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It is no coincidence that payments, the most competitive area of banking and financial services, is also the ripest for disruption. The record levels of corporate and venture capital flowing into the payments sector are impacting all spheres of banking, from retail and commercial to investment and emerging neo-banks. As these new payment capabilities evolve, banks will either experience increasing disintermediation or will grasp the opportunity to innovate and reinvent the relationship with their customers.
"It is now time for governments, merchants, banks, and startups to explore and work together in realizing the true impact of what request-to-pay might bring"
Request-to-pay (RTP), one of the hottest topics in payments and already a popular service offered by many fintechs, is primed to usher in a new wave of payments innovation for both consumers and businesses alike. Built as a message layer that sits on top of existing banking and payments rails, RTP provides a flexible way for consumers and businesses to settle bills, instantaneously and transparently.
Here’s how it works: A consumer or business decides to purchase a good or service. A request-to-pay message with details of the purchase is then sent by the seller to the purchaser. Once the purchaser authenticates and approves the transaction, and once the merchant receives assurance the payment is on the way, the goods or services can be released, and the purchaser’s bank sends the payment to the seller’s bank through a clearing system in real time.
RTP’s potential upsides are myriad
RTP brings a number of potential benefits to consumers, businesses, and merchants, as well as positive knock-on effects for the financial services sector and the global economy.
For consumers, RTP is a simple way for friends and family to exchange funds conveniently, in real time. It is primed for easy integration with social media and chat channels, meaning it will likely be highly desirable and adopted by millennials. RTP makes fulfilling invoices as simple as opening a link, which allows every communication channel to serve as a potential medium for payments. RTP is also designed for flexible payments schedules, giving consumers more options for how they settle invoices. For example, a consumer will be able to settle half of an invoice immediately, and the other half at a later date, depending on their personal cash flow, financial needs, and the terms set by the merchant. Similarly, RTP is very well suited to recurring payments, offering an alternative to Direct Debits and putting greater control in the hands of the consumer.
On the other side of the equation, B2C merchants benefit from easy customer registration. To wit, many RTP schemes will allow customers to initiate payments through a phone number or email address, making it easier for them to collect payments from their customers and at the same time reducing the risk of storing card or bank details. For B2B merchants, RTP’s flexible architecture enables new payment schedules and timelines, which can help limit late payments and accounts receivables, thus improving the merchant’s view of their cash flow, a critical metric for any business.
Most importantly for merchants, RTP is a data goldmine—understanding how customers pay for goods and services empowers those merchants to create tailored products around the needs and habits of specific customers. Banks, which may view RTP as decretive because it cuts into the payment stack, in fact, may stand to benefit from RTP, as they will be able to offer complimentary tailored, data-driven products and services to their customers.
For financial services companies and society at large, RTP can unleash a new wave of economic opportunities for underbanked populations. There are millions of people worldwide with bank accounts and cell phones but no credit cards. RTP can help those individuals access new goods and services, while simultaneously offering merchants a new pool of potential customers. By empowering buyers and sellers alike, RTP can have a stimulative effect on entire economies and regions. RTP also has the potential to reduce the payments cost base for financial institutions, giving them some much-needed oxygen against emerging disruptors.
RTP’s future is bright, but not inevitable
The ultimate success of RTP depends on whether public and private institutions play an active role in integrating the RTP capability into their existing payments infrastructure. The fact is, RTP represents a significant shift in payments and banking infrastructure; to capitalize on such an opportunity, caution, strategic thinking, and collaboration are required in equal measure.
State governments and supra-national bodies will play an important role in laying the regulatory groundwork for RTP to flourish. Governments in need of a blueprint should look to the United Kingdom, whose New Payment System Operator (NPSO) allows billers and financial institutions to provide feedback using an API sandbox. This forward-looking approach to RTP is part and parcel to the U.K.’s New Payments Architecture, which seeks to modernize the U.K.s payment infrastructure and empower consumers with more information and choices.
As governments and regulatory bodies seek to implement RTP schemes, they should likewise follow the lead of the U.K. Financial Conduct Authority’s global fintech sandbox, which encourages private-public collaboration. Merchants will need to experiment with RTP use cases to gauge how they will integrate RTP standards. Banks will want to start building internal and external APIs to support their RTP function and collaborate in realizing a shared set of standards around customer authentication and existing protocols such as ISO 20022. And startups will want to start building new products and services that meet the required standards.
In sum, the potential of RTP is enormous and well-established. It is now time for governments, merchants, banks, and startups to explore and work together in realizing the true impact of what this new service might bring.