Digital payments have played a central role in the expansion of digital economies, e-commerce, and cross-border trade. Today, the payments landscape is on the brink of remarkable shifts, driven by the explosion in real-time payments and the rise in cross-border transactions.
In parallel to these shifts, the payments sector has also been a hotbed of intense competition and innovation over the past decade. The emergence of fintech companies and tech giants has fundamentally reshaped traditional banking models, introducing innovative payment solutions tailored to meet evolving consumer needs.
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This article delves into the latest trends, challenges, and opportunities in RTP and cross-border payments, focusing on how European banks can leverage innovative business models to drive growth and remain competitive.
Real-time payments (RTP): Trends and growth potential
RTP is one of the most significant disruptions in the global payments ecosystem. By 2022, over 70 countries had implemented RTP systems, processing more than 200 billion transactions globally. In Europe, RTP transactions are forecasted to grow from 13.2 billion in 2022 to 34.2 billion by 2027, with a compound annual growth rate (CAGR) of 21%.
Key Market Trends in RTP
- Domestic Growth of RTP Systems
RTP adoption is accelerating across domestic markets in Europe. In Europe, the UK’s Faster Payments Service (FPS) is a prime example of this success. Established in 2008, FPS processes billions of transactions annually, allowing businesses and consumers to transfer funds instantly. In 2023 alone, FPS processed 4.5 billion transactions with a value of £3.7trn, underscoring the growing reliance on real-time transactions for both retail and corporate use cases.
Similarly, other European countries have embraced RTP. For instance, Sweden’s Swish platform allows users to transfer money instantly through their mobile phones.
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By GlobalData- Expansion into Micro and Macro Payments
While RTP initially catered to smaller transactions, real-time gross settlement (RTGS) systems are now supporting high-value transactions. In Europe, the TARGET2 system, operated by the Eurosystem, offers real-time settlement of large payments in central bank money, helping companies improve liquidity management and reduce risk[1].
- RTP in cross-border e-commerce
Real-time payments are extending into the realm of cross-border e-commerce, which is growing rapidly across Europe. By leveraging RTP for cross-border transactions, European banks can better support international merchants, increase customer satisfaction, and capitalize on the booming e-commerce market.
Challenges in Seizing RTP Opportunities
While the growth of RTP is encouraging, banks face several challenges in capitalising on these opportunities:
- Legacy Infrastructure
The biggest hurdle for many banks is their reliance on legacy. Banks need to not only update their payment rails but also ensure interoperability with existing infrastructure. Integrating RTP solutions with existing legacy systems can be complex and resource-intensive, requiring significant investment and strategic planning.
- Organisational Culture
RTP requires an organizational shift towards innovation, agility, and customer-centric services. Internal resistance to change, reliance on old workflows, and risk-averse mindsets can slow down RTP adoption.
- Regulatory Compliance
European banks must also navigate a complex web of regulations. The European Union’s Payment Services Directive 2 (PSD2) is one such regulatory framework that requires banks to open their payment infrastructure to third-party providers. While this presents opportunities for collaboration, it also adds compliance challenges that can slow down the rollout of RTP services.
Cross-border payments: trends and potential
Cross-border payments are evolving rapidly, driven by the demand for more efficient and cost-effective solutions. Expected to reach a market value of $250trn by 2027, cross-border payments play a crucial role in global commerce and offer banks substantial growth potential.
Key market trends in cross-border payments
- Increased demand for real-time transactions
As global trade accelerates, there is an increasing need for real-time cross-border payments. Real-time cross-border payments are critical for enabling seamless international transactions, reducing delays, and enhancing cash flow for businesses engaged in global trade.
- Market growth
The cross-border payments market is expanding, fueled by rising volumes, particularly in sectors like e-commerce. Banks have significant opportunities to enhance their offerings by catering to the increasing demand for streamlined, multi-currency services. - Technological innovations
The introduction of new technologies, including blockchain and digital currencies, is reshaping cross-border payments. For example, Ripple, a blockchain-based platform, offers near-instant settlement for international payments. This reduces costs and improves transparency, which is particularly important for European banks navigating the challenges of high fees and exchange rate volatility.
Challenges in cross-border payments
High costs
One of the most significant challenges in cross-border payments is the high transaction costs, driven by fees, exchange rate fluctuations, and compliance costs. According to the World Bank, the worldwide average expense of transferring $200 from one nation to another was approximately $12. European banks, particularly those involved in remittance services, must focus on reducing costs to remain competitive. The G20 has set a target to lower remittance costs to 3% by 2030, putting additional pressure on banks to find more efficient solutions[2].
Settlement Delays
Settlement times for cross-border payments can range from real-time to several days, depending on the payment rails used. Compliance checks, varying regulatory requirements across jurisdictions, and the use of multiple intermediaries contribute to these delays. However, the G20 aims for 75% of all cross-border payments to reach the beneficiary within one hour by 2027, signaling the need for faster, more reliable systems.
Transparency issues
Cross-border payments often suffer from a lack of transparency, with customers frequently unaware of transaction costs, hidden fees, and exchange rates. A 2023 SWIFT study revealed that transparency remains a key concern for both consumers and small businesses when making international payments.
Revenue opportunities through new business models
To unlock new possibilities in digital and real-time payments world, banks must modernise their payment systems by adopting composable platforms. In order to tap the opportunities in RTP and cross-border transactions, European banks must explore innovative business models that drive revenue while enhancing customer experience.
Embedded Payments
Embedding payments into primary customer journeys allows banks to create frictionless, integrated experiences. By integrating payment services into platforms such as e-commerce, travel, or even everyday apps, banks can provide seamless, real-time transactions, while earning transaction fees and gaining valuable customer data.
For example, Shopify and Amazon have successfully embedded payments into their ecosystems, offering customers a smooth, one-click checkout experience. Banks can emulate this by embedding their payment solutions into various platforms, enhancing customer loyalty while tapping into new revenue streams.
Banking as a Service (PaaS)
Banking as a Service (BaaS) model enables banks to offer their payment infrastructure to third-party developers, allowing external platforms to integrate payment functionalities via APIs. This helps in creating new revenue opportunities by tapping into the growing demand for flexible, cloud-based banking solutions.
Marketplaces
Marketplaces are evolving as the next frontier for financial services, where banks can offer a range of financial products and services through a single, integrated platform. Developing such financial marketplaces presents a promising business model. A prominent example is Google Pay, which has evolved from a simple payments app to a financial marketplace, offering a comprehensive range of services like digital banking, peer-to-peer payments, and more. By adopting a similar model, European banks can position themselves as central players, while monetizing a range of services beyond payment processing. Further, by embedding payments into marketplaces for non-financial services, banks can further expand their reach and revenue potential.
To conclude
The rise of RTP and cross-border payments presents both opportunities and challenges for European banks. Banks must address regulatory, technological, operational, and customer-centric considerations to effectively navigate the complexities and provide seamless, secure, and efficient payment services to their customers. Collaboration with industry stakeholders, investment in technology, exploring new business models, and a customer-centric approach are key to drive growth and maintain a competitive edge in this evolving financial landscape.
John Barber is Vice President and Head, Infosys Finacle and Siva Subramaniam is AVP, Senior Industry Principal at Infosys Finacle
