Most people understand instant payments as fund transfers that happen in real-time. These transactions can be requested anytime and anywhere, and are accessible as soon as they are sent. However, financial institutions tend to define instant payments as payments that are processed in under 5 minutes. This stands to reason: businesses have to account for uncertainties, such as the processing time of supporting institutions.
In recent years, the demand for instant payments has skyrocketed. According to this Market Analysis Report, instant payments have a market size of USD13.55 billion in 2021 and are forecast to grow at a 34.9% CAGR to USD193 billion in 2030. This puts a strain on the remittance industry to deliver instant payments while navigating a crowded marketplace full of corresponding intermediaries, infrastructural issues, rising costs and tricky regulations.
As a result, many have adopted new payment technologies, even harnessing the power of blockchain and digital currencies, to address such challenges.
Is SWIFT swift enough to handle instant payments?
Payments typically go through SWIFT, or the Society for Worldwide Interbank Financial Telecommunication, a common language used by financial institutions to send payments across the globe. SWIFT is used in 200+ countries, connecting more than 11,000 institutions, but it is not without shortcomings.
Its main selling point is also its biggest drawback: with great availability comes great complexities. A standard SWIFT transaction can take up to 3 days. The reliance on an unknown number of participating banking intermediaries also creates uncertainties in terms of costs. While SWIFT has claimed that it can facilitate instant payments, these tend to be narrow in application.
Many have also sought to lessen this dependence on SWIFT. In 2015, China launched its answer to SWIFT, the Cross-Border Interbank Payment System (CIPS), to foster the use of its currency in cross-border transactions. This is unsurprising. According to SWIFT’s monthly currency report, the Chinese yuan accounted for 3.2% of the global payments delivered on the platform in January 2022, good enough for 4th. However, this pales in comparison to the greenback, which accounted for 39.92% of all transactions in the same month.
CIPS has a long way to go to gain traction among SWIFT incumbents, but disruptive innovations are a hallmark of fintech and the launch of CIPS is an encouraging move. However, it remains to be seen whether SWIFT or CIPS can mitigate the inherent problems of a global settlement system built using many different parts that may not necessarily adhere to each other’s rules.
Direct partnerships to boost reliability of instant payments
A targeted approach, in which institutions embrace direct volume-based partnerships in specific countries, may be the most sensible short-term solution. For example, Tranglo Connect added Hong Kong as a receiving corridor in January this year. By leveraging Hong Kong’s Faster Payment System and the Global E-money Alliance, an international social banking platform, Tranglo Connect can facilitate instant payments on this superhighway.
Meanwhile, the cross-border agreement between Philippines and Singapore to link their QR and payment systems late last year is expected to be a “concrete step towards the vision of an Asean network of interconnected real-time payment systems”, according to Ravi Menon, managing director of the Monetary Authority of Singapore. The report added that remittance flows between the 2 countries totalled USD2.15 billion in 2020, so the deal made perfect sense.
And the latest such development sees the Arab Monetary Fund inking an MoU with India’s NPCI International “to promote the usage of multi-currency instant payment service… in the Arab region and at a global level”. The MoU is looking at streamlining the payment flows in the India-Arab corridor by introducing a single payment rail that leverages the power of NPCI’s Unified Payment Interface, which processed USD940 billion, or approximately 31% of India’s GDP, in 2021.
Digital payment rails can facilitate cost-effective transactions
No discussions about instant payments are complete without blockchain and digital currencies. According to a Pymnts report, 37%1 businesses use cryptocurrency and blockchain for cross-border payments. We covered the many advantages of digital currencies in cross-border payments, and the 2 keywords that often crop up are speed and cost.
A study in Kenya agrees. It found that the use of stablecoins on digital payment rails could lower cross-border fees from 28.8% for a USD5 transaction to just 2.02%, regardless of transaction value. The same study also found that stablecoins allowed payments to be transferred instantaneously. Stablecoins are a form of cryptocurrency typically pegged to fiat currencies to hedge against the volatility of cryptocurrencies.
For remittance businesses, RippleNet’s On-Demand Liquidity (ODL) could eliminate the need for pre-funded accounts, which can be extremely costly and locks in valuable working capital. ODL leverages the digital asset XRP to bridge 2 currencies in seconds, allowing customers to improve their cash flow.
Conclusion
Speed is the equivalent of convenience, especially in the remittance industry. Instant payments can revive industries and capture untapped opportunities, but true long-term benefits can only be achieved if global systems fully align.
1 Based on a survey of executives at 250 multinational businesses and 250 financial institutions.
