The UK Faster Payments Service heralds a new epoch for payments. Although there are obvious benefits to individuals in terms of convenience and certainty of payment, the potential benefits to business and the economy are even greater. Martin Kearsley, director of strategy at VocaLink, explains how the infrastructure was designed and its potential benefits to consumers and businesses alike.
Faster payments and the need for speed
The payments landscape is changing fast. Distance is no longer a meaningful measure of payment efficiency and has ceased to be a source of competitive advantage. Speed has become the major factor that determines commercial success throughout the industry. However, the quality of a payments system cannot be judged by speed alone. Speed must be considered alongside other criteria such as security, accuracy, cost efficiency and overall customer satisfaction. It is against this backdrop that the UK payments industry embarked on its journey towards a faster payments system.
The UK Faster Payments initiative has its origins in the Cruickshank Report of 2000. Although the report highlighted the need for fast, low-cost payment services in the UK, a mixture of other criteria has fuelled the journey towards the introduction of Faster Payments. Overall, bank customers have become more discriminating, and expect greater choice and convenience from banks and other payment service providers. And, in the digital age, customers now have access to sufficient information on which to make an informed choice. Customers also expect value for money, and the market has reacted accordingly: a paperless, borderless payments environment has increased competition, which has in turn reduced prices for end users.
Technological progress has played – and continues to play – an important role too, in enabling new payment services to be launched. Many new banking services use the internet or mobile technology, or both, blurring the line between different payment channels. Customers want to move towards self-service banking and new digital payment services. These services require shorter payment clearing cycles to succeed and to bring payments into line with the needs of a 24/7 society.
In essence, the UK payments environment has been long overdue for a refresh to keep abreast with the evolving needs of its business and retail customers. So there were many compelling reasons to deploy the Faster Payments programme. Nevertheless, the introduction of Faster Payments has been a major challenge for the UK banking industry. Why?
An accident of history
The structure of the UK payments industry is a product of a long evolution. In many respects the UK payments environment is a digital adjunct to an analogue world. The payment systems infrastructure has its roots in a three-day clearing cycle based on cheques and physical payments. The Faster Payments programme had an eight-year gestation, which gives an indication of the scale of the challenge. Major changes to payment systems invariably have far-reaching implications for business processes and the transition can be high risk and costly. The UK banking industry took a sensible and cautious stance towards Faster Payments, realising that, however desirable it might be to shorten payment cycles, making it happen was never going to be easy. But the threat of regulatory intervention made it imperative.
Faster Payments Phase One – the end of the beginning
Phase One of the UK Faster Payments programme was launched on May 27, so consumers can now make single immediate payments via telephone and internet banking. Banks can send standing orders via the service and overall business volumes are increasing fast. The scope of Faster Payments will evolve over time as new richer services are integrated with the service, but the launch of the service heralds a new dawn for the payments industry. How has this been possible?
The success of the Faster Payments programme was dependent on having the right technology infrastructure in place. That infrastructure was designed and built by VocaLink on behalf of APACS and the UK banks. The real-time platform on which the Faster Payments Service is offered provides a strategic platform on which the international industry can build. Faster Payments will be the vehicle that transforms the way business is done: a shift in the role of the financial supply chain.
How fast is faster?
In deciding its business and investment strategy, VocaLink looked at the potential of the payments industry. Rather than strive for incremental improvements in clearing times, it designed, built and implemented a real-time payments platform. Why? VocaLink decided that a real-time platform would offer strategic benefits to the payments industry. Although a ‘faster payment’ is generally accepted to be anything less than two hours, the vision is for payments to be effected in real time.
Real-time produces real benefits
VocaLink chose real-time technology as this offers the greatest business benefits to banks, consumers and corporate customers. The strategy reflects a belief that there will be continued convergence between customer channels, such as internet, mobile, point of sale and ATM (automatic teller machines). The banking industry will need to support these channels and to do so individually is both time-consuming and expensive. The real-time platform allows the rationalisation of bank and inter-bank infrastructures. This could save the UK banking industry and its customers up to £1.5bn per year.
How?
Banks can avoid the expense of building and supporting independent infrastructures and, with convergence, can support multiple instrument types on a single platform using standard formats (such as ISO 20022) in real time. Through standardisation, and the use of the VocaLink real-time payments platform, banks can accelerate the time to market for new services. Benefits accrue to both business and retail users.
Consider the benefits for retail customers. Customers that operate in a real-time environment, or even a near real-time environment, are very quickly informed of the status of all payments, whether sent or received. Real-time payments offer all the benefits of cash without the downside. This ‘electronic cash’ improves financial control and allows the development of new self-service banking and payment services that meet individual needs and lifestyles. Banks can offer a consistent customer experience over a range of channels. This simultaneously increases customer loyalty and reduces the bank’s overheads.
The corporate customers of banks will benefit hugely from real-time (or near real-time) payments too. With traditional batch processing, a payment can fail at any stage of the cycle. This takes time and money to resolve and complicates cash management. With real-time payments, the status of each payment is readily available, so there are savings to be made as fewer people will be needed to investigate failed payments. Corporate treasurers will welcome the simplicity that emerges from the combination of real-time payments and standardisation. In practice, the burden of reconciliation is greatly reduced and the benefits of ‘just in time’ management are brought to the financial supply chain.
Conclusion
The above depicts an environment where all payment systems operate in real time and the payments are effected as electronic cash. In reality there is some way to go so the introduction of the Faster Payments Service is the start of the journey. That in itself is an achievement involving the concerted effort of 13 major institutions. VocaLink has articulated its vision of the future in deploying a new platform to help banks realise their ambitions with minimal risk and upheaval.
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