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Instant payments finally gaining traction in Germany

Our CEO, Leo Lipis, was interviewed by Deutsche Welle to talk about how banks in Germany are finally enabling private account holders and businesses to transfer money in a lightning-fast way. So why isn’t being used?

Leo Lipis

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February 28, 2019

It may not mean an awful lot to all Germans, but being able to complete a money transfer through bank accounts within seconds — rather than days — can't possibly do much harm in Europe's biggest economy.

Recently, Germany's savings banks, or sparkassen, introduced a new feature allowing customers to make a transaction as an instant payment. But it only works if the receiving bank also supports instant payments.

In general, though, an increasing number of lenders active in Germany have already joined the group of early adopters of the technology. Berlin-based Leo Lipis, who heads the Lipis Advisors consultancy, sheds some light on the benefits of instant payments and where Germany stands at the moment.

DW: How much of a blessing is it to be able to transfer money between banks within seconds?

Leo Lipis: Instant payments can be defined as payments from one bank account to another that are completed and confirmed for both the payer and the payee within less than one minute, typically within five to 10 seconds.

It's a trend that's been going on in the industrialized world as well as in developing countries for 15 to 20 years now. It happened to be new in Germany and in the euro area where it was just introduced a little more than a year ago.

The first modern instant payment system in Europe went live in the UK around 2008, if I'm not mistaken. I actually helped design that system back then when I was working in England. But there are some in other parts of the world that went live before that. There was one in South Africa, also in Brazil and Mexico — places you might not think of as being frontrunners in instant payment systems development.

There are different uses, of course. There are person-to-person transaction (P2P) payments to settle bills immediately. The real benefits are for corporate customers, though, like for instance small shops being able to pay their suppliers in real time.

It can allow them to compete against some of the much larger businesses that may have a lot more sophisticated tools at their disposal for managing their inventory and their supply chains.

It looks like German lenders are a bit behind in implementing real-time payments? Would you go as far as to say they've miserably failed on this front?

I wouldn't say "miserably failed." The German banks are implementing it a bit slower than in many other countries. They aren't the slowest either, they're somewhere in the middle.

There's actually a pretty simple explanation for German banks taking their time — the current system works very well. The benefit of moving from a normal credit transfer in Germany, which takes two to four hours normally, to an instant payment that's done in five to 10 seconds is not a huge benefit for the vast majority of payments.

The vast majority of payments are scheduled a day or two in advance anyway, like people's salaries, dividend payments from investments or pensions and other payments like direct debits that are not eligible to be made into instant payments anyway. So, the current system serves most purposes quite well.

In other words, the benefits coming from real-time payments can only happen for a small slice of the pie, may be around 20 to 30 percent of all payments — which still is a lot.

One of the reasons why some lenders have been a bit hesitant to make real-time payments a reality is the costs involved? Are we talking about considerable costs?

Oh, certainly. I'd say that even for a medium-sized bank, the costs could be tens of millions of euros to modernize the infrastructure for instant payments.

For a large bank, it could be in the hundreds of millions of euros. So, it's not an inexpensive upgrade, especially because many banks run older IT systems for things like core banking — for tracking account balances, calculating interest rates and fees.

Some of the systems might be 20 years old, in which case they aren't actually running in real time, which means that even if they receive a message saying "please credit a given client's account €50," they would not be able to post it to that account and notify you in real time that this account has in fact been credited.

On the surface, the upgrade sounds quite simple, but if you get into the details, it's actually quite complicated for the banks.

For instant payments to work you need a player who acts as a clearing house? Who does that in Germany?

We're talking about interbank infrastructure, about clearing houses that act as a sort of hub linking the banks to each other. They have to make sure that the actual payment message goes from bank A to bank B.

In Germany, that can happen through an organization called EBA Clearing of which the major German banks are members. It's a Paris-based organization; it runs a system called Real Time 1 (RT1) that links together the major European banks.

RT1 handles the real-time messaging, but also facilitates the settlement which happens at the European Central Bank (ECB), using a system called TARGET2.

Banks also have the option of using any one of about 10 other clearing and settlement mechanisms, but no lender in Germany is using them at the moment.

Most German banks offering real-time payments make you pay a small fee for making such a transaction, and right now the amount of money you can transfer that way is rather low. Isn't that rather counterproductive?

There's no doubt that charging more for an instant payment transaction than for a regular one will depress volumes. Statistically, in countries that have higher prices for payment transaction, volumes are lower. There's a very clear correlation.

On the other hand, I can understand that the banks want to recover some of the costs involved in introducing such a system. The right strategy for banks is to keep prices low enough so that they don't act as a barrier.

In terms of the cap on the value of transactions, which currently is set at €15,000 ($17,000), I strongly believe that limit is going to get up relatively quickly. Once the banks get used to managing the system and managing the fraud issues that may come up, I expect the limit to be raised.

Finally, which countries are Europe's instant payments frontrunners, and what's the situation outside of the continent?

Instant payments started very early in the UK, Denmark and Sweden — all outside of the euro area, with much smaller markets to deal with. They don't have to coordinate thousands of banks, but only tens of banks, in each case probably just four to five banks that really call the shots.

Sweden focused very much on P2P payments, while the UK focused on corporate payments. And Denmark took a different path again with the emphasis on mobile payments.        

Outside of Europe: South Africa and Nigeria have real-time payment systems. When we look at Asia, the large economies there have real-time payment systems, including Japan, China and India, Taiwan, South Korea and Singapore.

Australia just introduced one, and the US introduced one in late 2016.

Dr Leo Lipis is the founder and chief executive of Lipis Advisors, a consultancy in the field of payment systems. Leo has about two decades of experience in payment systems management, consulting and research across Europe and the Americas.

Before getting Lipis Advisors off the ground back in 2007, Leo held positions in payments strategy and analysis with a number of commercial lenders, clearing houses and central banks.

The interview was conducted by Hardy Graupner.

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Leo is the founder of Lipis Advisors and has over 25 years of experience in payment systems consulting and research on all six continents. Prior to founding Lipis Advisors in 2007, he held positions in payments strategy and analysis with commercial banks, clearing houses, and central banks.