faster payments

Did the UK Faster Payments Service change the world, or did the UK find itself in the fortunate position as infrastructure pioneers for our current digital age? Liz Lumley investigates.

Back in 1998, the first year Amazon.co.uk started selling books, the UK government commissioned a review of the banking sector. The resulting Cruickshank Report, published in March 2000, recommended opening up the payment systems to increase competition.

The aim was to make UK payments faster, that is, to ensure access to funds within a couple of hours of any payments being made, rather than within days. This resulted in the launch of the UK Faster Payments Service (FPS) in May 2008, one year after Apple launched the iPhone. FPS reduced payment times from days with the older BACS system to typically a few seconds.

A decade-long domestic project involving a myriad of government task forces, trade and regulatory bodies, incumbent banks and infrastructure providers became what is widely believed to be the first truly 24/7, 365 days a year real-time payments system in the world. 

Today, almost 14 years later, everything from socks to high-end household appliances can be bought within seconds via a smartphone. Modern payment rails, which enable real-time clearing and settlement, are a requirement of our modern, digital age. Remembering a time when payments could take days is like trying to recall what it was like to travel via a horse and carriage. 

However, John Walsh, head of domestic payments and receivables, Europe, the Middle East and Africa (EMEA) at Citi, doesn’t think “anyone knew, when the UK started, that instant payments is going to be what it ended up being”.

The question is: did UK Faster Payments change the world, or did the UK find itself in the fortunate position as infrastructure pioneers for our current digital age?

Unforeseen consequences

“I remember [at the start of the FPS project] banks having to basically guarantee that they would first put the standard order volumes through the faster payment infrastructure to give the operator of the service a guaranteed volume to recover the costs of actually running the infrastructure,” says Gavin Maclean, head of product, payments, Lloyds Bank Commercial Banking. “We didn’t know, we didn’t have a strong sense, that within months you would have millions of consumers doing instant money transfers.”

According to statistics from global financial technology provider FIS, 72% of the world has access to instant payments, with 60 countries offering real-time payments schemes today. Russia, the UAE, Argentina and Colombia launched real-time payment schemes in 2020 or 2021, and Canada, Peru, New Zealand and Indonesia will be launching theirs soon. 

P27, a cross-border Nordic scheme involving Denmark, Finland, Sweden and Norway, is expected to launch this year. Many more countries are also developing upgrades, replacements and renovation of legacy real-time schemes, including the UK. 

“There’s actually no country I can think of right now that’s not planning an instant payment scheme,” says Mr Walsh. “It is important for the economy at this point to have that scheme, and whether that’s instant payments as we think of it, or whether it’s a mobile switch variation across the ecosystem, they’re really coming on online.”

Pay.UK is now planning a New Payments Architecture (NPA) to replace the current FPS and BACS clearing, allowing clearing and settlement through a single purpose-built central infrastructure. NPA is currently in a ‘build-and-test’ phase, with full rollout planned over the next decade.

Outside looking in

Despite this progress today, it was only a few years after the launch of FPS when emerging fintech players shone a spotlight on the complexities of the model and the need to expand access beyond a handful of domestic banks and building societies. Around the time Singapore launched its Fast and Secure Transfers (FAST) domestic instant payment system in 2014, fintech companies outside the established banking ecosystem in the UK were lobbying for better access to FPS. 

The resulting industry pressure saw the launch of the New Access Model in 2016. Aggregators under the New Access Model offered technical access, with settlement unbundled as a separate service offering. This created choice and flexibility for agency banks and non-bank payment service providers (PSPs) seeking 24/7 real-time access to FPS.

Soon after, Metro Bank became the first UK high street bank to join FPS since its inception. Starling Bank became the first digital-only bank in 2017 and global fintech giant Wise (then TransferWise) became the first non-bank PSP to be a directly connected settling participant in 2018.

“FPS was crucial to us from day one,” says Helen Bierton, chief banking officer at Starling Bank. “One of our engineers said that building the integration was one of his highlights because he had a fixed deadline and as an engineer he could really get his teeth into it and get the gateway connections.”

FPS was crucial to [Starling Bank] from day one... It has become such a core part of our proposition.

Helen Bierton

She adds: “Then, over time, we were able to connect directly. And now that means we’ve gained a lot more experience and we now use the scheme not only for our own customers, but we’re providing it as a gateway for other businesses to gain access. It has become such a core part of our proposition.”

In addition to speed, cost reduction is also a major benefit for many payment players. “We were able to immediately drop our prices in the UK by 20% by becoming both the first non-bank to obtain a settlement account with the Bank of England and a direct participant in FPS,” says Caroline Clare, head of European expansion at Wise.

In addition to FPS, Wise is directly connected with the New Payments Platform in Australia, Hungary’s Instant Payment System and FAST in Singapore, as well as other global real-time schemes indirectly. 

“Some schemes require that a business operates a physical datacentre, which creates duplication and additional complexity. We are primarily a cloud-based business, which allows us to intervene quickly if something goes wrong, but can create a headache when joining schemes with such prescriptive requirements,” says Ms Clare. 

“We’ve also found that, at times, the infrastructure associated with these schemes can be outdated and more suited to banks rather than non-banks,” she adds. 

Tech challenges

Regulations such as the Payment Services Directive 2 (PSD2) in Europe, which require banks to open up application programming interfaces (APIs) to third-party players, are aiding fintech companies in easing access to real-time payment schemes.

“As a tech company, we expected the tech that we were going to interact with to be great because our tech was great, but what we found was just chaos,” says Jack Wilson, head of policy at TrueLayer, a global open banking platform that allow companies access to payment systems, among other services. 

Mr Wilson goes on to say that TrueLayer’s “period of naivety was very short-lived” when it “became very realistic about what was on offer and spent time devoting resources to collaborating with the banks to solve problems and troubleshoot”. 

However, because of provisions in the laws around open banking mandates like the PSD2, TrueLayer could invite the involvement of the regulators to alert them to banks posing obstacles to open banking and open API availability. In June 2020, the PSD2 regulator in Europe, the European Banking Authority (EBA), stepped in to intervene on TrueLayer’s behalf in Spain.

Incumbent banks have an optimistic view of the collaborative mindset brought on by open banking initiatives. “In the UK, for example, you do have fintechs that are direct participants in the UK FPS, but you still have other companies where they’re an indirect participant and that’s totally fine as well,” says Dan Baker, EMEA head of core and emerging payment rails at JPMorgan.

“We’re in a place now, with API connectivity, where connections and transfer of information can be done extremely quickly,” he adds.

Open banking mandates like the PSD2 have changed the payments rails and changed the whole process of accessibility, according to Citi’s Mr Walsh. “It isn’t just the bank view versus the fintech view. It’s now: ‘OK, how do we make this infrastructure work in a much more optimal way?’,” he says.

Barriers to entry

However, many fintech companies are still feeling the historical pain inherent in trying to access a bank-led payment infrastructure. 

“Historically, it has been a complex process for financial service providers like fintechs to directly connect with the UK FPS and similar schemes, which has traditionally been the purview of incumbent banks as connectors and knowledge-holders,” says John Salter, chief customer officer at ClearBank. “High barriers to entry include prohibitive costs, complicated regulatory hurdles, and a slow and bureaucratic application and onboarding process. The complexity traditionally carries on after onboarding, with inattentive customer support and slow reaction times when things go wrong.”

Currently, ClearBank operates only in the UK. Plans to expand internationally will focus on markets with established real-time payments schemes, says Mr Salter. “Without a scheme, it would be impossible to deliver the real-time and near-real-time settlement that our clients’ customers increasingly expect as standard,” he adds. 

Alex Reddish, managing director at Tribe Payments, echoes Mr Salter’s thoughts. “Implementation to connect to [multiple] schemes is complicated, which meant for us the return on investment in doing so was hard to justify. As a result, we opted to use an intermediary to connect,” he says.  

Wise’s Ms Clare attributes the high cost of connecting to real-time schemes to incumbent bank ‘gatekeeping’, where these banks are able to decide how much access to that infrastructure costs. “Non-banks often pay many multiples of the actual cost of a payment because banks have to make them on the non-bank’s behalf,” she adds. 

Ad van der Poel, managing director, co-head of product management EMEA, global transaction services at Bank of America, says: “Allowing fintechs access to real-time payments is more about collaboration, which I think the industry and industry bodies, and the regulators, are much more open to [today] than they were 10 years ago. 

“The industry doesn’t always realise that a real-time payment does not necessarily have to go via real-time payment schemes,” he adds. “There are a lot of models that can do real-time payments, like [loading] a card.”

The US approach

The US has lagged many other countries in real-time payment implementation, but that does not mean the country lacked instant payment options. Mobile payment provider Venmo (now owned by PayPal) has been offering US bank account holders instant payment services since 2009. In 2017, The Clearing House (TCH) launched the RTP network, the first new payment system launched in the US in 40 years. Today, TCH RTP delivers real-time payments for business and personal transactions, payroll and Request for Payment (RfP). 

According to Steve Ledford, senior vice-president for products and strategy at TCH, users learned from the experiences of older real-time payments schemes in other regions. 

“When you start a new payment system, you do have some idea of how you think it might be used, but we learned that folks will come up with unexpected innovative uses,” he says “[TCH RTP] doesn’t have a rigid view of how folks are going to be making payments, and what type of use cases and therefore it allows that flexibility.” Offering RfP was one of the payment types the US introduced at launch after seeing it emerge over time with schemes in other markets. 

Since the US has taken a market-led, rather than a mandate-led, approach, there are competing real-time payment schemes being developed, in addition to non-bank networks such as Venmo. The US Federal Reserve is currently developing the FedNow real-time system, which is due to be launched soon. 

Cross-border aims

Most domestic real-time payments schemes have been developed using the data-rich ISO 20022 messaging standard, which eases interoperability issues between global schemes, a next step for global payments. 

Last October, EBA Clearing, Swift and TCH joined forces to enable real-time cross-border payments. The three companies completed a proof of concept as part of the initiative, Immediate Cross-Border Payments (IXB), which demonstrated the ability to synchronise settlement in one instant payment system with settlement in the other and convert real-time messages between both systems. Seven banks – Bank of America, BBVA, Citi, HSBC, Intesa Sanpaolo Bank, JPMorgan and PNC Bank – participated in the proof of concept for IXB. 

Many in the industry are optimistic about the initiative. “TCH’s RTP programme integrating with Swift is promising,” says Archana Prasad, vice-president for product management at Marqeta. “This will likely be slower and steadier, but will have very broad adoption.

Harry Newman, head of banking strategy, Swift, says: “New entrants and new models have emerged with improved products and client experience, jostling with banks and PSPs to become the issuer, provider, processor or partner of choice. However, while consumers expect payments to be fast, frictionless and embedded, they also expect them to be safely delivered, with no risk of loss or fraud.”

While big banks and tech firms look positively towards a new era of open finance collaboration, many in the payments space are more reserved in their judgement. “Have faster payments changed the world? Definitely not. Can they change the world? A resounding yes,” says Vinay Prabhakar, vice-president for global marketing at Volante Technologies. “But to do so, financial institutions and clearing houses will need to jettison antiquated ways of thinking about payment services, and think well outside the financial services box.” 

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