Switzerland: Instant Payment Will Become the Standard

The cluster of people present includes St. Galler Kantonalbank Chairman and Executive Board Member Patrick Graf, Professor Sébastien Kraenzlin, Head of Banking Operations at the Swiss National Bank, Michael Montoya, the Managing Director of SIC Ltd until 31 May 2023, and his successor Matthias Sailer.

Instant payments are processed and settled 24 hours a day, 7 days a week, and 365 days a year. What importance do you think consumers place on instant cash flow?

Patrick Graf: In today’s world, where I subscribe to a newspaper and can instantly access it, it makes sense for digital payments to be executed instantly as well. Seeing a transaction executed instantly and the money being received in a flash, with the same going for refunds, brings peace of mind. Having an eye on the current state of one’s finances at all times is a real advantage.

Sébastien Kraenzlin: The consumer’s perspective also plays a role here. A Whats-App message reaches me right after it’s sent, but payment processing via e-banking, by contrast, can take several hours, and credit card transactions can take several days for the amount to be credited to the merchant. At the moment, only cash ensures final and irrevocable money transfer in real time. In the future, this immediate availability and finality will also be made possible by instant payment.

Matthias Sailer: What Sébastien is alluding to here is end-to-end automation of payment processes and complete transparency with instant payment – not just between banks, but also between the payer and the payee. And don’t forget counterparty risk, which vanishes completely with instant payment because the transaction gets processed immediately and irrevocably.

Small-value payments, for instance via TWINT, which in reality do not conform with instant payment rules at present, illustrate that bank customers have a need to quickly move money from one account to another at any time of day. What makes sense for private clients also works for corporate clients. This is precisely where the huge potential of instant payment lies. I’m thinking particularly of treasury payments, but also of delivery-versus-payment transactions, which are hugely important for corporate clients.

What problems does the new real-time procedure solve?

Sébastien Kraenzlin: I would rather speak of risks. Staying on the subject of TWINT, on one hand, there’s the risk that although the payee receives the payment in real time, the money transfer between the two banks doesn’t take place until two days later. The recipient bank thus advances money to the payee in actual fact. On the other hand, there’s a comparable risk in the acquiring business for point-of-sale transactions. We thus have a certain fulfillment risk here, as well, which we can address with instant payment. Besides tackling those risks, we are also developing new prospects for service innovations.

Patrick Graf:There’s another aspect worth bearing in mind: you can schedule a payment to be executed anytime you wish, down to the exact minute. This means that you can arrange – for whatever the reason – for salary payments to be disbursed to your employees at precisely 8:37 am on the 25th of each month, even if it falls on a weekend or a holiday. The payments are executed instantly at the specified time so that your employees see their money credited to their accounts at the exact same minute. This enables your company to optimally manage its cash flow.

Sébastien Kraenzlin: We can broaden the framework even further. We have cash and digital money, and in the future, we will probably have tokenized money as well. It is essential for these forms of money to be interchangeable, or fungible, at all times. Cash, of course, has always been instant, so to speak, and digital money will also become instant with the advent of instant payment. Finally, the tokenized money ecosystem is also expected to provide round-the-clock availability. The 
challenge now facing banks is to set up round-the-clock accessibility so that they can continue to play an active part in these three worlds.

To what extent is this round-the-clock availability an exertion for banks?

Michael Montoya: The entire instant payment procedure is based on the end-to-end automation of payment processes that Sébastien and Matthias mentioned before. If the rollout of instant payment nonetheless were to cause banks to move their working hours to the nighttime, it would mean that something has gone wrong. It goes without saying that new challenges would emerge. How, for instance, should a bank conduct itself if a payment gets held up overnight because it was flagged by a check against international sanctions lists? We need to gain more practical experience in dealing with such occurrences.

How can we ensure that instant payment won’t become the exception in payments?

Patrick Graf: It’s crucial to lend momentum to this system. We see it very nicely with TWINT: after a rough start with the search for users, this P2P payment mode eventually took root. Then things went more quickly and easily with the POS business, especially online. Instant payment is bound to experience something similar. What’s needed first is a good offering followed by positive user experiences.

Michael Montoya: The challenge that banks are confronted with is that generally they are not set up to operate around the clock. Although some individual trading, IT, and call center units operate 24/7, that isn’t the case in a bank’s accounting department, where day-end closings and batch processing are still part of the daily routine. Instant payment will give banks an opportunity to organizationally adapt their well-functioning 24/7 operations and convert them into customer offerings that go beyond normal business hours.

All payment transaction banks in Switzerland will have to be capable of receiving instant payments, but what is the vital spark to induce them to submit such payments?

Michael Montoya: When the Single Euro Payments Area (SEPA) was introduced, nobody used it, and there was no volume. What did banks do then? They forwarded any payments that met the SEPA criteria as SEPA payments regardless of whether the payer commissioned the transaction as a SEPA payment. That got the whole thing rolling. Customers eventually adapted when they found out that third-party charges were suddenly lower in the SEPA. Analogously, I can picture banks routing credit transfers into the instant payment process without the payer having commissioned them as instant payments. The payee is pleasantly surprised by the quick crediting of the money to his account and thus has a positive user experience. Then perhaps a new service arises in the form of a receipt confirmation notice to the payer, which could be a company, for example, that appreciates this added service even if it didn’t commission the payment as an instant payment. Each bank decides whether it wants to create new offerings and ultimately new user experiences for its customers via this new avenue.

Patrick Graf: It’s entirely to be expected that instant payment won’t be a hit right away – it was no different with SEPA and TWINT. We just have to be patient. Meanwhile, it’s important for everyone to use the same terminology for this new normal: “instant payment” in English, “Instant-Zahlung” in German, “paiement instantané” in French, and “pagamento istantaneo” in Italian.

Michael Montoya: There’s one more point that we haven’t touched on yet. We have to draw a distinction between instant payment as an offering for customers and the instant payment process that takes place within the market infrastructure. This process will be utilizable for other use cases besides payment transactions. Take, for example, spot currency trading, where it currently takes two days after the closing of the transaction for the money to change hands. Or take securities trading, where settling a transaction involves settling the cash leg of the trade. The instant market infrastructure enables better solutions to be developed precisely for use cases of this kind.

Matthias Sailer: The strength will lie in cleverly combining the different application areas. There is thus a lot of potential to create added value for all economic actors.