Instant payments: The future today

by MNB | Magyar Nemzeti Bank | The Central Bank of Hungary

The historical and banking aspects of the launch of the instant payment system

Monika Németh

Leader of the Sub-Working Group on Market Services within the Working Group on Innovative Services in the nationwide project

The introduction of instant payments and the widespread use of the system’s services are essential in today’s technological and market environment to maintain the competitiveness of businesses and the country. • Only awareness of real-time financial data and their immediate, automatic processing ensures fast and flexible response to the quick shifts in market developments. • The range, price structure and price level of banking services are critical for economic development. It has become essential to use technologies facilitating cost-effectiveness. • The well-functioning service ecosystem of card payment solutions has become an increasingly painful cost driver for merchants and service providers.

The capabilities of the instant payment system may provide a digital and cost-effective solution to the above challenges.

Isolated instant payment systems developed among industry players have been present in Europe for 8–10 years. Even the two most successful examples from Europe (Sweden and Denmark) show that even if market participants with a large customer base joined forces, achieving any meaningful coverage took at least six years. That is too much time. The MNB had two choices: follow the international examples and foster industry partnerships but in effect leave it entirely to the market to create instant payments, or use its regulatory instruments. The central bank wisely chose the latter option.

This decision expected massive investments from all the banks operating in Hungary, but it also laid the foundations of the long-term competitiveness of the entire Hungarian banking sector. The general obligatoriness also ensured critical market access, which is indispensable for generating any return on investment. (According to the MNB’s Payment Systems Report, there were 8.4 million payment accounts accessible online in Hungary when the instant payment system was launched. This is the initial market size where the basic services of the instant payment system can be accessed since 2 March 2020.)

Besides the compulsory and well-defined basic services, the regulation also foresaw auxiliary, convenience services, but only established the framework necessary for ensuring fair competition and innovation. It was up to the service providers to define the technological and procedural open standards that ensure the freedom of competition and innovation, the safe provision of services and the unbiased framework for cooperation between service providers. One of the most exciting areas of the preparation was to outline the operational framework of the value-added convenience services developed for the instant payment infrastructure.

The instant payment system was established as a result of the close cooperation between the MNB, the banks required to participate and the technology companies and developers supporting the developments of the financial sector, in almost three years. The preparation was organised in the nationwide project created under the joint leadership of the MNB and GIRO, which developed and operates the infrastructure, in expert working groups. The MNB invited experts from several financial and non-financial policy areas to join in the common reflection.

I hereby wish to thank Executive Director Lajos Bartha for asking me to head the SubWorking Group on Market Services within the Working Group on Innovative Services that developed the framework for the infrastructure’s value-added services.

IMAGINING THE FUTURE AND DEVELOPING THE OPERATIONAL FRAMEWORK

The working group sought to find the points where an industry standard, recommendation or code of conduct had to be formulated so that value-added convenience services can be developed and provided to users through the instant payment system with low barriers to entry and under transparent conditions.

Let us see how and where we started. Together with technical experts well-versed in digital technologies, economists, IT experts, banking professionals, fintech firms, mobile companies, utility companies, merchants, checkout developers, card company experts and many others, we wanted to find answers to the following questions: • In which typical situations can instant payment offer an appropriate value proposition? • What is the value proposition that can convince cash users and increase the available market share? • Since without a wide coverage the investment does not generate returns, which convenience services can be introduced for large numbers of customers and quickly? • Who pays? What could be a sustainable model for the various convenience services? • Will instant payments upend the card market? Are they friends or foes in the fight against cash? How to do this right?

After the analysis of successful international models, the following success criteria were determined: • The continuous and close cooperation between the regulatory authority and market participants is crucial for market-building. • The GIRO central infrastructure capacities and cost-driven, transparent pricing can help market-building considerably. • The local (Hungary-specific) consumer issue(s) or need(s) have to be identified for which service providers can develop very simple convenience services that can be used with very low entry thresholds. This can generate the critical mass, which can be used as a basis for the value-added services relevant to other, smaller segments. • In the case of these services, the priority areas need to be determined where regulatory intervention, standard or procedural recommendations or the development of a selfregulating code of conduct may be necessary. • These processes and standards need to be developed together.

Based on international experiences and Hungarian purchasing and payment habits as well as the market environment, four typical situations were selected where the convenience services based on instant payments provide a real value proposition according to our team of experts: • Purchases made at physical merchant acceptance points • Purchases made at online stores • Payments between individuals • Bill payments

THE MOST EXCITING PHASE OF THE PROJECT THAT CALLED FOR THE GREATEST CREATIVITY AND PATIENCE

In addition to establishing the value proposition of instant payments’ to users, the interests of the business players concerned in the process had to be explored to identify the drivers that enable the development and provision of the various services. The cooperation and development processes between business players had to be thought through from a technological, legal and business perspective. We learnt a lot in this phase of the project. The user-side service processes (‘customer journey’) were actually drawn up in parallel. Then the entry points critical for maintaining competition in the charted services were determined, along with the regulatory instruments that can ensure safe services and fair competition at the same time.

The joint policy work contributed to the open MNB recommendations facilitating the work of the developers and service providers of auxiliary services: • Guidelines on the QR code data entry solution applicable in the instant payment system4 • Guidelines on the payment and data entry processes applicable in the instant payment system and on the standardisation of the basics of certain related business services5

MOTIVATING THE RETAIL AND SERVICES SECTORS TO INTRODUCE THE NEW SOLUTIONS IS INDISPENSABLE FOR THE SUCCESSFUL ADOPTION OF THE INSTANT PAYMENT SERVICES

Due to the lack of the necessary knowledge and competencies on the part of service providers, the value propositions of instant payments were initially unclear and the companies were not in a position to decide. Education in itself is not enough. Visible results can only be achieved through motivating companies and supporting them in identifying their business opportunities. To smaller service providers (e.g. tradesmen, smaller shops, hospitality, bars and restaurants, hairdressers), the available benefits and necessary steps need to be made clear tailored to their own business activities. It is very important that service providers with many clients (e.g. telecommunication providers, utility providers, insurers) should offer instant payment among their payment solutions. The project has shown that in the case of large enterprises, customised education and motivation are just as important as for small outlets.

4 https://www.mnb.hu/letoltes/qr-kod-utmutato-20190712-en.pdf 5 https://www.mnb.hu/letoltes/fizetesi-folyamatok-utmutato-20190712-en.pdf

All market participants have to pull their weight in market-building. Cooperation is key here as well. First, on 2 March 2020, the obligatory basic services became available in Hungary (instant credit transfer to bank accounts or secondary identifiers), but in the months following the go-live, banks and non-bank service providers started offering convenience services. The rest of 2020 and 2021 will be about market-building. The regulatory and supervisory authority and market participants now focus on encouraging the widespread use of the basic services and expanding the range of value-added services.

In September 2020, a new dimension of instant payments appeared: the central infrastructure now accepts batch transfers and requests to pay; batch requests to pay can be sent by non-bank service providers, too. Service providers can now collect their fees with a request to pay sent to a mobile number or email address, we do not have to remember the deadline for our children’s school payments and in many other situations we can fulfil our payment obligations with a single click.

1 January 2021 is another milestone in instant payments: the Trade Act stipulates that every company with an online cash register has to offer an electronic payment option to their customers. Approximately 60,000 merchants and companies need to choose between card payments and instant payments in the next months. Since these merchants probably had not been using card companies’ services for financial reasons, we believe that the Act will give a significant boost to the adoption of instant payments.

THE FUTURE IS ABOUT DEVELOPING REAL-TIME BUSINESS PROCESSES AND TRANSFORMING THE OPERATING MECHANISM OF THE ECONOMIC SECTORS

The establishment of the instant payment system and the introduction of the services is basically the banking sector’s investment, but, if we do this right, its benefits will bolster the competitiveness of all the sectors in the economy in the medium and long run, and they may also change the operating mechanisms on the given sectors. Over the longer term, the operating mechanisms of the economic sectors other than the financial sector may be transformed, too. The widespread use of instant payment services entails the need to accelerate business processes and develop instantaneous response capacity.

Web shops, utility providers and insurance companies face especially exciting challenges: they need to make their business processes and decision-making mechanisms real-time if they want to remain competitive. The sectoral regulations will have to be revisited for

the transformation of the operating mechanisms and business processes in the different sectors.