Over the next five years, instant payments are set to catalyze a complete transformation of payments and banking, ushering in a truly digital service model. According to a new report by banking tech provider FIS, this shift will present significant challenges to banks, requiring them to reinvent their operations and update their systems to manage soaring transaction volumes. However, it will also open the doors to new opportunities through innovation and product development.
In a new report released on October 09 and produced in collaboration with Payments Cards and Mobile, FIS examines the instant payments revolution, exploring how it will lead to genuine digital transformation, and the challenges and opportunities banks will face in the next five years as they work to remain competitive, grow revenue and increase profitability.
According to the report, the past decade has seen Internet and mobile banking, along with digital wallets, become widely used around the world. Although these changes may appear transformative, they have often been achieved through patching or additions to existing legacy systems that are increasingly expensive to maintain and unfit for purpose.
The upcoming phase of digital transformation, however, will be marked by the rise of instant payments across 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 more secure, faster and frictionless payments, the report says.
The “second digital finance revolution”
This new era, deemed the “second digital finance revolution,” will see the banking industry undergo changes similar to those expected in industries such as media and healthcare. These changes are being driven by a number of factors, the report says. For one, regulators in most emerging and developed markets have taken action 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, mandates all banks, financial institutions and payment service providers in the European Union (EU) to offer instant payments to customers around the clock at no extra cost.
The rule change has led to substantial increase in instant payments, with daily transaction volumes exceeding 2.8 million by April 2024, up more than 20% in a year, data from the European Banking Authority show.
FIS anticipates that meaningful changes will start to emerge in December 2024 as banks must demonstrate their ability to handle processing, fraud, sanctions checking, and other tasks in less than ten seconds.
Data standardization is another trend marking this new era. In 2004, the International Standards Organisation (ISO) introduced Data Standard 20022 to give the financial industry a common platform for sending payments messages and exchanging payments data. As the successor to ISO 15022, ISO 20022 has gained widespread global adoption, steadily becoming the norm.
This means that banks are now facing unprecedented demands for processing capacity, needing to manage higher transaction volumes and velocity than ever before.
Additionally, the EU’s Digital Operational Resilience Act (DORA), which will apply as of January 17, 2025, will impose stringent cybersecurity requirements for EU banks, their suppliers and third-party partners, emphasizing the need for advanced cybersecurity tools and infrastructure upgrades.
This combination of consumer demand, regulatory pressure, changing international standards, and competition from digital-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 yet to embark on a full-stack transformation of their payments software architectures will struggle to manage the high volume and high velocity of instant payments.
Inversely, banks that take action now to modernize their systems will unlock rich opportunities in terms of new products and services, lower maintenance costs and other benefits, including being first to market with innovative ISO 20022-based products.
According to the report, ISO 20022 itself offers a rich opportunity as it incorporates rich transaction and customer data. This enables banks to analyze usage patterns for their products, refine fraud prevention strategies, and identify new product and service opportunities.
Instant payment rails also provide opportunities for new, innovative services. Request-to-pay (RTP), for example, is a digital payment solution that enables a payee to send a request for payment to a payer.
The European Payments Council (EPC), which first released its RTP scheme rulebook for the Single European Payments Area (SEPA) in November 2020, is currently pushing for the adoption of RTP across the bloc.
Verification of Payee (VoP) is another service set to be launched by the EPC by April 2025. This service, which has existed in the UK as Confirmation of Payee since 2019, will help cut frauds and scams by enabling payers to verify the identity of the party they are paying.
Instant payments have risen drastically over the past years. According to ACI Worldwide, a paytech provider, real-time payment transactions hit a new record of 266.2 billion transactions in 2023, marking 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. In 2023, real-time payments accounted for 53.4% of domestic transactions in India and 43.2% in Thailand, underscoring their surge in emerging markets.
The World Bank projects that the growth of real-time payments will continue globally, with instant payments expected to expand at a compound annual growth rate of 35.5% through 2030.
Featured image credit: edited from freepik
