• 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.

As someone who has worked on the core infrastructure side of Payments for a number of years, amongst all these headlines, there are two questions that I have yet to find good answers for.   The first is what exactly is how “fast” does an Instant or Immediate payment need to be and, secondly, whether there is a compelling large-scale defined Consumer/Corporate need for these (given the cost that would need to be invested to deliver such a system)? Before I am seen as being “behind the times” with these questions, we should consider the following:

• Most consumers already enjoy the benefit of an “immediate” payment by virtue of their ability to pay for something using a debit or credit card. They can already gain immediate value by being able to take the goods they have purchased at the point of sale. In turn, the vendor has comfort that the payment will be honoured.
• The latest statistics published by the Payments UK Trade Association (available here) make very interesting reading. In September 2015, 85% of all payments settled in the UK across the four main payment systems were pre-timed payments (either debits or credits). This is notwithstanding the fact that the UK has one of the most advanced Faster Payment Systems in the world available to its Banking population. Indeed, the stats highlight that nearly half of all payments handled by FPS are standing orders or future dated payments.
• This key statistic of 85% is driven by the fact that most payment requirements are known in advance and are therefore “programmed” to take place on a certain date (look how many direct debits people have set up against their bank accounts).
• Notwithstanding the uptake of mobile banking and other “ease of use” payment channels, the statistics also show that the total number of such timed payments is actually increasing (4% year on year) as opposed to decreasing.
• In parallel, looking at the month of September 2015 versus September 2014, the uplift in Faster Payment Transaction volume is virtually all accounted for by a drop in Cheque based transaction volume thereby indicating a shift in consumer usage of payment types but not a change in timed versus untimed).

Two key questions therefore arise from the above:

• Is there a potential need for any of the 85% taken up by Timed Transactions to become “immediate” as opposed to Future Dated?
• For the remaining 15%, how much faster does a payment need to be? It is clear in the UK that Consumers are favouring use of the Faster Payments system with its two hour settlement time as opposed to the six day settlement cycle of Cheques. This trend may slow though with the introduction of Cheque Imaging and next day settlement during 2016.

Taking the first question, the fact that the volume of timed payments is rising as opposed to decreasing is a clear indication that there remains clear demand for this type of payment. If the UK or other countries were to move to more consolidated Payment Systems at a future date, they are likely to need to retain the ability to settle daily batches of timed transactions rather than looking to channel all of these through an instant payment settlement channel with the ramifications this would bring with respect to performance, capacity and resilience.

With regards to the second question, it is not clear how much consumers and corporates really want immediate as opposed to same day settlement (or a few hours) for their payments. However, the difference between these is stark in terms of the technical and cost challenges they would bring to the payment industries in most countries. These would include:

• How can AML and Sanctions checks be performed in a truly real time payments environment?
• Payments can readily clear on an immediate basis when customers bank at the same bank (via internalised settlement). However, payments “chains” commonly exist where end users bank with Payment Service Providers who are not Direct Participants in the core Payment Systems and therefore rely upon correspondent/agency arrangements with other PSPs who are Direct Participants. End to End payment may therefore involve a number of intermediaries on either side of the Payment System. It is not clear how immediacy could readily work in this situation.

In summary, there is doubtless a need for Faster Payments across country locations (particularly where such systems do not currently exist). However, statistics speak for themselves and, with only 3 out of every 20 payments in the UK appearing to require settlement in this fashion, there are some difficult questions the broader payments industry will need to face in the coming couple of years in terms of attempting to define the end-user need for “immediate” or “near immediate” payment settlement and the scale of investment that should be invested to support this.