Instant Payments — Instant Revenues? #itscomplicated
Instant Payments generate a lot of buzz in the industry of payments, for years already. Everyone likes to have their opinion heard on it: Banks, Central Banks, Software Providers, Consultants… all talk about Instant Payments.
Instant Payments is needed, you hear, otherwise Bigtech or Fintech will take over. The banks are more hesitant. They fear the consequences in their P&L: the cost of implementation, the IT performance 24/7/365, cost of risk and compliance, uncertainty on liquidity…
They all say Instant Payments is customer-driven.
Today everything is instant: mailing, messaging… your pizza, or even the clothes you order online, arrive faster than the payments itself.
This needs to change, they say: the industry can no longer argue why payments are not instant.
On the other hand: I don’t hear a lot of friends asking me about instant payments. Nor do I see a lot of enthusiasm in newspapers on Instant Payments. OK… my friends didn’t ask for a smartphone either until it was on the market.
Question is: is the consumer prepared to pay for making an Instant Payment, like they did for a smartphone? This is almost the same as asking: is the consumer prepared to pay for sending an email instantly?
The answer is clearly no…
Yes, but these email providers, like Google, Yahoo… make revenue of your data, they say…
All over Europe, banks start rolling out Instant Payments, so we have a few reference points when it comes to pricing. That is: for retail customers, as this is the only segment where regulation imposed sufficient transparency in the cost of daily banking.
Pricing of daily banking remains very country specific. There are countries with a rather high cost of banking, like France, UK, Italy. On the other hand, you have countries like Belgium where the cost of daily banking is a lot more modest or even free of charge in some cases.
This makes it very difficult to extrapolate a pricing strategy based on what you can observe abroad. Nevertheless, these different strategies may help you in the creation for a better vision on the pricing of your instant payments.
You can call it value pricing or relative pricing. In essence, it is about charging a % on the transaction amount, eventually with a minimum and a maximum price.
The idea is that a customer is more willing to pay for a higher value transaction. The risk is also bigger of course, so there are rational arguments for this kind of pricing. To a certain extend…
The advantage for a bank: you bet on the lower value transactions and this helps you test the system before going full-fledged. You build a proper liquidity history before forcing every transaction through the Instant Payments engine.
This price setting is often used because people tend to be willing to pay more for a higher value transaction: you don’t want to pay €0,60 for a transaction of €6, but it is no issue for a transaction of €10,000.
This approach is very common in Italy for example. The transaction cost varies between €0,6 and €20.
Italy has an interesting case by the way on pricing Instant Payments. A test of Intesa Sanpaolo indicated that consumers are willing to pay for instant payments today. They started Instant Payments in November 2017. Their offering was initially free of charge, resulting in a high uptake by consumers. In 3 months, 50% of their consumer switched from SCT to SCT Inst. That moment, the bank started charging for Instant Payments. After the first slump in volume, consumers did seem to understand the value of Instant Payments, and they were prepared to pay for it.
You pay a fixed cost, a fee per transaction, very transparent, very clear. For low-value transaction: sometimes very painful.
The advantage for a bank: you can charge high in the beginning, to test the model. Tweak it afterward, depending on your Instant Payment ambitions (or as a reaction to your competitor’s ambitions).
This seems to be the way to go in France. Keep in mind this is, overall an expensive country for your bank activities. At the start, the issuing banks charged on average €0,8-€1 per transaction.
The question in France is how sustainable this is with the recent move of Boursorama, who started offering Instant Payments at no cost.
The fixed cost scenario is also the way Germany took.
Instant Payments are offered free of charge, or they are added in the bucket of daily banking services you already offer in a package. You believe Instant Payments is the new normal and you use the implementation to modernise the whole payments infrastructure.
By offering Instant Payments free of charge, you stimulate consumers to adapt to the bright world of instant. You do everything to lower the regular payments to a degree where you can simply stop processing them.
That is the direction The Netherlands like to go. Today they have a fast payments product, which is charged, with marginal usage.
Most banks in Belgium remain hesitant to communicate their pricing strategy on Instant Payments. They seem to take the position that pricing on Instant Payments do not need to be communicated 2 months in advance because it is not a change in price, but a new, optional, product offering.
ING is the only Belgian big bank that already added Instant Payments in their tariff list. They offer it also free of charge.
This shows a mixed picture of pricing instant payments. I guess all depends on:
- are you keeping your legacy running? Instant Payments is just an add-on and charging makes sense because you like the bulk to remain on the legacy. Question is how long this is sustainable?
- are you promoting yourself as the innovator? Instant Payments should be offered free of charge because you welcome everything that is instant. That is what the customer wants
- are you afraid of the consequences of Instant Payments on risk, compliance or finance? Charging Instant Payments may reduce the volumes of this product
- are you looking for more fee income? Charging makes sense, whether you play on the unit cost or an upgrade of your daily banking packages. The question here: don’t you risk to charge yourself out of the market? That depends of your competition of course.
Just keep in mind that payments are, and will remain, a commodity. As such, as an issuer, it makes no sense to compare it with a smartphone. After all, and instant payment is just a payment, an electronic transaction.
Consumers will not keep paying for individual transactions: one day Instant Payments will be free or added in a service pack where a consumer doesn’t have the transparency of how much he pays per transaction.