Transforming the payments landscape with Request-to-Pay

Payers spoke to Michel Boelhead of local clearing at Payments Bank, banking circlee, on how Request-to-Pay can become the cornerstone of the digital payments revolution

We’ve been talking about Request-to-Pay for a few years now, but growth seems to have accelerated in recent months. Do you think 2022 is the year we’ll see it go mainstream?

Alongside Buy Now Pay Later (BNPL), Request-to-Pay (R2P) is certainly growing and is set to become a vital part of the evolving new digital payments landscape in the next couple of years. Today, less than one in five European banks offer R2P solutions, but by the end of 2023 we expect at least half of institutions to have R2P offerings.

We’ve seen payments innovations accelerate over the past two years, which has undoubtedly led to faster R2P growth than originally anticipated. The recent rapid growth of R2P indicates a huge market appetite for a flexible, inexpensive, and secure new way to manage regular or one-time payments. A secure messaging service designed to make payments simpler and more flexible for businesses and consumers, as well as cheaper and easier to manage for financial institutions and merchants involved in the payment journey, R2P is a suitable financial innovation in the future .

Why hasn’t R2P hit the mainstream until now?

Despite the benefits it brings, there are significant hurdles preventing R2P from reaching its full potential – legislation being the biggest hurdle right now.

Currently, the second European Payment Services Directive (PSD2) requires full customer authentication for every payment request sent. This is what currently makes R2P less attractive. Fortunately, solutions are on the way.

For example, the minimum transaction value requiring authentication has recently been increased from EUR 30 to EUR 50, and to GBP 100 in the UK, and automated customer authentication systems can be used where authentication is still required. These are all changes that also provide a clearer path for R2P.

What else is holding R2P back?

Another challenge faced by banks adopting R2P messaging is selecting a means of integration and deployment. Most banks choose to offer R2P in their online banking and mobile apps, but the integration is more complicated. Banks must choose the path that best suits them and their customers, today and tomorrow. A route is a one-time integration with a third-party provider. Another option is a one-to-many platform solution. Third-party integration is the easiest to launch, but its capabilities are limited.

The platform solution, on the other hand, is the best long-term approach due to improved connectivity between banks and customers. But creating an interoperable platform takes more time and investment. Pay.UK is building such a platform, working to define the parameters of an instant payments system allowing all players to connect in the same way to the same model.

R2P will only take off if a pattern is defined and financial entities are agnostic so that R2P offers are the same regardless of which banks are involved in the request.

How is R2P being adopted in different regions?

Most R2P systems are built as a national model designed to be connected to regional interfaces, such as P27 in Northern Europe. Indeed, R2P frameworks are already established in the UK, EU, Australia and the Nordic countries. A US program was launched in 2021 and a second should be launched in 2023.

Pay.UK expects R2P to save the UK economy between £2-3 billion, so it’s no surprise that UK FinTechs and banks have been keen to get involved. UK financial institutions have launched a range of R2P offerings including billing solutions as well as personal and Peer-to-Peer (P2P) payments. However, currently, it is mainly seen as an opportunity in the business-to-consumer (B2C) and consumer-to-business (C2B) domains, especially in e-commerce.

Other regions focus their R2P efforts on different opportunities. In Northern Europe, for example, the peer-to-peer capabilities of R2P are mainly used when requesting money from relatives or paying bills.

Who stands to gain more from R2P: banks, payment companies, merchants or customers?

There are wins for everyone involved.

With R2P, businesses that have relied on invoicing for payment — and all the time, administration, and resources that can entail — can turn the tables and request payment of an invoice. The advantage for the seller is clear; the benefits for buyers are also considerable. When receiving a “payment request,” a customer can quickly and easily pay in whole or in part, choose to contact the biller, request more time, or even refuse to pay. Customers gain flexibility and control over how they manage their finances.

R2P also offers many advantages for banks, merchants and their customers, among which the security improvements are among the most important. Consumer authorization happens within a bank’s app or website, which means that R2P transactions are protected by bank-level security. This may include two-factor authentication and strong customer authentication protocols mandated by PSD2, where applicable.

Another significant advantage for merchants of all sizes is the lower cost of R2P compared to card payments. For businesses that currently rely on card payments, R2P offers an alternative that bypasses card rails and associated interchange fees, dramatically reducing the cost per transaction.

The potential for instant settlement is another attractive feature of R2P for consumers and businesses, although the feasibility depends on the method of integration adopted by the banks involved in the transaction. R2P is already proving popular for accelerating cash flow for micro-merchants and on-the-go economy workers, and for eliminating friction in paying bills for 18-34 year olds.

What should we expect in the future for R2P?

One of many examples of the industry-wide transition to more accessible digital services, R2P clearly demonstrates the potential of a flexible payment system based on open APIs and designed to meet the needs of users at the digital age. Banks looking to modernize their payment platforms by launching R2P solutions must decide whether to take the third-party or platform approach.

We expect national and international one-to-many platforms to prove cheaper and more efficient than third-party integration – as has already been demonstrated in the Nordic and UK programs. They will also be more easily connected across borders, bringing vital interoperability capable of increasing both the potential and use cases of R2P.

While it will likely take a few years for R2P to reach its potential, once adopted and secured, it will have the ability to become an international payment model. And, once linked to digital and mobile uses, R2P is likely to represent a viable, accessible and profitable alternative to international payment systems.

About Michel Boel

Michael has over 15 years of experience in the financial industry and joined Banking Circle after working for Saxo Bank. With hands-on experience in capital markets, operations and product development, Michael covers both technical and commercial aspects of the transaction banking value chain. Over the past decade, Michael has focused on international and domestic payments ecosystems – using his deep knowledge of regulation, finance and the payments industry to execute and drive implementation projects across worldwide.

About the banking circle

Banking Circle is a fully licensed, next-generation payment bank designed to meet the global banking and payment needs of payment companies, banks and online marketplaces. Banking Circle solutions power the payment propositions of more than 200 regulated businesses, financial institutions and marketplaces.

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