From November 2007, customers of all kinds will be able to make payments over the Internet or via telephone banking up to a limit of GBP10,000 that will reach the bank account of the beneficiary/payee within two hours. The Faster Payments service will be available 24 hours a day, seven days a week and will cost significantly less than CHAPS payments (the UK’s same-day real-time gross settlement system). It is anticipated that the speed and cost of this new faster payment service will attract payments that would normally be sent down existing channels, such as BACS and CHAPS.
Although this important change in the UK’s payment systems was primarily intended to improve the service delivered by banks to consumers and small businesses, it is now clear that corporates of all sizes will benefit from Faster Payments. Importantly, for corporates already enjoying the cost and flexibility advantages of direct access to BACS, they will also be allowed direct corporate access to Faster Payments, albeit only on business days, rather than seven days a week. The introduction of Faster Payments looks set to herald wider adoption by corporates of lowest cost routing solutions capable of sending payments down the most efficient channel, according to the urgency, value and currency of each payment. This trend will affect not only sterling payments but also euro payments across the EU.
Direct Corporate Access to Faster Payments
Corporates will have the option of making Faster Payments either via their bank’s e-banking platform or via direct access. Today in the UK, over 25,000 corporates already benefit from the cost and flexibility advantages of direct submission of files to BACS, for both direct credits and direct debits. This is different to most European ACHs (with the exception of the Netherlands and some Nordic ACHs which also permit direct access by corporates), since it is more typical for corporates to send payment files to their banks before they are passed through to the ACH. There is a valuable cost benefit for the banks in allowing corporates to have direct file submission to the ACH, since the bank is relieved of the significant administration and processing effort which would be required if all payments and direct debits were passed individually through their books, instead of being handled by a functionally rich, shared central processing infrastructure, such as Voca in UK or Interpay in the Netherlands.
It is encouraging for corporates that the UK’s Faster Payments service will also permit direct access, so that that businesses and bureaux (on behalf of corporates) will be able to send bulk files to direct corporate access and then onto the core central system, run by Voca and LINK. Payments within a file will be disaggregated and then processed in the same way as all other payments.
It is anticipated that this direct corporate access service will be available between 06:00-14:30 on bank business days, not 24/7. However, as a result of this important change, corporates will achieve cost effective non-urgent and urgent sterling payments (up to a limit of GBP10,000) by direct access during business days. It is thought that the somewhat arbitrary limit of GBP10,000 for Faster Payments may be removed in due course. Importantly, these Faster Payments will use the same standard 18 protocol that corporates already use for their BACS payments today, although SWIFT XML ISO 20022 standards are also contemplated.
Similarly, member banks and agency banks will sponsor corporates and bureaux who use direct corporate access, in the same way as corporates today can be sponsored for direct access to BACS. Banks may also sponsor so-called third party beneficiaries. These are organisations such as credit card companies or utilities that have collection accounts with a member bank. Non-responding third party beneficiaries can receive notifications, in near real time, for payments they receive via their sponsoring member. Responding third party beneficiaries can determine the fate of payments they receive, in near real time.
Lowest Cost Routing in Sterling and Euro
The introduction of Faster Payments, combined with a number of other important changes in the payments landscape, looks set to see wider adoption by corporates and banks of lowest cost routing solutions. The expanding range of payment types in sterling as a well as pan-European euro payment instruments offers increasing flexibility for corporates to select, or even auto-select based on business rules, the most suitable payment channel, such as BACS, Faster Payments or CHAPS for sterling payments, based on urgency and value of the payment. Similarly, in the case of euro payments it is increasingly recognised that corporates will have a range of choices regarding payment channels. It is now generally accepted that we will not have just one single pan-European ACH (PE-ACH) but several single euro payments area (SEPA) compliant regional ACHs who will operate alongside the purpose built PE-ACH STEP 2. In addition, banks will have bilateral file exchange arrangements in place with partner banks to handle particular concentrations.
These ‘super ACHs’ referred to above look set to include Interpay of the Netherlands whose merger with the German payments processor, Transaktionsinstitut, was recently announced and further consolidation forms part of their strategy. This will give them competitive advantages in terms of pricing, efficiency and richness of functionality, such as direct corporate access, which should make them the first choice processor, at least in those areas for which they provide direct coverage. The moment when corporates will want to manage these routing choices in the most efficient manner possible is upon us and some corporates will not be satisfied leaving these choices in the hands of their bankers. Web-based payment factory solutions can deliver such lowest cost routing as well as secure access to the most suitable payment channels, such as multiple banks and key infrastructure providers. They also incorporate validation tools covering international bank account numbers (IBANS), bank identifier codes (BICS) and sort codes to ensure clean data is produced for the bank or payments processor, hence attracting STP charges, and minimising the risk of bank repair charges.
Corporate Checklist
The deadline for Faster Payments is near, just 14 months from ‘go-live’. Although this new service is optional for businesses, as opposed to mandatory for banks, corporate treasuries would be well advised to begin planning now for Faster Payments, as indeed they should already be preparing for SEPA. After all, corporates will be the principal beneficiaries of these two major changes in the payments landscape, thanks to increasing standardisation and lower bank charges.
The following checklist represents a few basic steps that corporates might consider taking in the near term to assess how relevant Faster Payments are to them and whether they are likely to wish to utilise this new payment type on a large scale of just occasionally.
Step 1
Corporates could investigate how many sterling CHAPS payments they currently make for a value below GBP10,000. They should also take note of how much they are currently being charged by their bankers for these CHAPS payments, as this will form part of the business case for change, since for this category of payments the move to Faster Payments is a clear opportunity to reduce bank charges.
Step 2
Corporates could also consider how many of their existing cheques or three-day cycle BACS payments would benefit from being paid more quickly, albeit at a higher price than today. Here there should be some tangible benefit, such as completing faster vendor payments in order to obtain an early payment discount; or the ability to settle salaries of employment agencies on a weekly basis, knowing how many hours and days have been completed. A more generic example might be the benefit of enhancing a corporate’s working capital management through the delaying payment decisions until the settlement date, rather than having to initiate the sterling payment three days in advance under BACS.
Step 3
For those corporates who conclude they have large volumes of payments that would benefit from Faster Payments, they may wish to consider direct corporate access to Faster Payments. Corporates with only relatively few payments likely to benefit from this new instrument may decide that access to Faster Payments can best be met via a bureau or via their bank’s e-banking solution.
It may even be that the introduction of Faster Payments, combined with SEPA, will lead increasing numbers of corporates to conclude that, in order to achieve lowest cost routing, they want direct corporate access to a number of clearing systems such as BACS, Faster Payments and Interpay for pan-European euro payments, as well as multi-bank connectivity (via SWIFT’s new corporate access multi-closed user groups), all from a single payment factory platform, in order to ensure pan-enterprise visibility, security and control.
Pricing of Faster Payments and Impact on Existing UK Payment Types
Pricing is of course a competitive issue and the regulators are not determining the price which customers should be charged for Faster Payments There are indications that the initial price may fall in the range of GBP1 to GBP2.50, while it is also worth bearing in mind that the more the volume increases the less the costs will be. Innovative banks are therefore looking at Faster Payments as an opportunity to develop new services, rather than just another decrease in a bank’s payment revenues. For a retail customer, a CHAPS payment can cost as much as GBP30 and even reasonably sized businesses can pay GBP12 for a CHAPS payment, when initiated electronically. This suggests some CHAPS payments will migrate to Faster Payments.
Although Internet, phone and standing order payments currently account for just 7 per cent of automated payment volumes, the new Faster Payments system will cater for the large volume increases projected for the future, while current planning is that the Faster Payments scheme should be able to handle a peak day volume of 10 million transactions.
CHAPS sterling is one of the largest real-time gross settlement (RTGS) systems in the world, handling payments for an overall value of about GBP200bn on a typical day. Banks themselves use CHAPS to move money around the financial system, but CHAPS is also used regularly:
- for business-to-business payments.
- by solicitors to transfer the purchase price of a house between buyers and sellers.
- by individuals buying or selling a high-value item, such as a car.
It is interesting to note that half of CHAPS sterling payments are for values of less than GBP10,000 (source Bank of England’s Financial Stability Review, December 2005). It therefore seems reasonable to assume that up to half of the payments currently passing through CHAPS Sterling, which handles 32 million payments per annum are likely to migrate to the Faster Payments.
The use of CHAPS for relatively low value payments is of particular interest because it reveals a willingness to pay for rapid payment transfers. This supports the opinion poll research carried out by NOP for the BPSL Innovation Working Group in 2005 which showed that there is demand for change among personal and SME customers and that a faster clearing scheme would be used by a large number of customers but in relation to a relatively small proportion of the total number of BACS payments. The introduction of Faster Payments therefore looks set to attract volumes away from existing CHAPS and BACS channels.
Impact of Payment Services Directive
There is another interesting factor which could potentially have a significant impact in accelerating the move of BACS’ three day cycle payments to Faster Payments, or indeed perhaps to a new next day settlement payment instrument (D+1). The proposed EU payment services directive (PSD), which is currently being reviewed across Europe, proposes a harmonized set of rules on payment services for payments under euro50,000 for all EU currencies, including sterling. Article 60 proposes a mandatory maximum execution time of D+1 for all credit transfers by 2010. Clarification of the definition of this is being sought by the payments industry, but this could potentially mean that the UK’s current three day clearing cycle would not comply with this EU Directive, which could result in further changes in today’s UK payment systems within a few years.
Conclusion
The introduction of Faster Payments within the timeframe of ‘go live’ by November 2007 will undoubtedly prove challenging for the banking community and their technology partners. But the positive attitude being shown by the banks to use this mandatory industry change as a way of developing new products is most encouraging. Faster Payments are not mandatory for corporates, but those who do choose to adopt this new payment instrument stand to benefit from its flexibility and cost advantages and it is anticipated that this market will grow quickly, as payments traditionally sent by CHAPS sterling or BACS migrate to Faster Payments. Overall, the introduction of Faster Payments will make it easier for corporates to reduce bank charges and enhance STP rates, as well as improve their cash management.
Regulatory Background to Faster Payments
In a similar way to the new euro infrastructures and payment instruments that are being introduced across the EU for the creation of SEPA, it is once again the regulators who are driving change in the UK payments market.
Payment systems in the UK have been under the spotlight for some years because clearing times are longer than in almost any other G10 country, as on average it still takes three days to process e-payments. The UK payments system was examined in the Cruickshank Report – Competition in UK Banking, published in 2000 – and in the Office of Fair Trading’s Payment Systems in the UK in 2003. In March 2004, the OFT formed the Payment Systems Task Force to drive forward improvements in the UK payment systems.
At the end of last year APACS (the UK Association of Payment and Clearing Services) announced that a new Faster Payments clearing and settlement service will be introduced in the UK to facilitate near real-time clearing of internet and telephone banking payments and standing orders. The volume of faster payment transactions is anticipated to grow quickly, given the uptake of internet banking services and the likely migration away from alternative payment instruments, such as CHAPS sterling and BACS.
Project Timescales
The timescales for implementation are ambitious: As the Faster Payments service is scheduled to go live in November 2007, this means that systems must be implemented to enable UK banks and their customers to test the Faster Payments’ central infrastructure as early as May 2007.
Voca and LINK have been jointly selected by APACS to build and run the central infrastructure for Faster Payments. Under this innovative joint venture, the high volume real-time switching capability of LINK, which is already used to dispense cash from UK ATMs, is being teamed up with Voca’s experience in clearing and settlement and recent investment in new technology.
Impact on banks
The new Faster Payments service will require banks to clear and settle transactions for customers in near real time. This will impact on their liquidity management, accounting and anti-money laundering activities. Banks will need to upgrade some of their processing capability, whether they are full settlement members who clear directly (i.e. the top dozen UK banks), or the hundreds of agency banks who clear through these settlement banks. They will need to manage the business flows between their internal systems and the Faster Payments’ central infrastructure, ensuring delivery of single immediate payments, future dated payments and standing orders. This involves the introduction of an internal payment hub to communicate with a bank’s existing systems and a gateway to the Faster Payments switch, provided by LINK and Voca, which uses ISO8583 messaging protocol (widely used in the credit card industry).
How will Faster Payments work?
Under the Faster Payments service, customers will use their internet banking systems or the telephone to initiate payments up to GBP10,000 that will reach the beneficiary’s bank account within two hours. (It is anticipated that the system will move from two hours to a 15 minute timeframe in due course). The service will be available 24 hours a day, seven days a week. This means customers will enjoy far greater flexibility and convenience to transfer money and pay bills on the same day within a few hours and any day of the week. Faster Payments will also speed up the processing of standing orders (up to a limit of GBP100,000) from three days to same day but these will still only be made Monday to Friday. This will eliminate the ‘float’ (days of interest earned by banks) that currently arises on these payment instruments.
Although the Faster Payments service will operate on near real time, actual settlement between the clearing banks’ will be achieved by means of net settlement at the Bank of England, performed three times during the course of the central bank’s normal business days.