Revolutionary system makes a quiet entrance

It was somewhat ironic that the faster payment’s initiative, which was due to have taken effect in November last year, was delayed by almost six months. When it was finally rolled out on May 27, it happened with little fanfare.

This is surprising since the faster payments service (FPS) will revolutionise the way in which UK consumers and businesses alike make their telephone, internet and standing order payments. From late-May, all payments of less than £10,000 between businesses or consumers can be made in real time.

The traditional three-day clearing window has been scrapped and, in ­theory, a new era of consumer-friendly banking has dawned. Payments that could have taken up to five days in the past (including the weekend) can now be processed in a matter of hours and, in the future, potentially using mobile ­telephones.

Early days

To date, 13 banks and building societies, accounting for 97% of the UK’s existing payments traffic, have signed up. The chief executive of the Association for Payment Clearing Services (Apacs), Paul Smee, believes that it is still too early to tell what the true impact of the FPS initiative will be, both on banks and on their customers.

“The success of faster payments will be measured in years not days. I think people will find new ways of making payments, and commercial banks will find new ways to use the technology,” he says. “We’re giving customers what they want. If you look at life generally, things are speeding up... I would suggest there is growing incomprehension that we have online and telephone banking accounts but it still takes a very long time to move money between accounts.”

The launch of faster payments, however, has not been without its hiccups. The initiative was conceived in 2005 and its implementation was driven by the Office of Fair Trading (OFT). It was supposed to have been launched at the end of last year but, after the testing of the system proved more time consuming and complex than was originally anticipated, it was delayed by six months.

May’s launch of FPS was, in itself, a quiet affair. It received little or no publicity outside the trade press, leading some in the industry to question whether the technology and infrastructure was fully operational. Some have argued that the banks involved are in fear of a ‘Terminal 5’ moment and that is why they have been hiding their ‘FPS lights’ under a ‘bushel’. The recent opening of a fifth terminal at London’s Heathrow airport was mired in controversy after it was found that luggage infrastructure had not been properly tested. Not only that, but also the roll out of the service is severely limited. On day one of the new faster payments era, the only transfer that consumers could make using the real-time technology was for a maximum of £1 ($1.95). Only from this month will banks be able to handle faster payments of up to £2000.

Blink and you missed it

“It has been quite a quiet launch and the longer-term benefits for the consumer – that you can move money from here to there in an afternoon whereas in the past it would have taken you until next Tuesday – is an important thing for folks to know,” one market participant who did not wish to be named tells The Banker. “Banks don’t seem to have blown the trumpet quite as much as they could have done. I’ve read it in the industry news sheets but I’ve not seen too much of it on the television. You would think that if all [the infrastructure] was there, there would have been more of a fanfare.”

Martin Kearsley is the director of strategy at VocaLink, the technology company that built the infrastructure for the FPS. He refutes any suggestion that the technology is not ready and says that it was deliberate policy to opt for a phased approach to launching the ­service.

“The service underwent a rigorous industry-wide testing programme over an extended period to ensure it was fully functional and ready for a successful launch,” he says. “The industry never planned a big bang launch. Similar to chip and PIN, it was always the industry’s intention to launch a fully operating central infrastructure and to gradually ramp up the volumes of payments over time.”

He adds that despite the limited roll out, use of the service exceeded expectations on day one by 300% and that during the first 10 days of operation more than one million payments were processed.

“The [limited] roll out has nothing to do with a lack of confidence in testing or float. The industry has made a massive investment in developing this new payment infrastructure and its launch has been a huge success,” Mr Kearsley says. “In time, we expect to see the FPS being widely adopted by UK consumers for their internet, phone and standing order payments.”

Apacs’ Mr Smee estimates that the service will be fully operational for transactions of up to £10,000 by the autumn.

Sinking revenues

A far bigger question for banks, however, is not how the service will be rolled out to customers but the cost of the project. The FPS initiative is just one of a stream of recent regulations designed to make Europe and the UK’s payment processes more efficient. From the banks’ perspective, however, it represents yet another costly technological change, which rules out yet another revenue stream.

This year’s introduction of the Single European Payments Area will cut off lucrative revenue from cross-border payments in Europe for UK banks, and FPS will act as a blow upon that revenue bruise. The cost of implementing the infrastructure to facilitate FPS has been estimated at about £300m for UK banks.

But banks will also lose out in ongoing revenue streams. The faster payments programme was created by the OFT in 2005 after a task force estimated that banks were making £30m every year by not paying interest on money floating between accounts. Banks will lose that revenue under FPS.

Banks will not only lose the revenue from the so-called float under the faster payments regime, but will lose valuable income from Clearing House Automated Payments System (CHAPS) payments. CHAPS allows companies to make large transfers in a single day without having to wait three days for the transaction to clear. For this service, banks generally charge a fee of about £30. The onset of free faster payments of up to £10,000, however, will wipe out much of this revenue. Apacs estimates that last year, nearly half of all CHAPS payments – 14.6 million payments – were less than £10,000 in value.

The question is how will banks make up this lost revenue? “When you’re hitting banks in the revenue wallet they are going to have to find a way to balance the books – they’re not charities,” one industry participant says. “What they give back to the consumer with their right hand, it is possible for them to take with their left.”

Paul Smee takes a less cynical view and puts the lost revenues in perspective. “What were banks’ profits last year: £40bn? Across the industry £30m is insignificant,” he says. “That has not been the constraining factor on making this investment... in the wider context of things it isn’t relevant.”

Villainous intent

What is relevant, however, is how banks will protect themselves from a forecast onslaught of fraudsters. The mere fact that payments can now be made in a matter of hours, rather than days, will inevitably attract the attention of the more lugubrious elements of society.

According to fraud detection specialists, ACI Worldwide, the rapid availability of funds allowed by FSP, combined with better card security through initiatives such as chip and PIN, makes online banking an ever-more attractive target for criminals.

David Scholes, fraud strategy manager at National Australia Group (NAG), which owns Clydesdale Bank and Yorkshire Bank, is equally concerned. He says: “The three-day lag was a three-day window for fraudsters to get caught. Now that there is just a two-hour lag, there is less likelihood they will be caught... In a faster payments environment, the money can be shifted around up to 100 different accounts across the world before it ­disappears.”

John Hutchinson, the head of fraud risk management and financial crime detection at NAG, agrees: “In the past we had a window of opportunity to recall funds from the recipient bank – we don’t have that window anymore. Once it has gone from us and been received by the recipient bank, it is lost.”

Fighting the fraudsters

As for combating such crime, banks’ choices are limited. They do not yet know what strategies the fraudsters will employ. Another problem is that it is largely out of their hands. If fraudsters can dupe consumers, through techniques such as ‘phishing’ whereby account details are obtained by hoax e-mails, then there is little banks can do.

A recent survey by ACI Worldwide in Australia showed that 70% of internet users did not know what phishing was and one in 10 consumers were at risk of becoming victims.

Mr Frost says that the UK banking industry must wake up to the dangers that lurk ahead due to FPS. “Everything has moved from near time to real time. Because the speed of payments was slower, traditional risk management systems could work in near time – where the reaction to a fraudulent transaction had always happened, at best, after that transaction had gone out the door,” he says. “Thanks to faster payments, that mindset has to be ratcheted up a notch so that banks act in real time to stop that [fraudulent] transaction going out the door in the first place.”

The end of the beginning

Another criticism levelled at the OFT for pushing banks towards implementing faster payments was that consumers were apathetic. Account holders were hardly banging down the doors of banks demanding faster payments, and few, it is argued, will notice the changes.

Mr Smee agrees that consumers were largely ignorant of the changes but argues that FPS reflects a societal shift: “It is hard to say consumers were clamouring for something they never knew they didn’t have,” he says. “It is my personal view that the general drift of ­society, in other words everyone wanting everything very quickly, plus the growth and interest in internet and telephone banking made [faster payments] inevitable.”

It is also true to say that FPS, as it stands now, is just the beginning of an entirely different way of banking.

The real value will come, according to Mr Smee, when the industry takes advantage of the phenomenal infrastructure built to facilitate faster payments. This will include, among other things, the ability for account holders to transfer money in real time through the use of mobile telephones. “It is taking us strategically forward and the commercial opportunities around having a really effective payment service will emerge over time,” he says.

As for the potential success of FPS, Mr Smee is philosophical. He quotes Zhou Enlai, the first premier of the ­People’s Republic of China, who, when asked in the 1950s for his assessment of the French Revolution, said: “It is too early to say”.

HOW FASTER PAYMENTS COMPARE WITH CHAPS

A number of general characteristics are the same for the clearing house automated payments system (CHAPS) and the faster payments service:

• The service level is near real time/same day; and

• The payment is irrevocable once sent.

However, there are some important differences:

• Settlement: CHAPS is a real time gross settlement system; faster payments will be a net settlement system.

• Transaction size:With CHAPS, there is no upper limit to the size of payment, hence the system will continue to be used for house purchases and large company payments. With faster payments, there will be a transaction limit on the size of each payment (£10,000 [$19,540] for an immediate payment, or £100,000 for a standing order).

• PriceCHAPS is typically measured in pounds; faster payments in pence.

• AvailabilityCHAPS payments can be made between 08:00 and 16:00 on UK banking days; faster payments can be made at any time, any day of the year.

• Feedback timeWith CHAPS, a receiving bank does not have to confirm whether a payment has been received to the beneficiary account. With faster payments, a receiving bank is able to confirm that the payment has been paid to the beneficiary account in seconds.

• Protocols used (a complex point, key to international/investment banks)CHAPS is based on SWIFT messages and formats; faster payments is based around the ATM/debit card messages called ISO 8523.

_{Source: www.fasterpayments.co.uk.}