Deniss Fiļipovs, Latvijas Banka’s payment technology expert
Within a few years, Latvijas Banka’s vision of faster payments and its successful implementation have lead euro area countries to recognise instant payments as the new industry standard. Today, instant payments are considered a key element in Europe’s response to the new payment solutions which have evolved in the context of the global digital economy and could potentially threaten Europe’s sovereignty and its ability to control payment flows in the future.
Last year, we witnessed many discussions on whether instant payments could, one day, become a new norm. Today, most experts no longer doubt that this will be the case. It took us five years to get from an idea of instant payments to its realisation. At the time, pioneers in instant payment introduction were the UK, Denmark and Sweden. Their experience showed that the technological advancements could ensure very fast and easy payments, and such payments were becoming increasingly popular with the general public. Already then, it was clear that in the future instant payments could provide significant benefits to people and businesses also in Latvia.
Over the past few years, the digital economy has made rapid progress. As an economy without borders, it is significantly affected not only by the technological advancements but also by geopolitical factors.
In 2018, VISA and MasterCard payment cards were used in 64% of all non-cash payments in Latvia. These US-based international payment card companies dominate retail payments in almost all European countries. This means that European regulators are at risk to lose control over the providers of the most popular payment instrument. Moreover, payment cards are becoming increasingly popular due to the convenient contactless payment option. In addition, further development of payment cards may even more intensify in response to the successful introduction of instant payments.
At the same time, global technology companies have significantly increased their influence in the area of payments, and their payment solutions such as Apple Pay, Google Pay and Amazon Pay are also gradually introduced in Europe. Facebook’s Libra, an initiative that has received criticism from ministers, supervisory authorities and central banks of many countries, is also worth mentioning in this list. Moreover, similar trends are coming to Europe from the East where the number of China’s AliPay users is already three times larger than the total population of the euro area (340 million).
Payment innovations should be strongly supported and encouraged.
The growing risks highlight the issue of the European payment system’s efficiency and its ability to compete with global players to preserve its independence: having the freedom of choice, the consumer will prefer the cheaper and more user-friendly solution. The European payment system is still quite fragmented; therefore, payment innovations aiming to ensure equal user experience throughout the euro area, irrespective of the country and the bank whose payment solution is used, should be strongly supported and encouraged.
The efforts of the private sector in developing these innovations are much more effective when supported by the infrastructure of the European financial system. Central banks play a key role in this process both as infrastructure providers and as market development promoters or the so-called catalysts. Owing to the active engagement of central banks, instant payments have been successfully evolving in Europe as a market participants’ initiative generating various innovative instant payments-based solutions. It is a typical approach to focus on the compliance in a response to regulatory obligations rather than on the development aspect.
Strategic and timely action by Latvijas Banka has resulted in Latvia becoming the first euro area country introducing instant payments in compliance with the uniform euro area standards three months before such payments were first made in other euro area countries. The general public in Latvia soon appreciated the benefits of instant payments, thus increasing the pressure on other commercial banks to connect to the instant payments infrastructure and offer these payments to their customers.
In Latvia, instant payments are currently offered by Citadele, SEB banka and Swedbank, Latvia’s most innovative banks, ensuring the availability of these payments to more than 90% of individuals and businesses. It is expected that next year instant payments will be offered by several other payment market participants. So far, Latvijas Banka’s instant payment system has processed more than 7 million instant payments amounting to more than 1.5 billion euro. Given that SEB banka and Swedbank do not participate in Latvijas Banka’s instant payment system and use another European solution, the overall volume of instant payments carried out in Latvia is significantly larger. While an instant payment made in Latvia may often “travel by wires” across half of Europe, the average instant payment processing time for the participants of Latvijas Banka’s system is 0.4 seconds. The instant payment service created and maintained by Latvijas Banka has operated with excellent availability (99.99%) for more than two years.
The concept of a “two-speed Europe” also applies to the introduction of instant payments: while the process has been relatively sluggish in large, cash-oriented economies, the Baltic States have clearly moved to the forefront of this unconventional payment revolution.
In Latvia, instant payments are considered to be the industry standard and a general practice with regard to customer payments.
Meanwhile, in some other European countries this service is still exclusive and quite expensive. In Latvia, approximately 25% of all interbank transfers in euro are executed as instant payments, while in the rest of Europe such payments only make up approximately 3%. Considering that Swedbank very recently also started providing instant payments via internet banking, it can now be expected that most euro transfers in Latvia will be carried out as instant payments – within a matter of seconds, 24 hours a day, 7 days a week, 365 days a year.
Although payments became much faster, they still lacked some convenience for smart phone users, as the payer had to know and enter the payee’s IBAN. Since various additional services are as critical for innovation creation as the instant payment infrastructure itself, Latvijas Banka has established the Proxy Registry “Instant Links” along with the instant payment service. The Proxy Registry ensures storage of the links between the credit institutions’ customer account IBANs and mobile phone numbers. Where necessary, the Proxy Registry “Instant Links” can also store and use other identifiers (e.g. e-mail address, ID card number) linked to customer accounts. This enables Latvian residents to make interbank payments indicating the payee’s mobile phone number only, without the need to know and enter the payee’s IBAN for each payment. Citadele has already joined the Proxy Registry “Instant Links”, and SEB banka, Swedbank as well as banks in Estonia are expected to join the Registry in the near future.
Latvijas Banka will ensure even more convenient execution of instant and other payments already across the entire Baltic region.
As early as in mid-2020, the limit for one instant payment will be raised from 15 000 euro to 100 000 euro (for further information on this European level decision, see https://www.europeanpaymentscouncil.eu/news-insights/news/amendment-maximum-amount-sct-inst-transaction-100000-euros). So, instant payments will be available for practically any transaction, including many business transactions, thereby speeding up the money flow.
It should be pointed out that most non-cash payments are payments for goods and services carried out at physical points of sale and via e-commerce where payment cards are mostly used. Since payment cards are very easy to use, it is quite challenging to ensure a similar level of convenience when making instant payments. Nevertheless, we intend to continue our work, and we believe that the instant payment request functionality might notably facilitate the use of instant payments at physical points of sale. While banks are still consulted about the nuances of developing such a service, Latvijas Banka is already prepared to meet ambitious deadlines to ensure the service’s development and availability at least in the Baltic region. Furthermore, as Latvijas Banka develops innovative services, it also seeks to establish novel forms of collaboration with market participants. Hence, to encourage active cooperation and research, Latvijas Banka plans to establish an instant payments laboratory aiming to facilitate emergence of interoperable, secure and user-friendly instant payments – based payment solutions in the Baltic region.