Spotlight on UK Faster Payments: Five years on

Spotlight on UK Faster Payments: Five years on

For UK banks, this is a big build... by building such robust systems, banks won t have to do so again for several years...i think Faster Payments will be a beacon of change for other markets. Alan Koenigburg, JP Morgan Chase, 2007 Spotlight on UK Faster Payments: Five years on Source:UK Payments Council / VocaLink When the Faster Payments Service launched in forefront of payments technology globally and individual transaction limits of several thousand In 2012 the Payment Services Directive catalysed May 2008 it was the culmination of almost a the service remains the world s leading 24x7x365 pounds, whilst others offered far more limited the industry to ensure that the vast majority of decade s worth of work to improve the speed of retail real time payments system. However, this services. This was driven in part by differing accounts could be reached by Faster Payments payment processing in the UK, starting with the innovative new service had a relatively slow start approaches to fraud management. However the resulting in strong organic annual growth of over Cruickshank Report and the Office of Fair Trading s in the early years as a consequence of several introduction of two-factor authentication and out 20% in the number of one-off payments. Now, 90 creation of the Payments Systems Task Force. factors: lack of customer awareness; inconsistency of channel validation has ensured that initial million accounts are able to receive payments via In 2005 the contract to build and operate the real-time central infrastructure on behalf of the Faster Payments Scheme Limited was awarded to of bank offerings and incomplete reach across accounts. Initially the bank offerings varied significantly, concerns over fraud have been overcome and use and consistency of bank offerings of the service has improved dramatically in recent years. the service which has had a positive impact on volumes, mainly from single immediate payments. VocaLink. In one step it propelled the UK to the with some offering the service online with ii 1 Spotlight on UK Faster Payments: Five years on Spotlight on UK Faster Payments: Five years on 12

Businesses and Government adoption Early users of the service have been companies Over the years there has been growing usage other businesses which has driven demand for may come from charities and other small offering financial products that require immediate from businesses, who are able to submit a variety of Faster Payments Service transaction organisations once electronic alternatives to transfer to customers, such as short term loans batches of payment instructions to the service types. As availability has increased, demand multiple authorisation cheque payments are and also SMEs using the service to pay their via direct corporate access functionality, for bulk corporate access has grown creating in place. staff. Businesses are taking advantage of the almost instantaneous functionality and nearuniversal reach of the service for payments to individuals such as wages to agency workers and where suppliers need to receive the value before releasing goods and services. Government are also making emergency benefit payments to individuals in this way. allowing them to create files of credit instructions in legacy Bacs format but submitting them via the Faster Payments Service. In 2011 the scheme extended the direct corporate access service to enable 24*7 processing, which is having a positive impact on volumes. There has been robust growth by businesses making one-off payments to individuals and to competition amongst corporates to get payments to customers quickly. One such example is insurance companies, which can use faster payments once claims have been settled to attract customers. Single immediate payments are expected to grow as businesses find alternatives to cheque payments and make greater use of online payments. A further boost Forward dated payments are likely to get a boost from greater use for payroll and the 2013 spring budget announcement that merchant acquirers will give SMEs the option to receive settlement using the Faster Payments Service could reduce by up to three days the time it takes for card payments to reach SME s bank accounts. Faster Payments values Faster Payments volumes 800 774bn 1000 970m Transactions ( billions) 700 600 500 400 300 200 100 0 618bn 235bn 164bn 33bn 106bn 2008 2009 2010 2011 2012 2013 Transactions (millions) 800 600 400 200 0 811m 425m 525m 294m 82m 2008 2009 2010 2011 2012 2013 23 Spotlight on UK Faster Payments: Five years on Spotlight on UK Faster Payments: Five years on 34

Consumer adoption Consumers are the main users of the Faster Payments Service, accounting for almost 60% of the payments made last year and the volumes are continuing to grow. More than two in three of the payments consumers made were to pay credit cards and other financial bills as well as other individuals. These person-toperson payments include those to friends or family for shares of jointly-incurred expenses, such as taxi fares or restaurant bills and bill payments. The remainder were for regular bills, like utilities and subscriptions. Transferring money instantly to friends and family members is now replacing cash and cheques. Overall Faster payment volumes grew 20% whilst cheques fell 13% (in the year to November 2013) according to the latest UK Payment Council figures. Last year saw a far more interesting phenomenon: the widespread adoption of Faster Payments for individual transfers of money between accounts by individuals and businesses. These single immediate payments grew by 33% in the year to November 2013, and they now account for just over half the volume and value flowing through the service. 16 million Peak daily Faster Payments transactions, 2 April 2013 This has been driven by the banks using Faster Payments as the default mechanism for customer-initiated transfers, combined with the widespread adoption of easy-to-use mobile banking applications. Looking forward, a major source of growth in single immediate payments will be increases in the number of users of remote banking services, especially mobile banking and in the number of payments that each initiates through these channels. Examples include deposits to savings accounts, payment of credit card bills or payments from parents to offspring who are travelling or who are away at university. This trend is expected to continue as new offerings such as the Payment Council s mobile payment service, launching in spring 2014, will make initiating payments even easier for customers. 774.1billion Value of Faster Payments processed in 2013 All of this has been achieved with largely the same set of scheme member banks that launched the service five years ago, but this is set to change significantly. 3.12 billion Faster Payments transactions processed up to 31 December 2013 How Faster Payments works 1 Simon Remitting customer Choice of Payment 2 3 4 service given to bank Source: fasterpayments.org.uk 1. Simon wants to pay his friend, Mike, who has an account with another bank. 2. Simon instructs his bank through mobile phone, online or telephone to pay 50 today to Mike. Simon s bank carries out its normal checks to verify that he is the genuine customer. For example, they may ask Simon to provide a password or other security information. 3. In addition to Simon stating the amount he wants to pay, he also provides Mike s sort code and account number this is the information used to address the payment. Simon also enters the name of the account he wants to send the payment to, which will appear on his statement, and any reference details so that Mike knows what the payment is for. 4. Before Simon s bank allows the payment to be made, it will check that Simon s account has sufficient funds and that the request to make a payment is genuine. In certain cases, the bank may need to hold the payment to undertake further fraud protection checks. 5. Simon s bank submits the transaction through the Faster Payments Service. From this stage onwards, the transaction cannot be cancelled. Where Mike s account is with a Faster Payment Member Bank, he should generally be able to see the credit on his account within minutes and also be able to access the funds. If Mike s account is with a non-member of the Scheme, then it may take longer for funds to be shown on his account. Sending bank When a customer makes a Faster Payment, it will generally work in the following way: 10 Confirmation of payment 9 Faster Payments Service Central Infrastructure 6 Bank executes 5 payment 7 8 6. The Faster Payments Service sends the payment instruction to Mike s bank (the receiving bank ) after checking that all the relevant details are included and properly formatted, and then debits the sending bank. 7. Once Mike s bank has received the transaction, it checks that the account number is valid (note, it does not verify that the account name and number match), and then sends a message back to the Faster Payments Service that it has accepted (or rejected) the payment. 8. The Faster Payments Service credits the receiving bank with the funds and sends a message to the sending bank to let them know that the transaction has been made successfully. 9. Simon s bank marks the transaction as complete. Each sending bank will decide how this confirmation will be made available to its own customer. In all cases, once the payment has been made, a confirmation message will always be sent between banks. 10. Simon s bank confirms the fate of the payment to Simon. 11. The receiving bank will credit Mike s account with the 50 sent by Simon. Receiving bank 11 Mike Beneficiary customer 45 Spotlight on UK Faster Payments: Five years on Spotlight on UK Faster Payments: Five years on 56

Broader participation and wider adoption Currently the service operates on a deferred net settlement basis, which means that individual member banks are exposed to the risk that one of the other members cannot meet its settlement obligations. VocaLink is supporting the scheme company, its member banks and the Bank of England to introduce arrangements whereby member banks pre-fund their net settlement positions with cash deposits at the central bank. This has been encouraged by the Bank of England as supervisor of the scheme and as the scheme s settlement services provider, and it will open the door to broader participation in the service as well as significantly reducing risk. Another major step forward will be the launch of Zapp, a person-to-business and person-to- SME service, towards the end of 2014. Zapp will enable consumers to benefit from real-time payments on their mobile phone banking applications, allowing secure payments between consumers and merchants. Zapp will be integrated into the mobile banking applications of member financial institutions, providing a seamless real-time payment choice to customers as they shop.customers will be able to see their account balances before they pay and choose different accounts to pay from, thereby staying more in control of their finances. With Zapp, money moves instantly from a customer account to a merchant account. UK FPS: a snapshot Availability Continuous Volume 3.2 billion payments processed since 2008 to January 2014. 970 million processed in 2013. Participants Ten banks are direct members. All UK banks and building societies now send and receive Faster Payments either directly or as correspondents. Clearing and Fifteen seconds from submission to the scheme and confirmation that the payment settlement speed has been accepted from the beneficiary bank. Funds generally credited to the payer instantly (except with some agency banks) and may be drawn immediately or within 2 hours. Maximum transaction time is 15 seconds end-to-end (based on maximum processing and transmission times), although the average transaction time is lower. Transaction costs Payments initiated by consumers are free of charge. Costs for corporates vary. Future developments Payments Council Mobile Payment Service for person-to-person payments. Zapp, a person-to-business and person-to-sme payments service using digital channels (mobile, tablet, PC). FPS supports the following types of payments Once the faster payments system is accompanied by pre-funding of settlement obligations by its member banks, we will have brought the advantage of real-time payments to millions of payments users at the same time as removing from the system any settlement risk associated with these payments. This is another important step in the risk-reduction journey that began with the introduction of real-time gross settlement in CHAPS in 1996. Edwin Schooling Latter, Head of Market Infrastructure Division at the Bank of England Single Immediate Payments Standing Orders and Forward Dated Payments Direct Corporate Access (DCA) Corporate Bulk Payments File Input Module (FIM) Return Payment Scheme Return Payments A payment processed in Near Real Time (NRT). A Standing Order is a payment that is set up in advance and then occurs regularly. A Forward Dated Payment is a one-off payment that is set up in advance. A payment submitted in files by Corporates or Bureaux on behalf of a Corporate directly to DCA and then on to the Core Central System. This allows FPS institutions to submit a file of payments to FIM using the SWIFTNet FileAct or ETS channels. This may be sent via FPS when Receiving FPA Institutions have accepted payments and subsequently, for any reason, determine that the funds should be returned to the Sending FPS Institutions. Created in response to a rejection by a receiving FPS Institution of an Asynchronously Processed payment 67 Spotlight on UK Faster Payments: Five years on Spotlight on UK Faster Payments: Five years on 78

VocaLink Drake House Homestead Road Rickmansworth WD3 1FX United Kingdom +44 (0)870 165 0019 info@vocalink.com www.vocalink.com 5500880101/0214 8 Spotlight on UK Faster Payments: Five years on