What Are the Main Challenges Impacting the Instant Payments Market?

January 2023

Fintech & Payments

Michael Greenwood

Principal Analyst

Instant payments, also called real-time payments, are a form of electronic payment that is available 24/7/365, with the payment processed and funds made available to the recipient instantly.

Instant payments are often confused with faster payments, which are an electronic payment that, providing both the sender and the recipient are on the faster payments scheme, can process a payment almost immediately, but can take up to two hours. This means that instant payments are a form of faster payments, but not all faster payments are instant payments.

While our latest instant payments research predicts that the number of instant payment transactions will grow 289% over the next four years, its biggest players must address several growing challenges impacting adoption among consumers and financial institutions, including: 
 

Fractured Network

Instant payments rails are present in a large number of countries, but the number of cross-border rails are limited.
 
As such, it is not uncommon for a payment to be made between two countries that have instant payment systems in place, but none connecting them, meaning that a traditional form of transfer must be used. There are plenty of instant payment providers that offer cross-border payments, but as many of these vendors are reliant on third-party instant payment rails, the cross-border payment is not capable of being made. These payment providers can only facilitate cross-border payments where the payment rail is already in place.
 
This is an issue beyond the ability of most instant payment vendors to solve. Most firms do not have the capability or motive to put down their own instant payment rails between two countries. The barriers to this are not just practical, there is also an issue with the complexity of compliance with multiple jurisdictions. This means the barrier to entry is significant and the majority of the most valuable cross-border payment routes are already served; meaning the role of putting in place new infrastructure will primarily fall upon government bodies and transnational organisations.
 
There is an increasing push from international bodies to make cross-border instant payments available. This is most clear in the EU, with the creation and promotion of SEPA. SEPA does not only provide instant payments, with these conventional payments being widely used. The EU has shown a desire to encourage instant payments, and as part of this, it has tried to encourage movement from SEPA’s conventional payments to instant payments.
 

Legacy Infrastructure

 
The majority of instant payment structures are built upon legacy infrastructure, which creates difficulties when the time comes to updating these infrastructures for the twenty-first century.
 
For instance, upgrades can require significant system downtime, resulting in significant costs that must be factored into the cost upgrading infrastructure – and in many cases, result in modernisation initiatives being pushed back or cancelled altogether.
 
Such updates are necessary to transition payment systems onto the cloud as well as make sure they are compliant with the ISO 20022 standard. These changes are hoped to increase the quality and agility of the services, but many banks have not seen sufficient gain to warrant the cost of the upgrades.
 
The question of whether to upgrade infrastructure is one that banks, vendors and financial institutions should take on a case-by-case basis. The potential payoffs are clear: faster onboarding of instant payment systems, lower latency, and greater interoperability. However, the cost of upgrading to achieve these benefits will vary depending on the nature of the already existing system, how long the downtime will be, what axillary systems will be in place and how futureproofed is the system they are moving to.
 
With an economic downturn expected, businesses will tend to look to make less investments, favouring the keeping of more liquidity to react to any challengers that arise. In a recession, clients will be looking for more efficient services, and this will also apply to their payment providers.
 
It is possible that at the time when financial institutions are more cautious about modernising their infrastructure, their clients will be looking for payment systems with that modern infrastructure.
 
One force that could push modernisation of infrastructure, regardless of financial institutions’ views, is regulation. Many government and regulatory bodies see instant payments as a way of improving efficiency within their economies, ultimately leading to greater productivity and economic growth. With this top-down view, improvements in instant payments infrastructure will look like an excellent way to improve the financial sector, during tough times. With this in mind, there will likely be an increased use of regulation to bring infrastructure up to standards, especially mandating the meeting of ISO 20022 standards.
 

Fraud and AML Issues

 
There are companies that offer fraud prevention and AML (Anti Money Laundering) systems to support instant payments, and the increased use of AI in these products make them quicker and more accurate.
 
This, however, does not solve the issue that once a payment is made, it is reconciled too quickly for it to be recovered; meaning that all anti-fraud and AML procedures must take place before the payment is made or after the payment is settled.
 
To improve uptake of instant payments, greater awareness should be brought to the realities of the fraud risk of instant payments. Instant payment vendors would benefit from marketing campaigns that educate users on the safety of instant payments.
 
It important that this is supported with comprehensive anti-fraud and AML measures for instant payments. If the marketing campaign worked but the security measures were insufficient, those new users who fell victim to fraud would be more averse to using instant payments, even if the reality is that they were no more vulnerable. When a product gets a reputation as a risk, it is often necessary to prove it is safer than its competition, to dispel that reputation.
 

Diminishing Returns

 
The increased speed of payment has been of great benefit to many businesses. Delays of payment can be especially damaging to SMEs, as such same-day availability of funds was a great benefit. When faster payments were introduced, this allowed payments to be settled in a matter of minutes, which was of particular value to contractors and great for supplier relations.
 
However, as with anything, the increased speed of payments comes with diminishing returns. For almost all businesses, the difference between a payment taking a couple hours to settle and 10 seconds has no real impact. Providing a payment is settled the same day, most businesses will not see a meaningful difference between instant payments and alternatives.
 
Despite not being inherently transformative, instant payments offer benefits to many users. When waiting for a payment to clear, there is an opportunity cost, as this is time when that money could be working for the receiver. This is only a small cost but when scaled up to a big business across a large number of transactions, the introduction of instant payments can have an impact on the performance of a business. The improved speed also increases the liquidity of a business. This allows them to act faster and be more flexible. It is especially useful in environments where the situation may change over the course of hours, meaning the instant settlement of payments may give a firm an edge over those using more conventional payment methods.
 
It is also the case that the majority of uses of instant payments is not in the business sector. When being used by individual consumers, there are a different set of factors. Most consumers are not concerned with how long it takes a payment they have made to settle with a merchant they are purchasing from, however, when making informal payments between friends and family, this does matter.
 
Given the option, an individual would choose to pay someone they know back instantly, providing there was no additional cost to them. This is down to a difference in how they perceive the transaction. When purchasing a product, the consumer perceives that transaction to be over when they have possession of the product, whether the payment has been settled by that time or not. Whereas, when transferring money to a person they have a relationship with, they perceive the payment to be over when the receiver has access to the funds. This is why, in this circumstance, the sender will prefer instant payments, as it concludes the transaction quicker.
 

Competition 

 
Instant payments face immense competition from other payment methods.
 
In all realms of use, there are established and emerging competitors. The area with the most competition will be the B2C market. In most markets, card networks are well established, with contactless making them convenient. In the B2C market, the greatest beneficiary of the adoption of instant payments will be vendors. This is an issue for instant payment vendors as what form of payment is used in this space is primarily driven by the consumer and not the vendor. Consumers are most concerned with convenience. This means any instant payment offering aimed at the B2C market would have to compete with cards, digital wallets and cash for convenience.
 
In the B2B market, there are a number of different demands by users. The most popular form of B2B payment varies depending on region. In the US, cheques and ACH payments are popular forms of B2B payment. In this market, different firms look for different things from their payment provider. Some will look for speed, others will look for security, whereas others still just do what they have always done. In this case, cheques have the advantage of being used successfully for a long time. This gives it greater trust with their users, even when the alternative has objective upsides. In a results-driven business environment, less efficient methods tend to get pushed out but cheques remain one of the most popular methods of making a B2B payment, in the US. Instant payments have the advantage of speed and being 24/7/365, over these other forms of payment. This means that instant payments are more flexible and allow for more efficiency.
 
Another common form of B2B payments is corporate credit or debit cards. These operate in much the same way as consumer cards but have much higher withdraw limits. Most corporate credit cards have rewards tailored towards a business customer. Again, instant payments offer quicker transfer of funds, as well as 24/7/365 availability. There are some specific circumstances where less common payment methods are used. For example, in corporate travel, virtual cards are gaining popularity. These cards are available on a user’s phone and allow for fast, but not instant, payments to be made. They also have control features that allow the spending on the card to be controlled before being issued to the user and it can be deleted after use. Instant payments provide faster payments than a virtual card, but do not normally have the same extent of control. 
 

Related Reading

 
Our complimentary whitepaper, Three Key Trends That Are Accelerating Instant Payments, examines the driving forces behind the adoption of instant payments, in both the B2B and consumer markets.
 
“A new study from Juniper Research has found that the number of instant payment transactions will exceed 376 billion globally by 2027; increasing from 97 billion in 2022, a 289% growth. It predicts that an increased roll-out of instant cross-border payment schemes in multiple countries will drive this growth by enabling businesses and consumers to benefit from greater speed and efficiency. This efficiency is gained by processing payments over instant payment rails, which provide time and cost savings, while also offering greater transparency over transactions to stakeholders than traditional payment rails.”
 
“Juniper Research’s new Instant Payments research report presents an independent analysis of the future evolution of the highly dynamic instant payments market and instant payments technology. It provides a comprehensive study of the economic growth of the instant payments market, resulting changes in B2B (Business-to-Business) and consumer payments, and the challenges facing further instant payment adoption within the payment infrastructure.”