On track for faster payments

David Bannister

The last thing banks need is a failure to launch.

The announcement last year that the introduction of UK’s Faster Payment Scheme would be pushed back from October 2007 to May 2008 surprised few people. It was an ambitious project, largely driven by politicians looking to impress the consumer lobby, that would offer banks little in the short term.

Behind the scenes, however, there were stories of ‘blamestorming’ sessions among the participating banks, the operators and the various industry bodies responsible for seeing the project through.

Asked the real reason for the delay, one participant replied: “The question is, who blinked first?”

As the May deadline approaches, there is little scope for blinking. Since October, the banking industry has become a mixture of pariah, whipping-boy, scapegoat and laughing stock: any screw-up in the introduction of FPS would be a PR disaster to top British Airways’ Terminal 5 fiasco.

No doubt that’s what was in the minds of the people at Apacs, the UK trade association for payments providers that is charged with the development and delivery of the scheme, when they issued a statement at the end of February saying that “the banking industry is on track to deliver the infrastructure that will enable a new faster payments service to be launched starting on 27 May this year”.

That’s quite a lot of qualifiers for a short sentence: “will enable”, “to be launched” “starting on” … is it a launch or not?

The answer is, of course, that it isn’t really a launch, but the earliest date on which FPS-based services can be offered by the participating banks. “There is no question that they will begin a phased roll-out of services from the May deadline,” says Simon Bailey, director of payments at Logica. “There are still issues to be addressed, but there is a lot of work going into addressing them.”

In an interview published in the last issue of Banking Technology, Mark Hale, a director in the financial services transaction banking practice at PricewaterhouseCoopers, said: “Even though the industry has deferred from November to May, not all of the organisations involved are going to be there on time or in the way they originally intended. People are still coming to terms with the scope and scale of the changes required. Payments processing has a high level of operational, technical and risk dependencies, and because these have not been changed so significantly for a generation, people have understandably lost sight of the full potential of the implications. This is leading to some very urgent programme assurance and remediation work.”

Otto Benz, a senior executive in Accenture’s Banking Practice who has worked advising banks on FPS strategy and systems delivery, expands on this: “Based on the reports to Apacs, some of the members that are participating in the first go-live definitely still have a few challenges, but they’re all reporting that they will be able to do it. My understanding is that the central infrastructure is in a good state.”

Steve Carr, sales support manager at systems provider EFD (formerly eFunds), which has been working on the infrastructure development, says that the central systems are ready to go, and if it slips again the banks “won’t be able to say it was the central infrastructure”.

“The challenge for the banks is how they translate it into a customer proposition,” says Carr. “They will each have a different view of that.”

In practice, this means that the provision of FPS services will vary, even among the participating launch banks. In some cases, it will be a minimal service, only offered on a limited line of products for the first few months, as processes are migrated to new platforms and internal issues resolved.

“Some of the banks are only going to deliver, on day one, a subset of the payment types that they will eventually able to deliver. Some will be able to take incoming transactions, but not necessarily send outgoing ones, and some will be able to do standing orders, and some will be able to do single internet payments,” says Benz. “Only a few will be able to do all of it. What it means is that the customer proposition ‘all your payments will go faster’ won’t necessarily be available on day one. To begin with it won’t be full service, it will have to build up over time.”

Benz is careful to point out that this is largely due to caution on the part of the banks, particularly regarding testing their systems. Different processes in different banks are handled in different ways, and therefore migration will be on different timeframes. “I can’t blame them for being cautious; it’s a high-risk project,” he says.

According to Hale, the shortening of clearing cycles will have a wider impact than many people realise. “It means that branch accounting systems are going to have to be changed, because they’re founded on operational processes that can often take a couple of days,” he says. “D+1 means that everything you now do over an extended period now has to shift to intraday and realtime – your overnight batch systems, message standards, technology standards … everything that everyone has avoided changing about the branch accounting is going to change.”

This may lead to some customer confusion as different banks offer different services, but that could also be seen as the flip-side of competitive service offerings, which is what many will hope to build onto the basic infrastructure.

As banks roll-out their services over the next year or so, other issues begin to raise their heads, such as the future of the relationship between low value FPS payments and high-value same day CHAPS payments.

Currently FPS payments will have a maximum value in the region of £10,000 for one-off payments, or higher for direct debits, though individual banks may set lower limits. The charge banks will make for these is likely to be measured in pounds, while for CHAPS payments, current charges are around the £30 mark.

Clearly, at some point there is a crossover between large FPS payments and low-end CHAPS transactions. Where that will be is as yet not clear, but the banks can look forward to seeing their income from CHAPS dwindling over time. “What can be the future of two value transfer schemes in the same area?” asks Bailey.

On a wider scale, there are also questions over how FPS will interface with other European initiatives like the Single Euro Payments Area and the Payment Services Directive. “One of the big issues for banks is that there is a lot of stuff going on in payment systems, and one of the things we tell banks is that they have to consider everything that they have to do, in a more integrated strategic way,” says Benz. “There is a lot more interest in payments systems and in using payments as a business than there was five years ago. There are lots of opportunities to spread the costs and revenues across different kinds of payments. All business is like that – once you look past the doom and gloom there are opportunities.”

The obvious trajectory for all of these developments is towards a harmonised, pan-European payments infrastructure that operates in nearly real time, and that raises issues of fraud and security. Faster payments equals faster fraud has become a mantra for some (particularly in the security business, not surprisingly).

At the central systems side of things, Carr says that security is “as high as you would expect it to be”. He says that one fear would be that a criminal gains access to a PC and empties the true owner’s bank account. This is likely to lead to further pressure on banks to introduce two-factor identification.

Logica’s Bailey agrees: “It doesn’t create any new opportunities for theft or fraud, but there is a different level of risk and that is going to create a demand for security devices like chip-based ID readers.”

Benz takes the view that the security issue is not something that FPS services face in isolation. “Security is a big and growing issue, and doesn’t necessarily relate to this implementation of Faster Payments – they are taking something that exists and making it faster, but it is not any less secure than it was before. There is a lot more that could be done to secure credit and credit card payments, particularly on the customer-not-present side, but security is not really affected here – the real issues with security are when you’re walking around with your credit cards,”he says.

Bailey points out that the FPS infrastructure is something of a hybrid in that the authentication system used is based on the ISO8583 standard used in the credit card business, not the Swift-based messages used for SEPA transactions, so the sorts of security measures used by credit card companies are likely to be deployable.

The use of credit card standards “also raises a few interesting questions” about the replicability of the UK scheme in other geographies, which is what a lot of the vendors and others who have invested in developing the system hope can be done. “In most countries outside the UK there is more use of the credit card networks,” said Bailey.

George Ravich, vice president of marketing at Fundtech, says that his company is taking a global view of its investment in FPS systems development. “There is nothing in Faster Payments per se that is UK only,” he says. “Our model is universal.”

This homogenisation of payment processes is good for vendors, but is also good for banks, he argues: “By collapsing the silos, the banks will have a much better picture of their liquidity.”

In the current climate, banks could certainly do with better pictures of their liquidity: what they can most certainly do without is the introduction of the Faster Payment Scheme turning into a lost payment processing disaster on the first day, or to be blamed for a rash of high-speed frauds in the months ahead.

Even a damp squib of a launch would be better than that.

UK Faster Payments: the background

In May 2005, the Payment Systems Task Force, chaired by the Office of Fair Trading, announced an agreement with the banking industry to reduce clearing times on phone, internet and standing order payments.

Initially, the intention was to develop a system whereby payments would clear in half a day, but this was later revised to a system where the beneficiary should be able to access funds within a couple of hours of a payment being made, which is a huge improvement on the current system where the vast majority of electronic payments take three working days to be processed.

The new service will benefit customers by speeding up one-off payments made over the internet or by phone, enabling them to be made all day, every day. It will also enable regular standing order payments to move more quickly on bank working days: reducing the timescale from three days to provide a same day service. The new system will run alongside existing UK electronic payment schemes such as BACS and CHAPS.

In October 2005, the contract to provide the central infrastructure for this new service was awarded to Immediate Payments, a joint venture company set up by Voca and Link (which have since merged to form VocaLink).

Originally the service was scheduled for introduction last October, but it was put back to 27 May 2008.

APACS is responsible for the overall development and delivery of the Faster Payments Service, but once it is launched it will hand over day-to-day operations and management of the service to CHAPS Clearing Company, which operates the CHAPS sterling high-value same-day payment system.

Following the initial launch of the central infrastructure, work is planned to provide a Direct Corporate Access Channel. This will ultimately enable businesses to submit large numbers of payments directly into the Faster Payments Service.

Currently internet and phone payments account for just 4% of automated payment volumes, but these are growing rapidly as customers increasingly turn to them instead of more traditional payment methods such as cheques. Standing orders account for 9% of automated payments. The new system is being built to cater for the large volume increases projected for the future. The remaining 87% of automated payments are ‘bulk’ transactions generated by organisations and businesses both large and small and are: Direct Debits, used to pay utility bills, life and general insurance premiums and various subscriptions; Bacs Direct Credits, used for salary payments, pensions, and state benefits; and CHAPS payments.

The thirteen founding members are: Abbey, Alliance & Leicester, Barclays, Citibank, Cooperative Bank, HBOS, HSBC, Lloyds TSB, National Australia Group, Nationwide Building Society, Northern Bank (Danske Bank), Northern Rock, Royal Bank of Scotland Group. They account for over 97% of all payments made in the UK.