India has historically used cash as their primary mode of payment. Various estimates indicate that until 2015, more than 90% of consumer transactions and 65% of the total payment value in India was done through cash in India.

However, with the increase in mobile penetration, evolving technology, the entry of new players in the payments ecosystem, and initiatives by the Reserve bank, India’s payments landscape has undergone a revolutionary transformation.

After the launch of IMPS (Immediate Payments Service), India kicked started its payment journey. IMPS provides an instant, 24/7, and interbank electronic fund transfer.

A further boost to India’s payments system ecosystem came in the month of April 2016 when the National Payments Corporation of India launched the UPI^[1] (Unified Payments Interface), a platform that facilitates instant 24*7 payment and collection through a set of application programming interfaces. Since 2017, the platform has grown by mammoth margins, with 142 banks live on UPI.

The rise of UPI testifies the fact that initiating instant credit transfers is only the beginning. If we assume that credit transfers would stimulate innovation in other domestic instant payment services, the example of India will help in knowing where less mature instant payment system is headed.

How can instant payments be beneficial in India?

Instant payment services can prove to be beneficial in the following ways:

• Meet customer demands and expectations

The customer demand and expectations are growing day by day, and they expect banks to provide services that are fast and secure at the same time. These payments services can satisfy this expectation of customers.

• Boost the growth of financial institution by offering 24*7 payments solutions

By offering a 24*7 payment solution, customers no longer require to wait for the opening up of bank branches. They can make transactions anytime. This convenience adds more customers, thereby boosting the overall growth of the financial institution.

• Lower costs

With instant payment solutions, more transactions are now being made digitally instead of cash; it means that the payments would be less expensive and more user friendly.

What has proved to be the biggest challenge in the implementation of instant payments solution in India?

Financial institutions have faced a number of challenges in the adoption of faster payments.

Some of the challenges are as follows:

• Legacy payment infrastructure

Modern payment mechanism needs technology infrastructure that doesn’t match the present legacy architecture at the disposal of some of the largest banks in the world. However, as all payment solutions move towards faster payment, banks are increasingly modernizing or overhauling their traditional architecture. Additionally, when we look from a cost or a load handling perspective, it becomes more difficult for banks to implement these modern payment mechanisms.

• Getting optimum balance, security, and frictionless payments

With faster payments, customers can make payments in no time, but with the reduction of payment time and payment touchpoints increasing because of open payment architecture, faster payments have now become vulnerable to security threats. There is a need to arrive at optimum balance with proper security procedures and also ensuring that the user experience remains convenient and easy.

• Liquidity management

The amount of transactions in real-time payments is unpredictable and large. Banks require managing their liquidity, considering faster payment services is functional round the clock.

• Regulations

In the implementation of multiple instant payment schemes, regulations have proved to be a vital cog in shaping the real-time payment infrastructure. A perfect example of this is the implementation of UPI in India, wherein the National Payments Corporation of India played a crucial role in the management of service level agreements.  

However, with high restriction compliance environment with regulators can deter innovation, with the market participants finding it tough to interpret and implement complicated regulations from multiple regulatory authorities. The regulators should ensure a balance between a healthy participation model and compliance.

Key considerations for successful implementation of the instant payments system

In this segment, we bring to you some of the essentials for its successful implementation:

• Combining open banking with real-time payments

Combining open banking with real-time payments will assist in creating effective overlay services that will benefit from onboarding participants to payments and then settlements.

• Modernization programs of legacy payments platforms

Banks must focus on their efforts to modernize current payment platforms and to reduce the number of platforms that they currently operate from, thereby reducing costs. 

• Real-time payments and security

There is a need to consider infrastructure and data-level security, and harmonizing data laws with open banking regulations will enable secure real-time payments. There should be clearly documented standardized Application Programming Interfaces, including metrics and KPIs, should be in place. It will ensure the maintenance of optimum balance between performance and security.

• Evaluation

In order to build faster payments infrastructure, a considerable investment is needed from the industry bodies. Banks globally have built services such as bill payments, lending, credit scoring models, and developing customer insights. There should be an evaluation of regulations, customer demands, and other exiting gaps in the market. 

Conclusion

Read our article:Digital Payment System & UPI Payment Gateway