Transferring money to the recipient's account within seconds, at any time and on any day of the week - that's Instant Payments. For Dutch consumers, Instant Payments are now an essential part of the current payment landscape.
Since its introduction in the spring of 2019, usage has grown enormously. In 2021, approximately 25% of payments were Instant Payments (1). When only looking at individual payments, even more than 90% were Instant Payments (2). However, the use of Instant Payments by businesses is lagging. Why is adoption so low among business users? Will this continue in the future, or can we expect an acceleration of usage in the coming years? And does this have an impact on financial institutions that offer payment services?
Why is adoption so low?
Lack of Instant Batch
The main reason for low adoption among business customers is the lack of the ability to pay bulk payments instantly at any time of the day and week. This is called the batch Instant Payments in the market. While individual payments arrive in the recipient's account within seconds, bulk payments are not always paid out on the same day. In response to customer inquiries, several major banks have started delivering batch Instant Payments. It is expected that the first banks will deliver batch Instant Payments later this year. The advantage for business customers is that they can submit the batch at the desired time, but the processing is instant for the day the batch is paid out. For example, salaries or payments can also be made on weekends, while the company has already submitted the batch before the weekend.
Interoperability
A second reason why adoption is lagging is that interoperability in the Netherlands and Europe is not yet optimal. The European Central Bank (ECB) gave banks the freedom to choose which Clearing and Settlement Mechanism (CSM) they wanted to connect to the Instant Payment Network. There was a choice between the CSM of Worldline (which only provides accessibility to other Dutch banks), TIPS, and EBA (which facilitate accessibility within Europe). This freedom of choice has resulted in a lack of uniformity; some banks are connected to all CSMs, while others are connected to only one. The problem that has arisen from this is that a bank that is only connected to Worldline cannot exchange payments with a bank that is only connected to EBA or TIPS. This problem is not only occurring in the Netherlands but throughout Europe.
The goal of the EU is to enable European citizens to make real-time euro payments to and from any country. This goal is not currently being achieved due to limited interoperability. The European Central Bank (ECB) has taken action and is forcing European banks to be fully accessible in Europe. Banks have addressed this by ensuring that they are accessible via the TIPS CSM at a minimum. This means that they can receive Instant Payments from any European bank. The ECB has not yet required banks to be able to initiate Instant Payments via TIPS, so it remains uncertain which banks offer this option at the moment. In Q4 of this year, legislation is expected from the European Commission requiring banks to offer Instant Payments if they also offer regular payment services. This will make Instant Payments available to more businesses, and it is expected that the use of Instant Payments will only increase.
Lack of use cases
A final factor for the limited use of Instant Payments by businesses is the relative unfamiliarity with its use. There are few well-known examples in the market and the application in the value chain is too isolated. Instant Payments are limitedly linked to and applied in business processes (e.g. digital invoicing and instant payment of claims).
However, there is demand for Instant Payments in some sectors, but the demand is not always being met. For example, in the automotive industry, dealers want payment and transfer of the car to take place over the weekend. If the bank has not yet set up Instant Payments, this transfer can only take place via traditional payments prior to the weekend. In the broader context of service provision, banks want to keep their customers satisfied by meeting this demand. However, it becomes difficult to make a business case if customer satisfaction is the only thing that keeps it going.
Impact for financial institutions
As previously mentioned, some banks have not yet implemented Instant Payments in their landscape. It is a difficult story for this group of banks to explain to their customers why their payments do not appear in the beneficiary's account within a few seconds. If these banks do not keep up with the new normal, it is expected that they will eventually lose customers. However, meeting this customer demand requires a significant investment. Technical and procedural adjustments need to be made throughout the transaction chain. This includes looking at the reach (only to Dutch counter accounts or also European ones) and the way that reach is created (via which clearing). And that's 24/7, including weekends. In addition, the old infrastructure must be maintained for regular European payments and collections for the time being.
Conclusion
Due to the relative unfamiliarity with Instant Payments, the absence of some banks, the lack of Instant Batch, and the lack of uniformity in the Instant Payment landscape, few corporates have yet transitioned to implementing and embracing Instant Payments.
In the coming years, this will certainly change due to changes coming on various fronts. For example, banks will soon be able to make bulk payments Instant as well as single payments, and interoperability will improve in the coming period. Our expectation is that Instant Payments will become the norm for companies, and that migration to this will take place more and more in the coming years.
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