Faster Payments: Managing Customer Expectations
The UK banking community welcomed the launch of the first 24×7 retail real-time payments service in May 2008. With 23 million adults making payments through remote banking in 2009 (the first full year of operation), the faster payments service (FPS) has processed 137 million forward-dated and single immediate payments, representing 77% of all inter-bank remote banking payments.1
In 2010, the volume of transactions rose to 434 million, which represents 46% growth in volume over 2009. single immediate payments (SIPS) grew more strongly than other payment types and showed 69% growth over 2009. Standing orders (recurring credit transfers where float had been an issue) grew by the lower figure of 32%, as many member banks had finished their initial ramp up of standing orders in 2009. Total value grew by 58% to £167.3bn, with most of the additional value coming from SIPS, which have a higher average value than standing orders. This indicates the service is achieving what it was designed to do, and there has been a rise beyond the anticipated growth trajectory.
Internet and telephone banking transactions and the majority of immediate customer-initiated transactions have now moved to FPS. The large volume of largely forward-dated credit transfers for transactions as salary payments and corporate direct debit collections for subscriptions and monthly consumables continues to flourish over the Bacs service. In fact, Bacs Direct Credits experienced underlying growth of 3.1% in 2009 to 2.2 billion transactions.2 The UK’s real-time gross settlement (RTGS) system, CHAPS, has seen some decline in volumes, largely due to the contraction in the housing market, and there is an expectation of a transition in the coming years that lower-value business payments will migrate to FPS, leaving CHAPS for very high value and systemically important payments.
As the volumes on FPS rise, and banks and customers become aware of their rights and obligations under the Payment Services Directive (PSD), a clear demarcation into customer-initiated immediate payments routed via FPS and forward-dated payments and collections routed via Bacs will be seen. Customers will demand simpler integration with their environment and, increasingly, more and better information.
The FPS was developed by the UK banks and is managed by CHAPSCo on behalf of the banks. VocaLink built and operates the infrastructure on a daily basis. The central infrastructure operates 24 hours each day, with no scheduled (or unscheduled) maintenance downtime. This capability has attracted interest from banking communities worldwide as a platform to revolutionise the area of payments that has witnessed little innovation in the past 30 years until the advent of the single euro payments area (SEPA) discussions.
Interestingly, while there are challenges in designing, building and operating such an infrastructure, technology moves forward at a great pace. The potential for a mobile gateway for the existing infrastructures to enhance the real-time capability is now being examined. For other countries, the most common hurdles are agreement between the banks and stakeholders to introduce such a capability into the domestic market. Outside the PSD-affected countries there is still much debate about ‘float’ and providing such services at a low cost and price, rather than a drive towards providing innovative products, which might drive new economic benefit.
With a (maximum) two-hour clearing service, FPS has shifted consumer expectations, particularly the internet banking experience. In a world demanding instantaneous gratification, the consumer now has the ability to move money now, not tomorrow, nor in two or three days time. A shift in behaviour has been witnessed, evidenced in research conducted by VocaLink and Accord in 2010 which indicates that consumers are now aware that they can pay later – for example to pay off credit card balances later in the cycle (usually because they have forgotten the deadline) or because the service provider, in this case a credit card company, has started to promote the use of FPS for this purpose.
At first, this is seen by many consumers as a value-added service, but it will steadily become the baseline service expectation. As consumers discover that they can routinely transfer funds to a supplier or a friend/family within seconds, their appetite to wait for confirmation or receipt for another payment is limited. Banks have anticipated this experience and have been cautious in promising a service before the bank systems could deliver against this expectation. Perhaps for this reason, the active marketing of the FPS is not seen across the UK. It is a network effect. Each bank is dependent on the capability of the end beneficiary’s bank to deliver an optimum service. The banking community is challenged with delivering on the promise and ensuring that the ‘faster payments’ experience becomes ubiquitous.
In growing the products and services available to consumers and the corporate market, the role of a real-time transfer of funds has hitherto been confined to cards (albeit with chargeback) and irrevocable transfer via RTGS services. Even the RTGS system has not necessarily visibly delivered a receipt of funds to the end payer or payee immediately, rather intraday, and is expensive. Arguably, the RTGS platform is generally not the appropriate place for consumer or corporate-to-corporate payments. The cards processing environment has provided the instant gratification factor and has driven the growth of retailing and point of sale innovation. The rise of the debit card has been seen to the extent that it has now overtaken cash in high street retail in many countries. E- and m-commerce are where the next waves of innovation are happening. A widely accepted or interoperable method of electronic identity and authentication is required to deliver services in real time via the internet or mobile devices to facilitate delivery versus payment and remote payments. PayPal has succeeded because it is simple to use. Banks (either on their own or with a partner) need to excel at this concept of simplicity of service offering, or they will become dis-intermediated at the point where a customer interacts with a service.
The FPS was designed to serve the needs of a mature and developed economy, with a developed credit and trust model and a robust and stable retail banking system. The collateral and loss-sharing agreements that stand behind the operations of the payment systems in the UK facilitate an approach to settlement risk that might not be acceptable to the banks and authorities in other countries. The operation of a 24×7 settlement model (where the RTGS is not accessible outside of the Bank of England’s (BOE) operating hours) is an innovation of business and banking practices to support commercial objectives. This innovation will support growth in the economy and enable businesses to innovate in their delivery of new products and services with a lower cost base.
Card transactions typically attract interchange and acquiring fees. These can vary, depending on the merchant, processor and scheme, but as a percentage of the transaction they can typically be higher than those of an automated clearing house (ACH)-type transaction. In developing new online/e-commerce capabilities the first recourse has thus far been cards, more recently followed by PayPal and similar providers. Europe has seen the emergence of online payment mechanisms such as iDEAL, based on Internet banking services. In the UK eWise and VocaLink are partnering to transform the way people pay online and will launch eWise payo, a new Online Banking ePayments network (OBeP) in the UK for consumer availability in 2011. Unlike many other alternative payment options, eWise payo keeps financial institutions in the primary position of the payment chain, allowing them to protect and regain revenue being lost to alternative payment providers, while leveraging existing online banking infrastructure. By using the faster payments platform in partnership with the eWise OBeP network, financial institutions will also benefit from a service that provides rea-ltime consumer authentication, validation of sufficient funds and a guaranteed payment to the merchant. eWise payo delivers a new alternative online payments solution which addresses the increased demand by consumers for a simple and secure payment option.
Online banking epayments networks are alternative payment networks sponsored by banks. These platforms leverage existing banking infrastructure, including online consumer authentication, cash management services and settlement services. The International Council of Payment Network Operators (ICPNO) has been established to build the framework and establish the rules and standards for joining the global OBeP networks together for the benefit of all involved. eWise is a payments and online financial management solutions provider with a reputation for providing innovative solutions, which make transacting online easier and more secure. In the US, eWise is the exclusive network provider for secure vault payments, an OBeP network developed in partnership with NACHA, the electronic payments association.
For business to business online transactions, there is a desire for, if not a drive towards, e-invoicing. A bank-account-to-bank-account payment provides better reconciliation, lower fees and immediate credit to the correct bank account. It cuts out a range of intermediaries who have stepped into the void to attempt to facilitate trade. Some provide value-added services, such as purchase insurance, but where these do not prevail, the customer will gravitate in volumes towards the simplest, cheapest solution. Merchants who have relied on credit cards (other than cash) as a single method of receiving payments may find that the service they receive via an FPS-related service gives them faster receipt of final funds. Instant irrevocable delivery versus payment should be possible for online goods. A shift has been seen towards the use of FPS to settle card transactions intraday at a faster pace than would have been settled previously. This is the start of a wider move to make better use of the existing ACH capability. In Germany, the card acquiring concept has been dramatically altered by the initiation of a one-off direct debit to pull the payment from the consumer’s bank account, rather than the use of a credit card scheme to settle the transaction. The reduction in costs to these merchants is significant.
Growth in the use of the FPS has been not only in a shift of volumes of immediate payments from Bacs, but in a displacement of other forms of payments. Quite simply the numbers indicate that SIPS have started to rise above and beyond any displacement from Bacs or Chaps volumes. The vast majority of CHAPS payments (by volume) are below the new threshold (as of September 2010) of £100,000 and all things being equal (ie pricing), one should expect a shift of these transactions over time to FPS. This would free up the CHAPS system for those payments for which it is intended and free up expensive intraday collateral. Such a significant shift will require a dramatic rethink of pricing and promotion strategy by banks to corporates and financial institutions for these payments, and a gradual movement is expected, barring an extraordinary event that triggers a shift.
The availability of new access mechanisms for corporates and financial institutions and third-party beneficiaries to submit payments over the service has provoked great interest. Some banks have embraced the opportunity to provide an improved service to their corporate clients. Many banks, however, are reluctant to make the service accessible to customers. There are a number of valid reasons quoted by different organisations, but with the same net effect:
But often the customer does not understand or know what they are missing. At the moment there is a perception that the lack of widespread information on the service has stymied demand and innovation. Customers probably wants to send all their payments via one interface. If that customer is a corporate, they probably cannot understand why they cannot use their existing Bacs channel for FPS. Asking them to connect to something else, with a different set-up and a different security protocol, with different prices, is potentially a challenge. If the customer is a third-party beneficiary and wants to collect payments and receive faster payments from customers, then the benefit of real-time information with the payment is tangible. There is potential to simplify the product offering, and VocaLink is working with a number of banks to streamline their connectivity to a variety of payment services via a service bureau with complex capability.
SEPA is driving a move towards new messaging standards and refreshing the infrastructure within banks and clearing houses across Europe and beyond. It is an opportunity to review the product and service offering and examine whether the current paradigm is really good enough. Do the current payment offerings support what customers are trying to do – whether corporate or consumer? Clearly, there has been a growing gap between the legacy instruments and the SEPA products and services. There is clearly a divergence between the development of products using the capability within FPS and those leveraging SEPA messaging, which have, to date, largely been replacement products. The process is now starting, but large-scale implementation of ‘e’-products across SEPA is yet to be witnessed.
VocaLink has conducted a number of studies to track awareness and attitude to the FPS in the UK3 and into a mobile, immediate payments service in Europe. The key objectives of the UK research were to:
Queried on their awareness of FPS, one in four say they are definitely aware of FPS, a similar score to 2009. The proportion who ‘think’ they have heard of it has also remained at about the same level. This leaves just under two in three who are not aware of FPS. Online banking users are twice as likely to be aware of FPS. Awareness is highest among those who have made an online or phone payment – with 39%t definitely aware. At the same time, 35% have made an ad hoc online/phone bank payment within the last year. Half of them (53%) have noticed that the payment they sent arrived immediately, and over a third (38%) noticed receiving a payment immediately. While 67% have noticed the payment being faster, only 39% of this group actually said they were definitely aware of FPS.
When asked why they like FPS, the answers point to a noticed improvement in service (Figure 1). Of all people with a bank account (which represents 3 million people in the UK with a bank account), 7%t claim that they have changed their behaviour as a result of FPS, and they are using FPS more and using cash, cheques and cards less.
When questioned, 29% of people stated that the availability of Faster Payments would cause them to change their future behaviour – and unprompted, volunteered that it would encourage them to:
Of those sampled, 60% find the idea of FPS attractive, and the appeal is greatest among those who use online banking and have noticed the difference. Men are slightly more interested than women, but the appeal is markedly higher among more affluent (AB demographic) and younger consumers and those who bank online. A fifth of all consumers with a bank account say they would definitely or are very likely to use online/phone payments instead of cash or cheques – a similar level to last year. Interest is higher though among those who currently bank online or by phone: 36% say they are at least very likely to use FPS – a rise of 7 points in the past year.
In market research, it is usually the case that people’s stated intention to use a service is actually higher than their actual usage turns out to be. Iowa State University has developed a calibration tool to convert the stated intention scores into a more realistic likely future demand.
Using this calibration tool, the future demand among those people with a bank account is actually likely to be 10%, and among those banking online/via a phone it is 16%, ie 10% and 16% each audience would actually use FPS instead of cheques and cash in the future. These are similar scores to last year.
When asked about using FPS to pay bills instead of using cash or cheques demand is even higher and has increased in the last 12 months: 29% of all current-account holders (up 8%) and 53% of those who bank online/via phone (up 15%) say that they are very likely to or would definitely use FPS. instead. Both scores are significantly up on last year. After calibrating for any potential over-claim, the likely usage among people with a bank account is about 14% (up 4% from 2009) and 22% (up 6%) among people who bank online/via phone. “When you pay a bill, especially if you’ve left it a bit late, you always have that worry about whether it would get there in time. With (Faster Payments) you don’t have that worry. It’s real peace of mind.”
VocaLink has taken the concept of FPS as the infrastructure backbone for a mobile payment service and conducted additional research to establish whether there really is a demand for this type of service. This new ‘immediate payments’ proposition is:
VocaLink and Accord conducted a separate study4 to determine the interest levels among consumers and small business owners of such a service. The immediate payments proposition for the mobile phone appeals very strongly to consumers. Two in five of all those with bank accounts believe it would be very or extremely valuable. This level of interest is among the highest ever recorded by Accord, and it rises even further to one in two among those who already use online payments (53%t say extremely or very valuable), or have a contract mobile phone (49%) and those aged under 35 (55%). The one in four (27%) who do not find the idea very valuable are mainly concerned about security or are not regular mobile phone users. Respondents were questioned on a variety of scenarios and asked which method of payment they would choose in each case: immediate payments, cash, cheque, debit card or credit card. Immediate payments was the most popular payment option when people considered which method to use for transferring money to friends or family (55%) and when paying urgent bills (44%).
The commercial attractiveness of mobile payments as a service is most acutely apparent for small and medium enterprises (SMEs). In particular, trades people who provide services to the general public are keen to adopt a service that reduces their reliance on cheques and where they can instantaneously acknowledge receipt of funds. In the research, these small-business owners found the service so attractive in receiving funds that they would pay a small fee to enable their customers to send transactions via this method of payment, particularly in preference to cheques. They were concerned that the customer perceives no cost in writing a cheque, and so would not pay for an alternative method. For small businesses, the benefits are many: faster access to cash and thus improved cash flow; reduction in cost and time for banking cheques; guaranteed payment (no bounced/stopped cheques); universal acceptance (they all possess a mobile phone); and it is easier to manage than cash.
The FPS is growing in capability and reach. Member banks and their customers continue to innovate to bring to market new products and services that use the capabilities of the service. FPS will drive innovation and reduce costs in the market for both consumers and banks. Creating a ubiquitous service is just the beginning; the future depends on a commitment to deliver outstanding realtime services.
References
1UK Payments Administration (2010) ‘UK Automated Payments’, UK Payments Administration Ltd, London.
2Ibid.
3VocaLink in association with Accord (2010) ‘Faster Payments, The Voice of the Customer’, VocaLink, London.
4VocaLink Consulting Services in association with Accord (2010) ‘Immediate Mobile Payments, The Voice of the Consumer’, VocaLink, London
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