UK Faster Payments: The Final Countdown

After much fanfare and delay, the end of May ‘go-live’ for the UK’s Faster Payments initiative will at last provide the founding members of the Faster Payments Scheme the ability to transfer funds in near-real time. The formal kick-off of this initiative marks the most significant change in electronic banking in the UK since the introduction of BACSTEL in 1983. For customers of these member banks, which account for 95% of all payments made in the UK, the Faster Payments initiative will provide the opportunity to make immediate inter-bank transfers using the Internet or phone, and standing orders will be processed immediately, thereby removing the float from such payments.

That said, managing expectations associated with Faster Payments is critical and it’s worth noting that a small number of the founding banks will only be able to receive Faster Payments initially. While the delay associated with Faster Payments is the result of the industry recognising that the service must work perfectly from day one, certain elements of the service such as direct agency and direct corporate access have been pushed back to later phases. In addition, the functionality that will allow the non-founder member banks and corporations to make use of Faster Payments will not be available from the outset, perhaps not even until 2009.

As we move forward, the success of the Faster Payments initiative will be driven by the use not only among the personal banking customers of the 13 founding members of the scheme, but by customers of smaller ‘agency’ banks and corporate users. With three months to go, how can corporates make the most of the next 12 weeks?

Making the Most of the Next 12 Weeks

With the Faster Payments initiative, corporate treasurers believe there are four key applications:

1. Providing the ability to initiate one-off emergency payments such as expense reimbursements.
2. As a contingency for Bacs services, especially when payroll runs are missed or late.
3. As a mechanism for creating ‘just-in-time’ trade payments, which enable corporations to take advantage of enhanced payment terms with suppliers.
4. To initiate weekly payroll payments for temporary staff.

The current £10,000 limit on payments means that corporates will not immediately be able to move the majority of their CHAPS payments across to Faster Payments; however, this level is likely to change over time with demand. At the moment, it has been proposed that corporates will only be able to be submit Faster Payments between 6.30am and 14.30pm on normal bank working days.

The date for corporates to be able to connect into Faster Payments directly through third-party software, much as they do today into Bacs using Bacstel-IP, has not yet been set – although many believe it will be sometime in early 2009. Today, corporates with more than one bank sponsor for Bacs payments are able to manage their payments through a single bank independent Bacstel-IP solution. Until direct corporate access to Faster Payments is available, corporates who wish to enjoy the benefits of Faster Payments may have to manage multiple propriety electronic banking services, which could potentially be seen as a backward step in terms of technology and will make treasury management more complex.

The gap between banks being able to offer Faster Payments and software suppliers being able to offer competitive software is a concern for technology vendors who have thus far enjoyed a level playing field on which corporates have been able to choose between using bank proprietary software or the benefits of independent software.

As corporates prepare for the May go-live date, they can best maximise the time by:

1. Speaking with their ERP and/or financial application software providers to determine if it is possible to incorporate a Faster Payments payment type in their solution, ensuring control over the types of payments made, and aiding with reconciliation.
2. Assessing their low value (less than £10,000) CHAPS volumes and costs, and determining how much (perhaps all?) could be moved to Faster Payments.
3. Speaking with their bank partners and asking whether or not they will offer the ability to send and receive Faster Payments from day one and, if so, will the bank’s online business banking service support it?
4. Determining if their Bacs software solution supplier will be ready for the launch of direct corporate access early next year?

Agency Banks Find Themselves Between a Rock and Hard Place

For agency banks, the run-up to Faster Payments has, in all likelihood, not been as hoped. As the initiative has evolved, a point of contention has risen relating to how agency banks will be able to offer the advantages of Faster Payments to customers leveraging their Internet and phone banking services. Early on, agency banks had expected to be able to use direct corporate access to Faster Payments as a means of offering services to customers much in the same way they currently offer services using Bacs.

At the moment, however, agency banks only have two options for offering Faster Payments to their customers. They can either become a member, or a direct agency of Faster Payments, or pass their Internet and phone banking traffic through one of the main banks as an indirect agency. In many cases, neither option is deemed suitable, because of cost of ownership, and/or dilution of control in the process.

Not being able to offer a comparable customer experience through the provision of Internet and phone banking puts the smaller banks at an immediate disadvantage from the first day Faster Payments goes live. Finding a way to accommodate agency banks is a situation that will need to be addressed quickly by the members of the Faster Payments scheme.

Third-Party Beneficiaries Weigh Costs and Benefits

While much of the discussion surrounding Faster Payments has rightly focused on banks and corporates, the impact on third-party beneficiaries should not be overlooked. The ability to accept or reject payments as a separate leg of a Faster Payment transaction is of interest in the Faster Payments debate to major billers, such as utility providers and government agencies.

Typically, large utilities receive many payments online or over the phone with no payment reference, an old payment reference or an incorrect payment reference number. Funds that are paid to utilities in this manner and that cannot be matched electronically generally sit in holding accounts, creating added costs for fixing the lost payment to the payer and payee.

Although Faster Payments can be of great benefit to billers, there is a significant IT investment required to gain functionality such as the installation of complex switching software capable of reacting to payment requests immediately. Like other elements of the Faster Payments service, billers may determine that it is difficult to justify the additional costs when weighed against the benefits. Perhaps the only way third-party beneficiary functionality will achieve the necessary return on investment is if it’s offered, not as an in-house function, but as a hosted solution.

Conclusion

At long last, the hour finally appears to be at hand with UK Faster Payments. There is no doubt that, in the long-run, this initiative will have a dramatic impact on the payments business. But as the different stakeholders in Faster Payments get ready to take those final steps, let us not forget that the ultimate degree of success for this initiative will depend, in large part, on making sure that the expectations of corporates are managed properly, agency banks are provided with more practical alternatives for gaining the ability to offer Faster Payments, and that third-party beneficiaries are offered a more viable alternative to costly adjustments to their IT infrastructure.