26 August 2016
A Global History of Payments
Financial Times banking correspondent, Emma Dunkley takes us through the journey so far…
The seeds of a revolution in global payments are taking root. Countries around the world are developing innovative systems that enable bank customers to make immediate real-time payments.
The digital age has provided fertile ground for this revolution, which is being supported by regulators and authorities. People globally now have unprecedented instant access to information, products and services following the advent of the internet and mobile phone.
New payment methods, such as tapping a phone upon an electronic pad in a shop to make a purchase, have proliferated through mobile over the past few years, creating an increasingly widespread expectation for instantaneous payments.
Consumers and businesses alike are seeking to ensure payments have arrived swiftly and safely, with accounts instantly updated. Gone are the times where making a payment and waiting three days or more for it to settle is acceptable.
Many countries are now creating systems that facilitate real-time payments between banks. Accenture, a professional services company, estimates that there are at least 30 real-time payment systems in operation or under development around the world.
Systems have already been established in the UK, Denmark, Poland, Singapore and Sweden, while a number of others are expected to go live in the next two years, including Australia, USA and pan-Europe.
However, countries are not in lock-step in developing immediate payment systems. Indeed, some countries have long established faster payment infrastructure. Others are in the process of creating systems that are poised to leapfrog those countries with existing capabilities.
One of the forerunners of the instant payment system was Japan in the early 1970s. Some decades later in 2008, the UK launched its own system, which is regarded by industry experts as a blueprint for developing instant payments infrastructure elsewhere.
The UK system, called Faster Payments and underpinned by VocaLink, facilitated more than 1bn of Faster Payments last year, with a total value of over £1.2trn. The system, allows consumers and businesses to send money between accounts at different banks within minutes.
Its creation marked a turning point in the UK payments industry, by enabling the instant availability of funds and a notification that money has been received.
Unlike most other regions, the advent of Faster Payments was spawned by the British financial regulator and government to boost the economy. Paul Thomalla, a director of ACI Worldwide, said there was a political agenda in the UK to open access to payment systems beyond the largest clearing banks in attempt to foster competition and speed up money flow.
“The drive was to bring in competition with new entrants to allow payments to be made more quickly,” he said. “It was to benefit UK plc rather than the banks.”
However, the subsequent development of smartphones has served as the main driving force behind the creation of instant payment systems in other countries.
Liz Oakes, a director of KPMG, said: “There has been a sea-change in technology since Faster Payments came in. Expectations have changed, so countries looking to put in faster payments are fulfilling a customer need driven by technology.”
In Singapore, this vision for instant payments came from the central bank and domestic payment processors.
In the past, the country’s advanced economy had a number of clearing and settlement systems, and instant money transfers were only available between accounts at the same bank. VocaLink built a system based on its immediate payments software for Singapore, which was launched in 2014 with 14 participating banks.
The “Fast and Secure Transactions” scheme has reduced payment transfer speeds from three days to near-real time. It can be used by customers making payments through tablets, smartphones or personal computers and has been available around the clock since launch. According to VocaLink, payments are now effected in under 15 seconds. More than 33,000 transactions totalling S$64m in value were processed on the first two days of operation. 
Simon Burrows at PwC said: “Singapore’s FAST shows how immediate payments can open up access to technology, innovation and Fintech.” For example, adoption of contactless payments is huge in Singapore, with 47 per cent of cards in issue having contactless capabilities, just behind Poland and Italy, according to Payments UK. 
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Regulators and authorities in other regions are helping to support the creation of an instant payments framework, rather than spearhead it.
In Europe, various countries have already developed their own systems, such as in Denmark and Poland.
But the foundations for a pan-European scheme are being laid. The European Payments Council is creating an instant payments scheme across the European Union. To achieve this, it is evolving its Single Euro Payments Area (SEPA) framework to set a common standard for sending instant payments across countries.
A pan-EU instant payments scheme in euros is set to be launched by November next year. The EPC said this will provide the foundation for “innovative payment methods such as mobile person-to-person payments”. 
For cash-based economies that do not have a long established culture of credit and debit card usage, the combination of phone and faster payments presents an opportunity to “leapfrog” others.
Thailand, for example, is currently developing a national e-payment system in conjunction with VocaLink. The “Any ID” service will be based on national identity numbers, which people and businesses can use to make payments.
George Evers, head of international product development at VocaLink, said that the Thai government could use the system to distribute money to citizens and organisations while having an electronic trace of money movement.
“This is a leapfrog opportunity. Real Time payments plus mobile provides a viable alternative to card infrastructure, while it is more secure and faster than card payments,” he said.
According to the World Economic Forum, e-payment can cut business costs and corruption and boost the ease of doing business. 
Other countries are galvanised more by the widespread adoption of mobile and digital fuelling expectation for payments in real-time.
In the US, the world’s largest payments market, banks are investing in an immediate payment system to deliver enhanced services for customer needs and to protect their revenue streams from new “fintech” companies.
PayPal, for example, does not run off the traditional payments infrastructure on which banks operate. It offers instant person-to-person payments, helping to boost the demand for more immediate money transfers.
“The US has been very innovative with mobile applications,” said Burrows at PwC. “But behind the scenes, they’ve had to cope with old payment systems. Immediate payments will enable an upgrade which will then unleash more customer-facing innovation.”
The Clearing House (“TCH”) in the US is now developing a real-time payment system in conjunction with VocaLink. It aims to go beyond existing real-time payment infrastructure elsewhere by providing a platform to launch innovative new services, such as messages confirmation payment and requests for invoices.
Steve Ledford, senior vice president of product and strategy at TCH, which is owned by the largest banks in the world, said: “We’re doing it because financial institutions want to provide a richer set of services around payments, rather than around legacy systems. It’s a payment system designed to be digital, as technology and mobile payments move forwards.”
The task, however, is huge. There are more than 14,000 financial institutions in the US.  TCH is working with a group of third party processors who provide services to those financial institutions to help move them to the system, which should be ready for launch at the start of next year.
“It’s the first new payments systems we’ve had in US for over 40 years,” Ledford said. Indeed, the US has an entrenched credit card and cheque culture. Figures from Payments UK show the average American writes 45 cheques per year, compared with 10 in the UK. Americans have 2.9 credit cards on average, versus 0.88 in the UK.
Consumers and businesses are poised to become major beneficiaries of the new system. Businesses able to receive immediate payment and invoices will have increased liquidity and certainty, ultimately helping to grow their operations. For example, insurance companies could compete on how quickly they can make pay-outs to customers, instead of sending out a cheque.
Indeed, the shift to faster payments has an economic impact in varying degrees depending on the country.
A paper by Accenture states how businesses can pay employees and suppliers faster and have funds available quicker.  With enhanced liquidity and greater turnover, businesses can potentially achieve more growth which in turn supports the economy.
A snapshot last year showed that almost half (49%) of UK Faster Payments were made outside of business hours, reflecting the demand to send payments 24x7 at a time convenient to them.
For businesses, the movement of cash in real time provides them with a degree of certainty in terms of account reconciliation. For example, a company with an account in the UK sending money to Germany after business hours might find it tough to trace the cash.
Carlos Sanchez, co-founder of Orwell group, said: “When money is not moved in real time, it’s ‘travelling’ so it is difficult to reconcile accounts of the same company. When cash moves in real time, you know where it is.”
In developing economies, mobile payments have been cited as a factor in helping economic growth.
The advent of M-Pesa in Africa is an example. In Kenya, where 40 per cent of the population are unbanked, M-Pesa, which is a text-based person-to-person mobile payment service, has been adopted by more than two-thirds of the adult population. A study by Payments UK said this system helps “both fuel economic development and contribute to improving financial inclusion in the country”. 
However, there is a risk that variations in economic growth between countries could be exacerbated by the creation of faster payments infrastructure in some areas over others.
Another potential issue is the development of different systems in various countries that are incompatible, precluding the ability to make cross-border payments. At present, no country is able to make an instant cross-border payment through the banking system.
To address this issue, a global standard is currently being devised, meaning that at some point in the future schemes around the world will be able to connect and facilitate cross-border faster payments.
“Regulators believe this is an opportunity to make our domestic systems work with each other if we use a common format,” said Light at Accenture.
A working group has been established by Payments UK which unites experts from more than 50 countries globally to agree a on a common framework to allow real time payments to be made around the world.
ISO 20020 was created as a result last year. The working group said this will help countries develop domestic real time payments but will provide “a consistent set of standards” that will “facilitate cross-border real-time payments in the future”.  VocaLink has already employed this standard in building Singapore’s system and in working with TCH in the US.
Nonetheless, the creation and embedding of domestic systems is a priority. Once these systems gain acceptance among consumers and businesses, the shift to international payments on these rails will be more seamless.
“You have to get domestic real time payment systems standing up first – and the volumes are in domestic payments - and then connect together with other countries,” said Oakes at KPMG. There are, nonetheless, other challenges to overcome, such as differences in regulation across regions in terms of anti-money laundering, and currency conversions.
Still, there is now a concerted push for cross-border instant payments which would represent one of the biggest revolutions in payments history. For banks, the creation of a structure to route immediate payments through their accounts is key. However, they will be operating in a competitive environment, as fintech players will also be aiming to insert themselves into this process.
Competition from digital developments is, in turn, producing innovative digital payment methods. For consumers and businesses, the expectation that payments are instant is becoming entrenched as a result. The groundwork for cross-border instant payments is being laid. The future is one of immediate payments being transacted around the world.