Everyday Bank Blog

Loyalty programs: Do they really keep customers committed in the long term?

One trend to come out of our recent Global Consumer Pulse Research that banks might consider good news is the high but slowing growth in customer service expectations—a slowdown which is giving banks a chance to re-evaluate the ways they meet customer needs and catch up.

In line with last year, trustworthiness (35 percent), employee skills (33 percent), high quality of customer service (32 percent) and ease of doing business (32 percent) are the core drivers of customer satisfaction for banking, and contribute to the general pool of consumer expectations for customer service, which has increased greatly since 2007.

Unfortunately, the percentage of consumers switching providers due to poor service has decreased only slightly during that time, leading us to think that most companies are still not giving consumers the kind of service they want. Indeed, over the past few years, consumers have consistently said their biggest frustrations with providers include:

  • Failure to deliver on their promises.
  • Inefficient and slow customer service.
  • Lack of convenient interaction.
Read the report.

Read the report.

One method banks have implemented to try to stem the flow of customers switching to other providers is to offer customer loyalty programs. Research shows that the numbers of customers adopting these programs is on the rise. Across industries, the percentage of consumers saying they participate in at least one customer loyalty program has increased since 2009, as has the percentage of respondents indicating such programs persuade them to stay with a provider.

Among banking customers, one-third say that they participated in at least one loyalty program, about the same as last year. Efficiency of these programs (determined by measuring customers who stayed with their providers because of the program) remains at around 56 percent. This sounds positive, except that program adoption is primarily driven by the desire to gain access to the “best deals”—indicating a short-term loyalty that fails to keep customers committed for the long haul. Although consumers stated that their loyalty increased due to such programs, their actual behaviors demonstrate they continue to leave providers at a high rate.

What all this shows is that despite many customers being pleased with the customer service being offered by their current bank and taking advantage of loyalty programs to access the best deals, they are failing to remain committed for the long haul. Which begs the question: Are loyalty programs worth the effort to implement them?

Learn more about how banks can drive customer engagement and seize digital’s opportunity.

The power of three applies to governing your digital transformation

Most banks split the execution of any change with detailed handover between various disciplines. This traditional approach does not work for a digital strategy. Successful, scalable digital transformation requires three important roles: The technology entrepreneur, the banking entrepreneur and the digital entrepreneur.

Let’s take a closer look at each of the three:

Technology entrepreneur

This is the architect of your bank’s future capabilities. This entrepreneur introduces new concepts, such as platform-based thinking, to create a more open, scalable and flexible technology environment.

Banking entrepreneur

The entrepreneur who balances risk and business viability is essential to maintaining sustainable banking value. Quite often the CEO assumes this role as he or she understands the relationship between value and risk, and knows all the nuances of the bank—from revenue flow to cost to regulatory boundaries.

Digital entrepreneur

Read the report.

Read the report.

This role calls for a customer-centric mindset and skill in anticipating customer desires, trends and behaviors in the digital ecosystem. Using insight, this entrepreneur will shape the banking ecosystem and drive the revenue and process digitization agenda.

Where these three roles intersect is the customer experience, and that experience hinges upon these three entrepreneurs working together. With harmony and collaboration, they can set the digital vision for your bank, select services to be launched, define the strategy for digital capability development and guide a successful, long-term digital transformation.

There is great power in these three roles. Use them to your bank’s advantage to drive scalable innovation across your enterprise.

If you want to learn more about what else is key to a successful digital strategy in banking, I encourage you to read our recent report, “Digital strategy execution drives a new era of banking.”

An update on my 2015 Payment Predictions

On 29 December 2014, seated by a brightly burning fire at home, I penned 20 predictions for the Payments industry for 2015. So, half way through the year, how are the predictions faring?

At this stage, I can report interesting developments on half of the predictions (for the other half, you will have to wait until the end of the year). Overall, I can confidently say they are holding up well, and are on course to paint an accurate picture for the year. Read on to find out more:

Digital Currencies

  1. Bitcoin will develop strongly, but without significant support from the banking sector

Mid-year: Bitcoin continues to attract a lot of venture capital and FinTech attention. H1 2015 saw $373m invested in Bitcoin companies according to Coindesk (with $832m invested in total so far), but no bank has announced plans for Bitcoin payment services (the received wisdom shared by many, including banks, appears to be that it is good to embrace the technology, the “blockchain”, but it isn’t necessary or desirable to embrace Bitcoin the currency – this is somewhat misguided in my opinion, but understandable given regulatory uncertainty – more on this in next year’s predictions).

  1. Daily bitcoin transactions will rise from around 85 thousand transactions per day at the end of 2014 to an average of 130 – 170 thousand transactions per day by the end of 2015

Mid-year: Daily Bitcoin transactions ranged from 88 – 149 thousand transactions per day in June 2015, averaging 117 thousand transactions per day, a 34% increase over the 87 thousand transactions per day average in December 2014, and a 95% increase over June 2014. At this rate, daily Bitcoin transactions will average 155 thousand transactions per day in December 2015, in the middle of my target range. It is worth noting that the estimated daily limit of 300 thousand Bitcoin transactions per day is getting near, with already a peak of 214 thousand transactions recorded on 10 July (the Greece crisis probably was a factor) – how Bitcoin evolves to cope with this growth will be a key question for 2016.

  1. The banking sector will experiment with, and form consensus networks such as Ripple, for real-time payments using digital currency technology, favouring these over proof-of-work networks (such as Bitcoin)

Mid-year: Several Australian banks have announced experimenting with Ripple – ANZ, Commonwealth Bank of Australia and Westpac , but banks are also experimenting with blockchain technologies e.g. Barclays and Santander. These announcements are good PR, but it will be interesting to see over the next 6 – 12 months whether these experiments and proofs-of-concept progress into commercial or core operational use in the banking industry.

  1. Ripple will make waves (how many times will this headline appear?)

Mid-Year Ripple has had some good PR such as the Australian announcements above. Lafferty news had a “waves” headline, while Silicon Angle managed a “Rippa for Ripple”  sub-headline. Ripple was the talk of the EBA Day in Europe in May 2015, with the CEO Chris Larsen giving the keynote address at this key European banking and payments event. And of course, Ripple interviewed me themselves. Overall, Ripple is on a roll, and its progress with banks, especially in the correspondent banking and cross-border sector is one to watch for the rest of 2015 and into 2016.

  1. Effective regulation will focus on the KYC, AML and sanctions controls on digital currency wallets, rather than on digital currencies specifically

The UK Government announced in March 2015 its intention to apply anti-money laundering regulation to digital currency exchanges, to support innovation and prevent criminal use. New York State finalised its Bitlicense which covers AML and much more, while the California State Assembly passed its own digital currency legislation.

Contactless and Mobile Payments

  1. Contactless card transactions in the UK will rise above 1.25bn txns for the year, and above 3bn txns across Europe, continuing to grow at 200% – 300% per annum

Mid-Year – we are only half way through the year and figures are not out, but all the signs are that contactless card transactions are continuing their relentless rise with Visa Europe , MasterCard and Worldpay all reporting surging volumes. I am confident these volumes predictions will be close to the reality when the figures are in for 2015.

  1. Apple Pay will catalyse strong growth in mobile NFC transactions, accelerating merchant adoption of NFC/contactless POS both in the US and in other countries where it is rolled out

Mid-Year – no figures for Apple Pay transaction volumes are available in the US where it launched last year. So far this year, it has launched only in the UK outside of the US, with banks representing about 35% of all current accounts, in July 2015. The UK is a much more mature contactless economy than the US. Assuming that 10% of UK smartphones can use Apple Pay (iPhone 6), this implies roughly 3% – 4% of UK contactless transactions, or 3m – 4m contactless payments per month could migrate to Apple Pay at the moment. How quickly this happens is anyone’s guess, but with the remaining big UK banks scheduled to go-live with Apple Pay later in the year, expect to see published transaction figures from Apple within 12 months trumpeting its success; for example around a milestone such as 1m Apple Pay UK transactions per month (my guess is this will be in Q1 2016, but I will revisit this at the end of the year).

Alternative, non-card Payment

  1. New account-to-account payments and alternative payments to card payments will start seeing successful adoption e.g. Zapp (UK)

Mid-Year – The Swedish real-time account-to-account payments system Swish is growing strongly and is being prepared for ecommerce payments. Denmark has a similar very successful account-to-account mobile payment system Mobilepay. Meanwhile Zapp, the consumer-to-merchant account-to-account real-time payment service in the UK has finally revealed it is launch date. Using a new brand, “Pay by Bank app”, Barclays Pingit will be the first bank app to offer the service in October 2015.

Interbank Infrastructure

  1. At least two countries in Europe will commission national real-time interbank payment infrastructures

Mid-Year – The Netherlands announced in June this year plans for a domestic real-time payments system to be running by 2019, and later the same month EBA Clearing produced a blueprint for a Eurozone cross-border instant payment system  which it intends to be operational in 2018. Expect other European countries to announce plans for domestic real-time systems over the next year.

  1. Cross-border interoperability of new real-time time interbank payment infrastructures will become a major theme of debate, especially in Europe

Mid-Year – EBA Clearing formed the Instant Payment Task Force in January this year which has met several times so far to debate instant payments including how interoperability of real-time payment systems can work in Europe.   In April this year, Payments UK led a roundtable meeting  of over 40 organisations worldwide to agree how to harmonise ISO20022 message data formats and processing rules for real-time payments, in order to support global interoperability of real-time payments systems.

Cards require investments to transform customer experience and operating model

Every executive can see the extent to which digital is changing the card business. A convergence of new customer behaviors, technologies, competitors and regulations will require issuers, acquirers and processors to review their overall card strategy to align the customer experience and operating model to new digital requirements.

For issuers, customers’ preferences are becoming clear: they don’t like sharing personal data with merchants, especially after the data breaches that have happened over the last 18 months (e.g.: Home Depot, Target). The strong adoption of contactless cards, the growth of e-wallet solutions (e.g.: PayPal, Alibaba) as well as the initial uptake of Apple Pay and crypto-currencies, have proved the benefits of a customer experience that does not require exposure of personal data (as in pull transactions, such as with cards) but simply requiring consumers to approve the purchase by tapping or clicking on their mobile devices (including through push transactions, such as e-wallet transactions).

Changing the customer experience from pull payments to push payments is something banks need to consider, starting from remote transactions and then moving to in-store transactions.

Regulators are already driving in this direction promoting push payments (e.g.: through the PSD2 enabling payments initiation services) and reducing cards profitability (e.g.: Interchange fees regulation). The caps on interchange fees not only will make the card business less profitable but will likely persuade issuers to consider alternatives to card payments offering a better customer experience without requiring sharing of sensitive data. Launching push payments solutions, such as those enabling payments directly from bank accounts (e.g.: Zapp, Swish, iDeal , MyBank) can be the option to consider both for online and in-store payments.

Since these new push payments solutions will take some time to achieve scale, an alternative route to improve customer experience can be to partner with new technologies such as Apple Pay and Samsung Pay. While these still use card networks with pull transactions, they disguise card data through tokenization allowing merchants to process payments without handling sensitive data. They have the potential market reach and influence to make a big impact using this technology, although with an extra organization in the value chain, margins may be impacted and issuers’ brand may be disintermediated from the consumer.

Some may argue that margin compression will be partly compensated by increased transaction volumes, driven by cash displacement of low value transactions, but this highlights the banks’ dilemma in the cards business: are current card management systems able to processes high volumes, coming from multiple products?

Efficiency in the card business is emerging as a key priority and – maybe for the first time – lots of issuers, acquirers and processors will have to identify how to offset the impacts of regulation and competition while reducing costs, improving flexibility and fraud management.

Issuers have a variety of choices, but it is becoming increasingly rare for a bank to develop its card technology capabilities entirely in-house without use of packaged software or outsourced processing. Banks can choose to renew their card capabilities through improving in-house platforms (e.g.: adding functionalities for digital commerce), acquiring a third party solution or outsourcing to a processor, and of course combinations of these for different card products.

As a first step, issuers should think carefully about what activities they should do and what activities (e.g. dispute management) are commodities and should be done by a 3rd party.

Digital innovation can also help to improve customer experience and one of the strategies might be to offer more with the card product. Mobile coupons, financial management and budgeting tools or just targeting more lending on the card could produce more revenues from cards if card product offers more. Now, it has become more important to cover up engaging card customers via their smart phones so that they can confirm risky transactions, available discounts when they are near a merchant that offers a discount.

Whatever a bank’s choice, it is clear that to ensure profitability the card business requires investment to overcome the hurdles of card legacy systems, to develop new digital capabilities (e.g.: value added services, mobile payments, fraud management) and to transform the customer experience, in particular to avoid cardholders sharing sensitive card and personal data with third parties for each transaction.

What happens after banks switch to digital?

Since their introduction, digital channels have significantly increased the number of overall interactions that banks have with their customers.

In our recent Global Consumer Pulse Research, we found that when they are prospecting for new products or services, consumers rely on multiple channels (three or more on average), including digital channels. They mostly rely on corporate websites and online expert or comparison sites, followed by word-of-mouth, online reviews and branches.

When it comes to using mobile devices, 58 percent of bank customers use their tablets or phones often when prospecting or seeking support. Out of the average 17 interactions per month made by a customer with its main bank, seven are through on-line banking and three are through mobile phones or tablets. In emerging markets, where the average of total monthly interactions is higher, at 21, customers display an even higher propensity to use digital channels.

Customers also report that they prefer different channels for different activities. For example, they tend to use internet banking when they are looking for research and advice (48 percent at least once a month, 20 percent at least once a year) or accessing services (64 percent once a month, 14 percent once a year), whereas they prefer to talk to someone at a branch when they need to fix an issue (21 percent once a month, 32 percent once a year). In emerging markets, the use of social media for prospecting is considerably higher than in mature markets (48 percent compared to 19 percent).

Read the report.

Read the report.

After switching to digital, banks discover that customers are looking for more digital services. Customers report being satisfied with online customer service channels compared with traditional channels, but that they’d like to use digital channels for other services as well. This is evidenced by the fact that across both mature and emerging markets, online subscriptions grew 6 percentage points to 60 percent in the last year, while purchases in branches declined by 6 percent. Even of consumers who seek advice in the branch, half of them use an online channel to purchase or subscribe to a new product or service.

Globally, 61 percent of banking customers expect to have access to more online interactions across their lifecycle. However, there is some variation across mature and emerging markets. Banking customers in emerging markets are much more likely to expect additional online interactions. In India, Poland and Russia, 86 to 88 percent are in favor of doing more online, and in Mexico a huge 91 percent favor more digital interactions. This contrasts with some countries in the mature markets such as Sweden at 24 percent and Finland whose customers only occasionally or rarely expect more online interactions.

Digital channels have shown their worth, but banks will need to address several challenges to encourage their customers to take more advantage of digital channels. Banks need to make sure they provide the right information across all the channels, gain customers’ trust in digital channels and improve customers’ knowledge of how to access and use the channels.

Learn more about how banks can drive customer engagement and seize digital’s opportunity.

Is Your Core Banking Platform Inhibiting Growth?

Digital banking is here—from online banking and mobile payments to direct mortgages and payments—but it comes with fast-paced customer demands, unconventional foes, disruptive technology, tighter regulations and a host of other challenges for financial institutions. Banks that want to meet the digital age head-on and perhaps even become an Everyday Bank need a modern core banking system that is a highly-efficient, high-transaction volume, just-in-time engine.

Before committing to a core banking transformation, I recommend banks ask themselves a series of questions:

  • Is your existing core banking platform an enabler or inhibitor to growth?
  • Can your core platform support integrated, omni-channel sales and service processes, an extended customer ecosystem-centric model and analytics-based actionable insights?
  • Can you achieve or maintain target efficiency ratios without renewing, replacing or transforming your current core platform?
  • Can you become a digitally dominant omni-channel bank without renewing, replacing or transforming your current core platform?

At Accenture we’ve seen that a properly executed core banking transformation can drive a 10 percent improvement in efficiency ratios, or more. But a transformation doesn’t always mean implementing a radical change. For your bank, it could mean taking one or both of the following approaches:

  • Gradual evolution through selective changes in current architectures, both technical and functional, moving gradually existing capabilities or developing new ones, taking to the extreme the concept of “hollowing out the core.”
  • Transformative approach affecting not only IT and functions, but also the operating model—infusing across all the organization the agility required to compete in the digital era.

For established players, there are five different starting points from which to evolve to next-generation core banking:

Read the report.

Read the report.

  • Data as the core. Adding new technologies and capabilities to be used across informational, operational and commercial layers, with predictive models and real-time analytics that enable better storage and analysis of massive data with simpler Business Intelligence stacks.
  • Omni-channel platform. An end-to-end process-led orchestration, providing capabilities hollowed out from the core and designed to deliver a differentiated customer experience.
  • Customer digital ecosystem. Extending the customer database to embrace the new digital customer concept, helping to complement and enhance existing capabilities to collect, analyze and use data on customer experiences and share information internally and externally.
  • Gradual core banking transformation. An intermediate approach, focusing on gradually building new digital functions and capabilities that enable core banking to improve on-line real-time capabilities, provide the next level of automation and digitization, be more granular to reinforce service reusability and flexibility, and provide a new distributed transaction model.
  • Modernization to cloud. A more disruptive approach, building a just-in-time transactional factory on top of a fully automated platform as a service software and hardware stack.

Whichever of these approaches your bank takes and wherever your starting point is, you can be assured that core banking will play a pivotal role as either an enabler or inhibiter of digital adoption and growth. Banks that want to become an Everyday Bank with a complete renewal of their cost structure and the potential to realize 18 to 25 percent Return on Equity (ROE) by 2020 must push forward in their legacy system evolution to embrace the digital revolution with a strong and flexible core.

To learn more, read The Role of Core in Digital Adoption.

Shifting gears: Executing digital strategy at two speeds

Digital disruption has opened up the competitive playing field in banking. Fintech start-ups are influencing customer expectations and affecting specialized revenue streams. Other players include large digital leaders who are extending banking services into non-banking digital ecosystems where they are already dominant.

So what should your Everyday Bank do to respond to this market disruption and rising competitive pressure? We believe it’s critical to execute at two speeds to sustain market momentum while also strengthening the core underpinning of your bank. Let’s explore these two speeds:

Speed 1. Disruptive growth options outside the core

Moving at disruptive speed means moving just as fast, if not faster, than your competitors are adapting. But, with this approach comes uncertainty, and it demands banks to take on the bold, entrepreneurial characteristics required to develop new capabilities.

Key to moving at speed is seizing new opportunities to grow beyond your core business. This might include:

  • Becoming a digital attacker that targets specific market segments.
  • Sharing the digital wallet through app commerce and digital ecosystems built on value-added services.
  • Penetrating vertical platforms by providing integrated financial or nonfinancial solutions to serve life needs.
  • Using the crowd for everything from community-based scoring or lending to enabling payments.
  • Monetizing data.

Speed 2. Transformation of the core

While pursuing disruptive growth, the Everyday Bank must transform its core by addressing fundamental elements that include:

  • Digital customer strategies – By establishing a true omnichannel customer experience, you can give your customer choices for how to engage with your bank anytime via any device, depending on their needs and expectations.
  • Digital enterprise strategies – To fully evolve end to end digitally, build a capability architecture, digitize processes and encourage digital collaboration.
  • Digital operational strategies – Flexible technology platforms and open architecture will allow your bank to evolve business models through new digital ecosystems.

Core transformation also calls for making shifts across resources, people, technology and operating models; proactively shaping and participating in new ecosystems; and addressing customer, shareholder and regulatory outcomes. These are not simple tasks, but they are essential to digital transformation.

Executing at these two speeds will allow your Everyday Bank to be digital, protect your territory and appeal to customers by delivering integrated services. Read more in Digital strategy execution drives a new era of banking.

What’s the key to customer retention?

For the last decade, the Accenture Global Consumer Pulse Research study has annually tracked the intentions and actions of consumers around the world. This year’s study included a sampling of more than 23,000 customers in 33 countries, including 16,000 banking customers.

One of the key trends we noticed this year is that customers are buying more products and services, but not necessarily from their current providers. Globally, 27 percent of bank customers purchased or subscribed to a new financial product or service over the last six months. When we compare mature and emerging markets, we see that the number is not as high for mature markets (just 20 percent) but is even higher than the average in emerging markets (39 percent).

Despite this overall growth in purchasing, over the past six years, consumers have increasingly expressed an intention to buy less from their current providers. In fact, 21 percent of bank customers say they are not at all likely to buy more products from their current provider. Conversely, at the other end of the scale, 21 percent say they are extremely likely to buy more products and services from their current provider. Clearly it’s a polarizing question.

Additional results showed that 18 percent of bank customers are evaluating or considering other providers more often than they did two years ago, and 59 percent say they are more likely to switch to another provider compared to 10 years ago.

Read the report.

Read the report.

So why are customers more likely to switch providers and less likely to purchase additional products from their current provider? Competitive pricing (39 percent), high quality customer service (34 percent) and good value for money (32 percent) are the top three dominant factors leading customers to switch to another bank. And almost a third of customers (31 percent) believe it’s not too that much of a hassle to switch providers.

For banks considering the question of how to keep their customers from switching to other providers, we found that first-contact resolution is the key. Of the consumers who switched to another provider due to poor service, more than 80 percent said they could have been retained if their issue had been resolved on their first contact with the bank.

Yet first-contact resolution has consistently remained the top frustration for consumers in the past five years (generally cited by around eight in 10 respondents), and the percentage of consumers expressing satisfaction with how companies have handled it has increased only marginally since 2009 (from 41 percent to 45 percent).

I think there’s a real opportunity here for banks to improve customer retention by re-examining their methods for resolving customer issues—more so in the emerging markets, which all have high complete switching rates, but also in the mature markets of Poland, Spain, Ireland, Sweden and Belgium, which all have higher complete switching rates than the global average of 18 percent. For banks in these countries, customer retention has to be a priority.

Learn more about how banks can drive customer engagement and seize digital’s opportunity.

Think Your Loyalty Program Keeps Customers Loyal? Think Again.

The hard truth about retail banking loyalty programs is that they do not always keep customers coming back.

Loyalty programs in financial services are expensive and expansive, but not differentiated. In fact, the market is flooded with look-alike programs. And as leaders in other industries transform their loyalty focus from vanilla rewards to customer value, banks will find themselves chasing customer expectations. Some already are.

The Lagging Loyalty Landscape

Eye-opening results from Accenture’s 2015 North America Consumer Digital Banking Survey—our multi-year survey of over 4,000 consumers in the United States and Canada—reveal just how low customer participation and perception of loyalty programs are:

  • Poor participation. Only a third of customers participate in bank loyalty/programs—54 percent do not participate at all.
  • Information vacuum. Seven percent of customers are not sure if they participate—and 6 percent are uncertain if their bank even has a loyalty program.
  • Program stickiness. Only 9 percent of customers cite loyalty programs as the reason for staying with their primary bank.
  • Customer switching. Under-delivered loyalty programs are a key driver of switching.
View the image.

View the image.

What Customers Want

Our survey also shows that customer expectations for loyalty programs are high—and specific. Consider the loyalty landscape from the customer perspective:

  • Design for digital. The ability to redeem loyalty points from multiple channels is a key characteristic of loyalty programs in customers’ eyes.
  • Count on convenience. Over half of customers say that the most important characteristic of a loyalty program is offering cash or open loop prepaid cards.
  • Deliver the good life. Nearly one-third of customers think the most important loyalty program characteristic is the offer of points for quality of life experiences such as travel.
  • Make it personal. Over half of customers want their banks to locate and curate discounts on their behalf in purchase areas that are relevant to them.

Taking the Long View of Loyalty

It is clear that banks have work to do to transform this loyalty lag into loyalty that lasts. After all, leaders know that they can’t risk losing customers in such a disrupted banking landscape. There are too many other players eager to lure customers away by upping the ante in many areas, including loyalty.

Getting more from loyalty programs requires a mindset shift for banks. Loyalty initiatives can no longer be viewed as an isolated part of the business. Instead, loyalty programs must be addressed as part of the banks’ larger purpose to maximize customer value. It’s about giving the loyalty organization a wider mandate not only within the enterprise, but also within customer’s everyday lives.

Learn more about Accenture’s latest consumer digital banking survey.


Real time payments: how to align legacy systems?

As commerce around the world continues to evolve into a 24×7 real-time ecosystem, there is growing pressure for payments infrastructure to keep pace with today’s realities transferring funds in real time.

“Real time payments” can be defined as an interbank account to account payment that is posted and confirmed to the originating bank within one minute, so the payee can use this value instantly and the payer has confirmation of the status of the transaction. The instant confirmation of the transaction won’t be enough in the future, it is the real time availability of funds that matters.  The ‘real-time’ payment infrastructure may enable passing of greater data (ie, the use of ISO20022 messaging standard) and also addressing of payments to alternate addresses (ie mobile telephone numbers).

Customers expect payments to be fast as alternative payments networks (e.g., PayPal, Venmo and digital currencies) are already able to provide real time payments within their ecosystem.

Regulators are actively promoting real time payments in different ways. The revised Payments Services Directive (PSD2) will ease interbank account to account payments, allowing third party providers (TPPs) to initiate payments directly from the account of consumers and corporates. At the same time through EBA Clearing in Europe and the Federal Reserve in the US, they are kicking off industry task forces to support the creation of real time payments central infrastructure.  In Australia, the New Payments Platform (NPP) program has already embarked on the creation of real-time payments infrastructure.

Real time payments are not new: 31 systems have been built or have gone into development so far, of which 4 initiatives launched in 2014 (Fig. 1). However some of the systems have been in existence for over 10 years (eg: Switzerland, Brazil, Mexico); some, over 40 years (eg: Japan)

Fig 1 – Real time payments systems adoption worldwide

View the image.

View the image.

Real time payments infrastructures may have different origin: they can be launched as domestic infrastructure to modernize the national payment system (e.g.: UK, Denmark, Singapore and Australia) or as a market driven initiatives to face competition from non-banking players (e.g.: Poland and Sweden).

To become a real time payments institution, it is not enough to connect to a new infrastructure, it requires investments and a wide transformation program.  In the UK the cost of building and maintaining the immediate payments infrastructure – Faster Payments Services – amounted up to £70-£80 million for each participating bank, but the cost of execution to upgrade their infrastructure and change processes for some banks was up to ten times higher. Today banks can be better equipped with some real time capabilities already in place if compared to 2008 when the UK Faster Payments Services was launched, but the complexity of this change can’t be underestimated.   This is even more so if both the ISO20022 standard and non-account addressing are also included in the program.

As found out in a recent poll done by NACHA at Payments 2015 conference, execution and high investments will be the major challenge also for US banks: for 37% of payments executives execution difficulty is the major barrier followed by high investment required (30%)[1].

Once the plans at industry level are finalized for how real-time payments  will be implemented, banks – especially in Europe, US and Australia – are going to look internally and define strategy and investments to migrate their entire infrastructure, technology, operations, systems, processes, fraud, risk systems from batch processes to 24/7/365 operations.

Legacy systems will have to fit for real time and new capabilities will be required. Account keeping systems and transaction banking portals updates will need to be in real time across channels like the funds’ availability. Funding and settlement for nostro/vostro accounts will change since real-time payments systems will likely have predefined funding cycles which create positions that need to be settled at least twice daily. 24/7/365 operations means also that customer services and exceptions handling are always available.

Despite these challenges, if banks want to become Everyday Banks where they are integral to their customers’ digital lives, then they have to provide real-time payments. Some banks are discovering the benefits of their real time payments infrastructure offering a multitude of innovative overlay services – such as Paym and Zapp in the UK – enabling P2P, in store and online payments directly from their current account.  In Singapore, a number of services have already been launched by the participating banks.  Other banks are evaluating crypto-protocols, like Ripple, to infuse real time capabilities in selected services like cross-border payments (e.g.: Fidor Bank, Cross River Bank and CBW Bank) and inter-bank transfers (e.g.: Commonwealth Bank of Australia)

In our view, banks need to take this imperative on board—and change their mindset to view the real time payments opportunity from the perspective of an Everyday Bank.