The Retail versus Wholesale Debate: Should retail and wholesale clearing and settlement of CBDC payments be separated? – Digital Pound Foundation

How does the market look today?

When looking at the payments aspect of central bank digital currencies (CBDCs), distinctions are frequently made between wholesale and retail systems and infrastructure. While this approach may reflect the traditional and legacy infrastructures that are currently in place, the opportunity for change brought about by the digital revolution raises the question of whether it is indeed time for a rethink.

As digital currency initiatives are being explored across the globe, we see different approaches being taken. The Bank of England and Bank of China are focused on retail use cases while the Monetary Authority of Singapore (MAS) and Banque De France are focussing on wholesale infrastructure. Only the Swedish Riksbank appears to be considering a hybrid model. This raises a couple of questions: Is the siloed solution approach the right one? Does such an approach reflect the clearing infrastructures that we have in place today?

How do Real Time Gross Settlement systems operate today?

If we look at today’s frameworks, many countries typically have at least one high value payment system which tends to clear and settle individual transactions on a real time accumulated basis and are known as Real Time Gross Settlement (RTGS) systems. These systems settle on a payment-by-payment basis. Due to high value transaction size, they tend to operate on a reduced set of operating hours and are often closed overnight and at weekends. RTGS systems are typically used in wholesale markets.

To meet the needs of retail markets, there is usually some kind of automated clearing house (ACH) which is used for low value mass payment type transactions. Final settlement in these systems is usually arranged via the RTGS on a Deferred Net Settlement (DNS) basis, meaning that RTGS is actually serving the needs of both wholesale and retail markets. With appropriate pre-funding/collateralisation in place, made possible due to the smaller values, these systems often operate at 24x7x365.

There are often alternative infrastructures operating in the same jurisdiction. In the UK, there are, in fact, five different infrastructures (CHAPS, FPS, BACS, Cheque Clearing and LINK) while in the USA there are three (Fedwire, CHIPS and an ACH). In Europe, there are TARGET 2, TIPS, EBA (Euro 1, Step1/2 and RT1), as well of course as the national ACHs. This highlights the legacy proliferation of payment systems in various jurisdictions.

A further complication is that, whilst we can differentiate between the payment infrastructures supporting wholesale markets from those underpinning retail payments, in many cases the reality is that the transaction split is far from being a simplified retail/wholesale split. For example, in the UK, CHAPS is used primarily for wholesale clearing but retail transactions such as house purchase payments are also made using CHAPS. Corporate payments go across the FPS system, however FPS has a £250k payment limit, and therefore any transactions above that limit would need to use CHAPS. In the USA it is actually the CHIPS system that processes a lot of high value transactions for the private sector rather than Fedwire which is the RTGS (admittedly CHIPS participants pre-fund all positions, but it is still a net settlement system). A similar scenario arises for the EBA Euro 1.

The need for a more holistic approach to CBDC Clearing and Settlement

These inconsistencies therefore raise the question of whether it would be sensible to take a more holistic approach when looking at CBDC clearing and settlement. A single “system” handling both wholesale and retail CBDC certainly makes sense from a processing point of view. Payment providers will presumably have to link into non-CBDC payment systems, and so subdividing CBDC payments into retail and wholesale would potentially complicate matters further as more complex internal routing is created.

A further consideration is that different systems carry different amounts of data enrichment (newer systems tend to carry richer data). By unifying the wholesale and retail CBDC, a single rich data format can be implemented, eliminating the data discrepancies that exist today across the UK payment systems. There is nothing to stop efficient scheduling of payments in one CBDC system to prioritise high value wholesale payments. Similarly, when implementing a liquidity savings mechanism the costs of payment on the wholesale side can be reduced by netting non-urgent payments and it may be possible to maximise Liquidity-Savings Mechanism gains by including high value retail transactions, and retail settlement transactions.

From a liquidity management perspective it would similarly make sense to have a single CBDC system rather than having to move liquidity between infrastructures. Interoperability between CBDC and non CBDC will also be easier if there is one CBDC system covering both wholesale and retail.

From a customer perspective, they are not concerned with the distinction. End users want the simplest, safest and most comprehensive outcome possible so that they can transfer value quickly, securely, and cheaply through a streamlined process.

Nevertheless, we can’t ignore the legacy framework and wholesale versus retail distinctions that exist today. The various cross-border wholesale initiatives that are currently underway may provide valuable insights as to how best to achieve an integrated approach. Furthermore, the current G20 initiative on cross-border payments and the recent Committee on Payments and Market Infrastructures for “ideas on solutions to expand PVP settlement” for cross-border payments lends further weight towards analysis in this important area.

The way ahead

As CBDC deliberations continue and as further analysis is undertaken, we need to ask ourselves whether the existence of the distinction between wholesale and retail money is an accident of the development of the means of transferring value between people and accounts or whether indeed the rationale for the separation no longer exists. Indeed, the same is true of the separate processes of payment, clearing and settlement. A well-designed CBDC would simplify the business of value transfer and obviate the need for these historic distinctions.

This paper was written by Jim Ford and Phil Kenworthy, both Originating Members of the Digital Pound Foundation.

Jim has served in the payments industry for over forty years and, amongst other roles, has served on the clearing committee of the ECU Banking Association, the forerunner of the Euro Banking Association, as well as numerous working groups of CLS Bank and assisted in its creation. Jim has worked with HSBC and Natwest as their payments industry liaison executive and has, since 2014, been increasingly involved in blockchain developments and in central bank digital currencies. He continues to provide strategic thinking into payments via both the Whitechapel Think Tank and the Digital Pound Foundation.

Phil Kenworthy is the former CEO of the UK’s High Value Payment System (CHAPS) and currently sits as an Independent Non-Executive Director on the Board of ClearBank and the Advisory Board of RTGS Global. He is a member of the UK’s Access to Cash Review Panel and is the Lead Technical Reviewer for the London Institute of Banking and Finance’s CertPay Qualification. Previous roles include Operations Director at CLS (global FX Settlement) and Chief Internal Auditor at CRESTCo (now Euroclear UK and Ireland). Phil also runs his own Payments Advisory Company. Phil began his career at the Bank of England.

Some rules were quickly established.   Wholesale payments were out of scope (the Bank of England had already announced in January 2016 that it was going to produce a blueprint covering an upgrade to the U.K.’s Real Time Gross Settlement System – subsequently published in May 2017[1]) and cash and card services were also largely excluded.

Following the initial consultation round, in November 2016, the PSF published its “Payments Strategy for the 21^st Century”[2].  This was based upon a set of solutions which were summarised as:

·        Responding to End-user Needs: Solutions to address current and future end-user needs; ·        Improving Trust in Payments: Solutions to engender trust in the safety and certainty of payments; ·        Simplifying Access to Promote Competition: Solutions to simplify access and enable participation in the market for Payment Service Providers in order to foster competition and innovation; ·        A New Architecture for Payments: Solutions to enable the development of the future payments architecture.

These were further broken down as follows:

Since that point, some strong progress has been made against these objectives:

• Three of the existing Retail Payment Systems (FPS, Bacs and Cheque & Credit Clearing/ICS) have been brought under a single entity (Pay.UK) with, as a consequence, simplified participation rules and member attestations;
• Confirmation of Payee has been introduced which, together with the EU wide implementation of Secure Customer Authentication, will contribute significantly towards fraud prevention;
• The Bank of England has worked with Pay.UK to establish common ISO20022 based messaging standards for future payment messaging (including the formulation of a Common Credit Message).

In parallel, the Bank of England has made good progress towards the introduction of its new RTGS system.  In July 2020, Accenture were appointed to develop and build the new service and, since then, the Bank’s progress towards its launch has continued apace (with commercial banks beginning a series of attestation stages to prove their readiness for its launch).

Other key industry developments have also taken place during this time.  Of particular note:

• In 2017, the Image Clearing System went live in the U.K., which provided the industry and consumers with a new means of banking and processing paper cheques;
• In 2018, the Access to Cash Review Panel was set up by LINK to review the U.K.’s position on cash access and acceptance which resulted in a series of recommendations being published in the Panel’s subsequent report published in March 2019. These not only covered the question of consumers’ immediate needs around access to cash but also looked to the future in terms of a secure and safe transition to digital alternatives.

The flagship of the Payment Strategy was the introduction of the U.K.’s New Payment Architecture (NPA).  This was designed to provide a layered approach; a core central settlement platform underpinning a number of service layers and channels thereby encouraging open competition from different service providers.  It was planned that this would replace the existing retail payment systems across a phased timeline[3]:

FPS and Bacs were due to commence their run-down during 2020 with complete closure at the end of 2022 and Image Clearing would close at the end of 2024.  Migration to NPA would commence in the latter half of 2021.

Sadly, notwithstanding the launch of a Strategic Partner Procurement Process by Pay.UK in October 2018[4], things have subsequently gone backwards in terms of the rollout of NPA.  Its scope has diminished, no vendor has been selected and, at the end of July 2021, the PSR launched a consultation aimed a further de-risking the programme[5].  If adopted, the end result will be to narrow the scope of the NPA Central Infrastructure Services (CIS) to a portion of existing FPS functionality (namely single push payments) and for a further vendor selection process to take place.  It is not certain what would happen to the remaining functionality that sits within FPS (e.g. Standing Orders) and whether FPS would therefore remain operating in cut-down form for the foreseeable future. With regards to Bacs, despite being the largest of the U.K. payment systems by volume, it would be excluded from the cut-down NPA scope (although Pay.UK would be tasked with carrying out “further work on the long-term strategy for Bacs”).

In the meantime, the PSR has had to extend (for both FPS and Bacs) the timeline for a mandatory re-tender of their central infrastructures provision.  This was not the case for LINK (which remains a standalone payment system operator outside the scope of the NPA work) who successfully concluded their mandated tender in October 2019.

Back in May 2008, the launch of the Faster Payments System put the U.K. firmly in the list of early adopters of real-time retail payment technology with the ability of consumers to initiate payments on a 24×7 basis.  Since then, close to sixty countries now have Faster Payment systems.

Having participated in that Payment Community event back in late 2015, it is depressing that, six years later, we are little further forward with the rollout of NPA.  Even with a fair wind behind the current position, by the time the PSR’s consultation has concluded, an RFP process run and development work commenced, we must be looking at 2024/25 at the earliest before a cut-down system could be introduced.

Meanwhile, the U.S.A. is looking to introduce FedNow towards the end of 2023 notwithstanding having started their process well after ourselves.

At this point, should we start considering other alternatives?  The latest incarnations of Faster Payment systems being introduced internationally contain considerable technical and functional enhancements over and above the Faster Payment System here in the U.K.  For example, Vocalink (who operates the existing Faster Payments System here in the U.K. for Pay.UK) provided the technology that underpins the 2017 PromptPay system in Thailand and, working with The Clearing House in the U.S.A., launched the Real Time Payment system (incorporating “Request to Pay technology”) there in late 2017.

Given the delays in the NPA programme, what is there to prevent an alternative, more modern “off the shelf” payment system from being set up here in the U.K. by another body, either new or existing, competing with Pay.UK?  If based upon those already operating elsewhere in the world, it is highly likely to meet the regulatory standards required to operate here.  This should also tick the “competition box” – one of the core statutory objectives of the PSR.

Such a system could likely be introduced in an accelerated timescale and could provide choice to the commercial banks in terms of payment routing (and thereby provide enhanced resilience and interoperability in the payment eco-system).  It could also be set up in a manner that could accommodate any move towards the adoption of digital GBP should the Bank of England decide to launch a CBDC.

Perhaps now is the time for more competition to enter this market-place?

[1] https://www.bankofengland.co.uk/-/media/boe/files/payments/a-blueprint-for-a-new-rtgs-service-for-the-uk.pdf

[2] https://www.psr.org.uk/media/0jmkqwwa/a-payments-strategy-for-the-21st-century-putting-the-needs-of-users-first_0.pdf

[3] https://psr.org.uk/media/pcnbkizw/171208-psf-consultation-report-draft-v1-0.pdf

[4] https://www.wearepay.uk/wp-content/uploads/2019/10/Strategic-Partner-Procurement-Prospectus-Oct-18.pdf

[5] https://www.psr.org.uk/publications/consultations/cp21-8-lowering-risks-to-delivery-of-the-new-payments-architecture/

The Impact of Digital Currency on the Future of Payments – Whitechapel Think Tank

1. Guarantee access to cash
2. Ensure cash remains widely accepted
3. Create a more efficient, effective and resilient wholesale cash infrastructure
4. Make digital payments an option for everyone
5. Ensure joined up oversight and regulation of cash

In this year’s budget, the Chancellor announced that the UK Government would legislate to protect access to cash and to also ensure that the UK’s cash infrastructure is sustainable in the long-term.    This was followed (October 2020) by HMT publishing a Call for Evidence (available here) to provide insights on its approach to the legislation.  It specifically sought views on:

1. How to ensure industry continues to offer ways to withdraw and deposit cash
2. How to improve cashback
3. What affects cash acceptance
4. Where regulatory responsibility should sit

Today, the Access to Cash Panel published its response to the Call for Evidence which can be downloaded here.

So, are people right to be concerned over the privacy of their data if they have to switch to using cards or other means of payments? At first sight, it is difficult to argue that the answer is “No”. When you walk into a shop and pay by cash, you are leaving no digital footprint behind of your association with the transaction. The retailer’s point of sale terminal (and any linked stock control system) will know that a specific item of stock has been sold, but it has no information in terms of the purchaser unless such information is voluntarily provided. The moment a payment is made with a card rather than cash, there is a linkage between the sale of that specific item, the initiation of a payment transaction via the merchant’s card acquirer (who would normally supply the point of sale terminal), the handling of the transaction via the card Scheme (e.g. Visa or Mastercard), the transaction authorisation via the card issuer and the subsequent payment from the customer’s card issuing bank to the merchant’s bank. Data is captured at various points in the transaction cycle and will then be retained (often for years) for regulatory and/or accounting requirements.

At this point, it must be highlighted that no details of the underlying purchases at a store are passed to the acquirers, the card schemes, the card issuers or the banks involved in the transaction. The data remitted will need to adhere to the underpinning ISO 8583 (card) messaging standard. This requires that a variety of data components be captured at the point of sale and passed through for processing (such as the merchant (card acceptor) unique ID, merchant name and location, date and time of the transaction and the total amount). However, a four digit Merchant Category Code is also included in Field 18 of the message which could give insight into the transaction. There are many of these. Some of those used by Mastercard[1] include:

• 5411  Grocery Stores, Supermarkets
• 5813  Bars, Cocktail Lounges, Discotheques, Nightclubs, and Taverns—Drinking Places (Alcoholic Beverages
• 5814  Fast-food restaurants
• 5912  Drugstores and pharmacies
• 5931  Second Hand Stores, Used Merchandise Stores
• 5933  Pawn Shops
• 5944  Clock, Jewellery, Watch and Silverware Stores
• 7273  Dating services
• 7995  Gambling Transactions
• 9211  Court costs including Alimony and Child Support
• 9222 Fines

In isolation, a transaction provides only limited information. However, over a period of time, the names and business type of the merchants that a consumer uses and the frequency of transactions would likely provide insights into a consumer’s lifestyle if this data was to be inappropriately utilised. Concerns on this have been aired in the media from time to time such as the following article from 2011:

https://www.foxbusiness.com/features/mcc-codes-unveil-consumer-shopping-habits

Turning to the retailer (where the underlying details of the transaction is known), things then boil down into two camps; those where the store has an agreement with the customer that their transaction data may be analysed and those that don’t. The former is readily highlighted by store loyalty programmes where a customer may receive incentives such as cashback, tailored vouchers or early access to sales or special offers. In exchange, the Terms and Conditions of such loyalty programmes are likely to inform the customer that their data might be analysed for marketing purposes. A hybrid form is also present where the customer may not hold a loyalty account but, at the point of sale, they are asked by the merchant for their zip/postcode and/or address details. This may be explained for an offer to go onto mailing lists or for warranty/guarantee purposes. Again, customer consent permits restricted use of the data at that point.

Any such data held by a company (or others in the payment chain) must be protected in line with local data protection laws. In countries covered by the EU 2018 General Data Protection Regulations, the obligations relating to data controllers, data processors and the associated rights for individuals “to be forgotten” via Subject Erasure Requests extended the earlier data protection obligations that firms had to follow.

However, data breaches can and do occur. In 2013, the US retail firm Target fell victim to Point of Sale malware, which resulted in the theft of data relating to up to 70 million customers. This resulted in Target settling a class action suit from banks and credit unions for $39.4m[2].

Turning back to the core question of whether consumers are right to be concerned over the privacy around non-cash transactions it is easy to see from the examples above how such concerns can arise. For these to be allayed so that these consumers will switch away from cash, more concerted effort and information will likely be needed from retail groups and payment entities as to how consumer data is used, how it is protected, how long it is kept for and the rights of consumers to request that it be deleted.

————————————————–

[1] Mastercard quick reference booklet – Merchant Edition (Nov 2018) https://www.mastercard.us/content/dam/mccom/en-us/documents/rules/quick-reference-booklet-merchant-edition.pdf

[2] Reuters – 3 December 2015 (https://www.reuters.com/article/us-target-breach-settlement-idUSKBN0TL20Y20151203)

In July 2018, we published a Call for Evidence and, in parallel, conducted a series of workshops across the United Kingdom.   From this, we learnt that:

• Cash use in the UK has halved in the past 10 years and is forecast to halve again in a decade’s time. In 15 years, one in every ten payments could be in cash.
• However, cash remains a necessity for approximately eight million people (17% of the population).
• If we go cashless too quickly, exclusion risks include: threats to rural communities; social isolation; a rise in debt; financial exploitation; and stigma towards those who rely on cash.

On 19th December 2018, we published our interim report “Access to Cash – Is Britain Ready to go Cashless”.    This can accessed here

Today (6th March), we have published the final report which sets out five recommendations for government and the industry to ensure that no one is left behind as we move towards a cashless society:

1. Guarantee access to cash
2. Ensure cash remains widely accepted
3. Create a more efficient, effective and resilient wholesale cash infrastructure
4. Make digital payments an option for everyone
5. Ensure joined up oversight and regulation of cash

The final report can be accessed here

At the end of July, we published a Call for Evidence and, in parallel, conducted a series of workshops across the United Kingdom.   From this, we learnt that:

• Cash use in the UK has halved in the past 10 years and is forecast to halve again in a decade’s time. In 15 years, one in every ten payments could be in cash.
• However, cash remains a necessity for approximately eight million people (17% of the population).
• If we go cashless too quickly, exclusion risks include: threats to rural communities; social isolation; a rise in debt; financial exploitation; and stigma towards those who rely on cash.

Today (19th December), we have published our interim report “Access to Cash – Is Britain Ready to go Cashless”.    This can accessed here

In Spring 2019, we hope to publish the final report which will include recommendations for government and the industry to ensure that no one is left behind as we move towards a cashless society.

• Overall, UK payment volumes were up 3% in 2016 to just over 8 billion transactions.
• The total value of transactions made across the main UK Payment Systems during 2016 was £82 Trillion (up 10%).
• The Faster Payments system has, unsurprisingly, seen the greatest year on year volume growth at 14% with just over 1.4 billion payments made across it. Of these, 57% were single immediate payments (with the remainder made up of Standing Orders and future dated payments).
• In contrast, Cheque volumes fell 15% in 2016 thereby repeating (if not eclipsing) the fall of 13% recorded in 2015.

The fall in cheque volumes is not surprising given the decreasing dependency on this medium. However, a deeper analysis of volumes and values over the past 25 years puts the current use of cheques in the UK well and truly in perspective:

(Base data source: Payments UK)

Mirroring trends elsewhere, cheque volumes in the UK have fallen 85% since 1990 with an overall value drop of two-thirds in the same time period. However, the latter is not inflation adjusted so, in real terms, the value drop is significantly more.

Notwithstanding these falls, adding on the total number of credits cleared in 2016 shows that, collectively, the Banks still cleared 366 million cheques and credits (or just over 1.4 million items per working day). This is still a large number of paper based payment transactions although, if the declining trend continues at the current rate, this figure could be nearly halved within four years. In the meantime, the infrastructure backing this process remains very much a fixed cost to the payments industry with the net cost per transaction rising as a consequence.

This brings to the fore the question of the future of cheques. In early 2011, the then UK Payments Council proposed that cheques should be abolished by October 2018. However, these plans were dropped just a few months later following both significant opposition to the proposal and the absence of a suitable alternative to cheques being identified. Six years on, these factors are still present given a significant portion of the population are still uncomfortable using electronic means of payment and the dependency that certain trades and sectors such as charities still have on cheques.

The Cheque and Credit Clearing Company subsequently announced (in 2014) plans to enhance the cheque clearing process by permitting the clearance of electronic cheque images via a new Image Clearing System (this would also cover other instruments such as bank drafts). This would also permit the current six day cheque clearance cycle to be substantially reduced. Work has continued since this time with the latest publicly available Board minutes from December 2016 highlighting that industry testing is due to take place from end May 2017. At this point however, no date has been published for the launch of the new system. It is also unclear whether this new system will be integrated into (or act as a service layer on) the New Payments Architecture recently announced as part of the new U.K. Payment Strategy published by the Payments Strategy Forum at the end of November 2016 (see here).

According to Cheque and Credit Clearing, the earliest example of a handwritten cheque known to be in existence in the UK dates from 1659. Over 350 years later, it would seem that this latest development is likely to be the final swansong for a declining financial instrument that has served us well, but whose volumes in the 5-10 year timescale are likely to represent just a fraction of the UK payment volumes. As such, there may come a time when the tough decision will need to be made to discontinue their use. We are not at this point yet. However, perhaps unlike 2011, a smudge of smoke can now be seen on the very distant horizon.

• On 23 May 2016, the UK Treasury extended its designation of Recognised Payment Systems under S185 of the 2009 Banking Act by issuing a Recognition order over LINK (the UK ATM Network Operator). This followed the formal demerger of LINK from Vocalink at the beginning of April 2016 and brings LINK formally under Bank of England Financial Stability Supervision alongside Bacs, CHAPS, FPS and Visa Europe.   Cheque and Credit Clearing remains out of scope at this point.
• On 20^th June, the Bank of England announced the extension of the CHAPS and CREST Settlement Day through to 6pm (an extension of 1hr and 40 minutes beyond that which had been in place for the previous 20 years). This has been achieved by, in turn, the Bank of England extending the Operating Hours of its Real Time Gross Settlement System and thereby extended the UK Clearing Day by the same amount. The Bank has made it clear that it wishes Direct Participants in both CREST and CHAPS to pass on the full benefits of this change to their customers which, in the case of CHAPS, could reduce the number of failed housing completions given there is more time for funds to be safely transferred on the day a house purchase completes.   Further details can be found on the Bank of England’s Website at http://www.bankofengland.co.uk/markets/Pages/paymentsystem/extending.aspx.
• Staying with the UK Payment Systems, on June 30^th, Faster Payments announced that a fifth Technical Aggregator had passed the Technical Accreditation process as part of their Open Access initiative. At the same time, Faster Payments announced that Direct Participation in FPS was due to double by the end of 2017 with four participants due to join this year. Further details about these announcements can be read here.
• Turning to broader regulation, on 29^th June, the BIS Committee on Payment Systems and Market Infrastructures published enhanced Guidance on Cyber Resilience for Financial Market Infrastructures following an earlier consultation towards the end of last year. This latest guidance is intended to be supplemental to the Principles for Financial Market Infrastructures published in April 2012. Whilst the guidance is aimed at the broader Financial Market Infrastructure community, its impact is likely to be felt at both international and domestic payment system level given the majority of Central Banks utilise the CPMI Core Principles as a basis of their Financial Stability Regulation. The announcement backing the publication can be read here.
• Moving onto payments strategy, on 1 June, the European Payments Council announced the publication of an updated Edition of its White Paper on Mobile Payments. This is for Consultation (with comments requested by 1 September 2016) and represents a substantive update from the last version published in 2012 given the technological developments that have taken place since then.   The announcement can be accessed here and the paper can be downloaded from a link at the bottom of that page.
• On June 16, Payments Canada (formerly Canadian Payments Association) published a research report analysing commonalities in the modernisation approaches to Payment Systems across 27 countries.   The announcement can be accessed here.

The most substantive announcement with respect to Payments Strategy came on July 13, when the UK’s Payment Strategy Forum (which was created by the Payment Systems Regulator in Q3 2015) issued its Consultation on how the structure and form of the UK Payments Industry should evolve so as to be “responsive to user needs”.   The consultation runs until September 14^th, is wide-ranging in its recommendations and can be accessed here.

In brief, the report contains the recommendations arising from four different Working Groups under the Payment Strategy Forum; User Needs, Simplifying Access, Financial Crime and Horizon Scanning.   In turn, these Working Groups took under their respective wings a series of “detriments” that had been identified within the broader Payments Stakeholder community and set out firstly validating these and then determining possible means of addressing them.

The resultant recommendations were then brought back to the Forum and consolidated in the report. Key recommendations include:

• Movement to a common messaging standards and APIs across the UK Payments Industry.
• The inclusion of enhanced data within the Payment messages and the creation of a single repository to retrospectively hold payment messages for fraud analysis purposes.
• The use of enhanced identity mechanisms (including the ability to validate that the payment is going to the intended recipient).
• A move to create more flexible payment solutions (including Request to Pay)
• The consolidation of three of the Retail Payment Systems (at a Governance and Rules level) to simplify access for new market participants.
• The creation of a simplified payment platform on top of which overlay services (such as Account Switching) would rest.

The Payment Strategy Forum and the Payment Systems Regulator are keen for the Consultation to be extensively reviewed across the breadth of the Payments Community and, having personally participated in one of the Working Groups, I would encourage all readers of this Post to download the report and provide objective feedback back to the Forum.

For those not familiar with the UK Payment Systems, the four principal systems used by consumers and businesses alike are:

• Bacs: Direct Credits and Direct Debits which operate on a three day processing cycle.
• CHAPS: Same day High Value Payments which settle in real time across the Bank of England’s Real Time Gross Settlement System (RTGS).
• Cheque & Credit Clearing (C&CCC): Used for the clearance of cheques and and credits over a six day clearing and settlement cycle.
• Faster Payments (FPS): 24×7 processing of both timed and immediate payments up to £250K. Normally cleared within 2 hours.

Between these systems, a total of 7.8 billion payments were made in the UK during 2015, which represents growth of 4% over 2014. In value terms, these added up to £74.5 trillion. The breakdown per system was as follows:

Separately, the UK ATM Scheme Operator LINK reported that 2015 represented a record year in terms of the amount of money (£128 bn) that had been withdrawn from its network of ATMs, the total number of withdrawals made and the number of ATMs in use. They note that the value withdrawn under-represents the total value of cash withdrawn via ATMs since it did not include figures for money withdrawn by the customers of Banks using their own ATMs.

The next table shows the breakdown of volume (millions) by payment type in 2015 with and the delta from the previous year.

So, what facts and inferences can be taken from these statistics:

• Real time/“immediate” payments only represent 10% of all payments made across the four principal UK Payment Systems. The remaining 90% are timed or forward-dated in one way or another. Even within FPS, over 40% of its volume is for timed as opposed to immediate payments.
• Of particular note, (and notwithstanding the fall in cheque volume), the total volume growth of timed and forward dated payments in 2015 (@ 197m) is greater than the corresponding growth in real-time/“immediate” payments (@ 122m).
• The volume increase in timed payments highlights that this remains a key payment mechanism for businesses and consumers alike. Most business payments just need to be paid on a given day and that is pre-ordained through their invoice processing and accounting systems. Most consumers probably do not mind what time of the day their monthly TV subscriptions are paid; they just want to know it will definitely be paid on the day it is due. Similarly, employees will want comfort that they will be definitely paid on the day their wages are due but may be less concerned about the time the money is paid into their account on that day.
• It is likely that part of FPS’ growth in “Single Immediate” Payments is from the downturn in UK cheque usage. The remainder is likely to be organic growth. A key question is whether this growth will continue unabated and whether it will also take payment volume from the “timed” market.
• The reduction in paper based cheque/credit volume is mirrored in other countries. However, with over 430 million items being processed in 2015, its significance (particularly to small businesses, charities and those who either do not wish or cannot access newer technology) is still very relevant.
• The growth in ATM volume and value also highlights that this payment medium still remains of importance to the wider population, notwithstanding the rise in other consumer-facing payment mechanisms such as contactless cards and Mobile Payments.

The statistics around timed payments would appear to raise a key question. With just 10% of the current UK payment market in the Real-Time/ “Immediate” space, is there sufficient future traction available to warrant and support the continued widespread investment being made in the area of “instant payments” and consumer payment interfaces?

As more and more countries look to implement “Instant Payment” solutions, the experience of the UK eight years on since its own Faster Payments payment system was launched also highlights that the requirement for timed/future dated payment solutions to be able to co-exist alongside real-time “instant payment” mechanisms remains a real world necessity. It would seem that, unless technology can find a way of innovatively amalgamating the world of timed and real-time payments (and the differing processing needs these payment types require), there may need to be a two track payments environment for the foreseeable future.