Earlier this year, PricewaterhouseCoopers, in association with VocaLink, published ‘Tomorrow Happened Yesterday’, which takes an objective look at the Faster Payments Service (FPS) one year on from its launch in May 2008.
This article will examine the report’s results and discuss:
- The key market issues and opportunities in the development of FPS.
- How the service might develop in the future.
- Provide insight into how to recover some of the significant investment costs through innovation.
Regulation Continues to Lead the Agenda
FPS is a self-regulatory response to the threat of regulation in the UK Payments market. Launched in May 2008, FPS is set to exceed 2.5 billion transactions by 2018 and will revolutionise the UK payments market by:
- Providing a true electronic payment proposition to customers.
- Promising to let customers make payments when they want.
- Creating revenue pressures for pre-existing business models.
- Confirming to customers that payments have been made.
- Exchanging value in near real-time.
Payment service providers (PSPs) are confronted with a number of operational challenges:
- Payments are irrevocable.
- The payment service is 24/7.
- Settlement is on a deferred net settlement basis.
- Incidents are exposed and visible when they occur.
- Accounting systems need to be real-time.
This creates complexity and risk for operational areas. In addition, the Payment Services Directive (PSD) will allow new competitors to access the benefits of the collective infrastructure to achieve reach and speed to market, as well as allowing them to provide services in a way that has only been considered far-off to date.
Providing New Revenue Streams for Banks
In undertaking this analysis, PwC specifically confronted a number of perceptions that have – rightly or wrongly – grown up around the FPS. Some perceptions emanate from typical teething problems and difficulties of implementing any new system; others either result from knock-on effects that the service is having on related banking processes, or they are driven by changes in customer behaviour that have been created by the new proposition itself.
The ‘Tomorrow Happened Yesterday’ report challenges these perceptions and establishes the facts behind them. It differentiates reality from the ‘myth’ and provides valuable insights into how the service will develop in the future and highlights a number of pitfalls to avoid.
The analysis drew PwC to conclude that:
- Faster payments may account for 2.5 billion transactions per annum by 2018.
- The infrastructure and the scheme are working well and with few complaints.
- The scheme creates opportunities to generate new revenue streams.
- Operational risk is increased if banks don’t apply appropriate controls.
- The lack of 100% receiver capability weakens the overall proposition.
- Regional variations exist in reach and customer access.
- A lack of courage and commercial focus resulted in the service being given away.
- The solution now supports the creation of account-based mobile payment solutions.
A Real-time Proposition Requires a Real-time Service
People live in an increasingly digital, real-time and interconnected world, where government is increasingly moving its services onto online channels. Furthermore, companies are increasingly using electronic billing (ebilling) and invoicing (e-invoicing) throughout their supply chains, and internet shopping is relentlessly continuing its significant growth.
In this ‘new world’, bank customers therefore expect an on-demand banking experience. To customers, this also means a banking experience that is highly integrated into their increasingly digital lives and one that is always available online.
Recent incidents and developments indicate that some banks and companies have underestimated some of the challenges and also some the changes. Examples of these issues include:
- Lack of resilience in out-of-hours online banking services resulting in services being unavailable.
- Limitations in online banking concurrent user capacity to meet actual demand patterns.
- The unavailability of online banking services because of related third-party service problems.
- Customer dissatisfaction because of misunderstood responsibilities under the new scheme.
- Customers relying on bank systems to make time-critical payments out-of-hours.
- Insulating accounts receivable (A/R) processing from streaming payment information.
- Provide real-time customer service where systems are not updated immediately.
Challenges Beyond Payment Processing and Clearing
Some banks have been much less willing to operate a real-time payments service than others, mainly because of the scope of the necessary changes required to their underlying systems. FPS is not just about a 24/7 payment processing system, but also about all of the related management, operational and support processes that now have to be 24/7 as well.
Banks that invested in modern real-time accounting systems before FPS’s development were therefore more able to implement and operate FPS than their counterparts, particularly where those counterparts were still relying on legacy and batch-based systems.
FPS has, therefore, changed the pre-existing rules as a result of the changed customer and stakeholder expectation, a greater impact of incidents than when using Bacs, and irrevocable payments completed in near real-time.
Some of the implications of this are clear. At one end of the spectrum, customers will simply be unhappy, but at the other end of the spectrum they may claim that they have suffered loss – that their banks owe them a new duty of care and, therefore, that they are owed compensation. This may be exacerbated if the existing current account pricing models are changed and retail customers are charged for their transaction services in the future.
An unintended benefit of FPS has been to up the ante for banks, incentiving them into the 21st Century and providing them with the business drivers to redesign their transaction banking platforms.
Courage and Commercial Focus Needed to Go Forward
To address these issues, banks will need to be courageous and to ‘think the unthinkable’ when considering their FPS agenda. For example:
- Have the threats been fully catered for in the strategic payments planning process, with appropriate assumptions made and necessary actions agreed?
- What is the expected share of the projected 2.5 billion transactions and how will this be achieved? Are the product areas generating new propositions and products that are sufficiently customer-oriented? Does the organisation have the necessary skills and experience to think like new entrants?
- Is there a migration strategy for the outmoded instruments and how will the cost base be reshaped? What is the organisation’s real-time strategy and how will customer experience be aligned with new operational processes? Have all of the potential implications from an operations, human resources and risk perspective been thought through? How will margins be protected?
- Have all of the direct and indirect threats and risks in relation to the service been analysed and understood? How do the implications differ from previous experience and what needs to be done differently? Are the required controls sufficiently effective and resilient?
- Is there a good story to tell around the mobile phone? Has product development truly walked in the shoes of the customer? Is the nature and role of the mobile with our customers fully understood? How will the strategy meet the emerging needs of the younger market place?
- Are the new services priced for value? Is there confidence that new services will add value and enable differentiation of the offering between payment service providers? How will they compete?
Regulators and market makers will have different perspectives and will accordingly have different questions on their agenda, such as:
- How does this development in the UK affect the competitiveness of the UK financial system? What lessons can be learned and how should other markets respond? What will be the role of FPS in the development of a more integrated European payments landscape in general and ‘e-SEPA’ in particular?
- What is the effect of FPS on an overall market infrastructure risk profile? How does it change the underlying fraud and integrity risk? Will it become a systemically important payment system and should it be regarded as part of critical national infrastructure? If so, then under what conditions should this happen? In the event of a crisis, how will a faster transmission mechanism that can be accessed with an unprecedented immediacy affect existing scenario plans and contingency arrangements?
- How does the establishment of FPS affect the infrastructure and payment instrument convergence agenda and how will it affect the experience of consumers?
- How does this type of improvement in one area of online banking affect the social exclusion agenda for those unable to access the new services?
- What are the implications for the typically national real-time gross settlement (RTGS) operators that often support urgent customer payments in addition to providing settlement services?
- If a service, which provides ‘faster’ or otherwise enhanced payments, is treated as a ‘free good’ for consumers, how will this affect related issues such as cross-subsidisation and market incentives?
