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Operator LINK reported that 2015 represented a record year in terms of the amount of money (£128 bn) that had been withdrawn from its network of ATMs, the total number of withdrawals made and the number of ATMs in use. They note that the value withdrawn under-represents the total value of cash withdrawn via ATMs since it did not include figures for money withdrawn by the customers of Banks using their own ATMs.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

Regulation & Legislation

• The key European announcement of the month came from the European Parliament on 8 October with the formal adoption of the second Payment Services Directive (PSD2). Whilst the Directive has still to be signed off via the EU Council of Ministers, this was a key stage towards adoption of the Directive across EU Member States by the end of 2017. The text of the press release can be read here. From this point, the emphasis will now shift to how Financial Institutions will adopt its requirements; in particular, the provision of access to customer accounts (XS2A) and the need for common minimum API and Security standards to facilitate this.
• Following the UK Payment Community event that took place on 17^th September, the first meeting of the UK Payment System Regulator’s (PSR) Payment Strategy Forum took place on 8^th October. As part of the meeting, they considered Strategy Setting principles and priorities including an initial set of items reviewed and weighted at the Community event. All papers for the Payments Strategy forum are available on the PSR’s website here.
• In the US, 1^st October marked the date when retailers and businesses either utilised chip-enabled Credit Cards or became liable in the event of card-presented fraud if they accepted EMV based cards without EMV enabled terminals.

Central Banks

• A key announcement from the world of Central Banks and their interaction with the wider Payment eco-system came from the Peoples Bank of China on 8^th October with the launch of CIPS (China International Payment System). Operated by The Cross-border Inter-bank Payment and Clearing (Shanghai) Corporation, the system will provide clearing and payment services for cross-border and offshore Renminbi transactions. 19 banks were selected to be Direct Participants at launch. 38 domestic and 138 overseas banks are also participating on an Indirect Basis. Further information can be found at the PBoC website.
• On 15 October, the Bank of England issued two consultation papers aimed at the further strengthening of the UK Financial system through structural reform. One paper was on ring-fencing and the other on operational continuity. The consultation closes on 15 January 2016. The backing Bank of England news release can be viewed here.

Immediate / Faster / Mobile Payments

• On 14^th October EBA Clearing published an updated Blueprint setting out the basic principles which would back a pan-European instant payment infrastructure. Over 230 parties contributed to the consultation which sets out a roadmap through to the delivery of the infrastructure in 2018. The text can be downloaded via a form located at this link. Earlier in the month, EBA Clearing also announced it was launching a Request for Proposal (RPF) for the delivery of the infrastructure.
• On 13^th October, STET (a SEPA based Clearing House) announced in Paris that it also planned to create an Instant Payment Infrastructure for European Payment Service Providers. This will be offered to the French Banking Community for early adoption. The announcement can be read here.
• Just 24 hours earlier, Vocalink announced the signing of a letter of intent with NITMX (Thailand’s main Interbank Payments Provider) for a joint study into options for the delivery of mobile payment services in Thailand). The backing article can be read here.
• On 30^th September, NACHA – The Electronic Payments Association announced the release (via its Payments Innovation Alliance) of a white paper entitled “Real Time in Real Life: The Impact of a Real-Time Payments System on its Users”. The paper aims to “provide clarity on what a real-time payment is by exploring what real time means, outlining the challenges to implementing real time, and identifying major use cases and user impact”. A link to download the report can be found here.

Payment Liquidity enhancements

• Earlier in October, two of the UK Payment Schemes (Bacs and the Faster Payments) announced the launch of their respective pre-funding initiatives. Designed to eliminate both intra-day and out of hours liquidity risk, the initiatives work by Direct Participants lodging (via committed interest bearing accounts held at the Bank of England), sufficient liquidity to cover their intra-day netted exposure. This will assist Faster Payments in its ambition to raise its current system imposed maximum limit of £100K per transaction.   At the same time as this announcement, Faster Payments also announced the commitment of three Challenger banks to join the system in 2016.

Standards / ISO 20022

• SWIFT used the opportunity of Sibos to announce the publication of is ISO 20022 Harmonisation Charter. Backed by the cooperation of 20 key Financial Market Infrastructures, the charter seeks to formalise a consistent approach to ISO20022 adoption via the sharing of information around its adoption. The backing document can be downloaded here.

Distributed Ledgers / Blockchain

• Against the backdrop of multiple announcements of Corporate and Fintech investment in Distributed Ledger and Blockchain technology came the announcement from the UK Government of its investment of £10m to launch a research initiative in distributed Ledger Technology. This announcement came as part of a speech given on 14 October by the UK Economic Secretary ahead of the launch of the Alan Turing Institute next month.   The text of the speech can be read here.
• As most know, one of the key challenges around Blockchain technology is its potential capacity limitations. SETL’s announcement on 12 October that it had cracked a billion transactions per day in a test environment was therefore particularly noteworthy given this is approximately the number of worldwide payment movements per day.

Other Publications

Two further research reports with specific reference to Payments have been published in recent weeks:

• The first (jointly published by RBS and Cap Gemini) is the “2015 World Payments Report” examines developments in the global payment landscape. It has a dedicated website that can be linked to here.

• The second (published by McKinsey) is entitled “Global Payments 2015: A Healthy Industry confronts disruption” and can be found here.

Outside of the Industry, many may wonder why this is the case? When setting up an online payment, writing a cheque or filling in direct debit mandates, you are normally asked for the beneficiary’s name.   Well, the answer is not as straightforward as you may first think and, to explain further, it is necessary to go some way back in time to briefly cover the origins of payment routing.

In many respects, there is a strong analogy between the background of payment routing and telephone call routing. In days gone past, there were Telephone Operators in towns or villages who would route telephone calls in their specific area to other numbers elsewhere. People could have the same phone number in different cities given the closed nature of each local network. When telephones became automated, Subscriber Trunk Dialling (STD) codes were introduced so that you first dialled an area code, followed by the number of the person you want (which is why, to this day, if you dial a local number, you do not need to put the STD code in front of it). International Subscriber Dialling (ISD) codes added an additional prefix which then enabled international calls to be directly dialled.  To map this analogy to the UK system of payments, the local phone number equates to the Customer Account number assigned by a particular bank, the STD Code to the Bank’s Sort Code and, for some international payments, the ISD would map against the country code at the beginning of the IBAN (International Bank Account Number).

Prior to electronic transfers being introduced, the principal means of transferring value from where a person banked other than the risky transfer of cash or a physical commodity such as gold was by the use of bearer drafts or promissory notes. Via evolving legislation (principally the 1882 Bills of Exchange Act and the 1957 Cheques Act) these evolved into the more recognisable “negotiable instruments” we know today. Processes evolved whereby the instrument could be endorsed and passed through the hands of several beneficiaries thereby avoiding the need for encashment. Local standards continued to develop for their clearing which, for the UK, meant that Sort Codes evolved in the 1960s from the earlier clearing codes which, in conjunction with the Bank Account number of the originator and the beneficiary, meant the payment could be routed.   This historical convention then persisted when electronic payment systems were introduced and remains so to this day.

The situation then became further complicated when it came to the routing and delivery of international payments given the proliferation of different account identification mechanisms from country to country. The two principle routing mechanisms subsequently established (and still in use today) effectively enshrined countries’ rights to maintain their own account numbering conventions.   International Payments are currently routed either via a combination of the SWIFT Bank Identifier Code (BIC) together with a BBAN (Basic Bank Account Number) or an IBAN.   The IBAN also incorporates the BBAN relevant to the specific country in the last 30 characters of its make-up.

As readers glaze over at this point, it is worth highlighting that all of the above have one thing in common. At no point in either the telephony system or the banking system does the name of the customer have any relevance in or to the routing process. You have to know the telephone number of the person you want to call in the same way that you need to know the bank account details of the person you wish to send a payment to. After this point, the analogy begins to break down.   For landlines, people can choose whether they wish to have their phone numbers published in directories or not.   Interestingly, mobile phone numbers have become more like Bank Account numbers insofar that it is a case of “if I want you to know my number, I shall tell you”.

Sadly, the impact of a “wrong number” written down is worse for a bank account. With a phone, at worst, you will dial a wrong number. If you “dial” the wrong bank account number, the payment will go to the incorrect payee.

That then brings us back full circle to the beginning of what can be done to prevent such mis-directed payments given the onus currently rests with the payment originator to ensure that the identity of whom they believe they are sending funds to is bona-fide.

Some steps have been taken to attempt to limit this risk. Most banks operate modulus checking algorithms which can detect a wrongly entered Bank Account format. Within the UK, Payments UK offers a Sort Code checker which both validates whether a Sort Code is valid or not and displays the name of the Bank and Branch if it is.   Elsewhere, there is a similar checking tool for the validity of IBANs. However, no service is available to check whether the person to whom you wish to send a payment is associated with the account and sort code you have been provided with.

A code of best practice for misdirected payments was published in May 2014 by the UK Payments Council (the predecessor to Payments UK), where those Payment Services Providers that subscribe to the code (fifteen as at the date of publication of this post) will take action within two working days of being notified of the misdirected payment as well as outlining the various options open to the customer if the funds cannot be recovered within 20 working days.   However, as these steps highlight, the process takes time and may still not result in funds being recovered.   This is why there is now a renewed focus on Payee Identity verification.

Payee Identify verification is not straightforward (if it was, it would have been done before now), particularly when attempting to be performed as part of a real-time or batched Payments Process.   Names on accounts often do not match the beneficiary name in a transaction. For example, forenames may be different (eg “Jim” vs “James”), joint accounts are often named using the account holders’ initials plus their common surname whereas a payment to one of the account holders is likely to be directed to a single individual, mis-spellings may be present and corporate names are often quite complex and may be different to the trading name the Payer specifies on the payment instruction.   These challenges are well understood in the world of Anti-Money Laundering and Sanctions checking, where “fuzzy matching” algorithms and percentage sensitivity settings are present in the specialist software used for these purposes.   Such checks will often highlight potential “bad transactions” which then need to be manually checked. Taking the millions of transactions that are processed and settled in the UK and Europe each day, the number of possible rejected payment instructions would be substantial thereby potentially leading to fewer genuine transactions reaching their destination in a timely manner.

It is for that reason that pre-payment validation options are being examined.   It is far better for the Payer to establish the bona-fide credentials of the Payee prior to the payment instruction being initiated than have the payment either rejected by mistake or credited to the wrong individual.

That then brings the next key challenge of how such a mechanism could work.   To some degree, this is already happening in the world of Mobile Payments. The UK PAYM service launched last year enables the payer to verify the name of the recipient before confirming the payment.   The challenge is that PAYM effectively works on a Closed User Group of participating individuals who have signed up to the service.   For normal banking transactions, we are dealing with a legacy structure of millions of bank accounts spread across numerous Payment Service Providers with no common participation agreement in place.

One possible approach would be for the industry to build a repository of account name/number information that would be securely accessed as part of the payment generation process.   The payee would enter the details of who they wish to pay and, prior to the payment being committed, validation of the payee name would take place against the central repository with potential mis-matches highlighted in a manner that would need to not compromise the security of innocent parties (for example, “the payee is different to the name you have specified”).   The Payee would then need to take steps to double check the identity of the payee prior to initiating the payment.

Such steps are a while off. However, given the identity assurance and richer data initiatives that are currently being pursued elsewhere in the UK Payments Industry, it is possible to see other benefits/synergies that could arise from a central repository of names, sort-codes and account numbers.   As an immediate example, a separate directory of Sort Codes (The Extended Industry Sort Code Directory) is currently maintained by the industry owned Payment infrastructure operator Vocalink.   Should a central repository be created, could all industry routing data be maintained within that infrastructure too?

There is little doubt that some substantial changes will arise on the back of payee identification verification (particularly if it becomes mandated via regulation). The question is, with pro-active and collaborative cross-industry planning, could other benefits arise from this?

As a final thought, the above highlights just some of the challenges that a domestic payee verification process would need to overcome.   The challenges increase country by country if cross-border end-beneficiary validation was to be available.   That will be the subject of a future post.

The first is an initial report on its World Class Payments Project entitled  “World Class Payments in the UK Enhancing the Payments Experience” and the second is an interim version of a Code of Conduct for Indirect Access Providers.

The update on the World Class Payments Programme sets out the latest progress on the project and highlights four key areas of future focus:

• Open Access for those who offer payments services to customers:   This focusses on simplifying access for PSPs to Payment Systems from a technical standards and connectivity perspective.
• Confirmation of Payee: This is possibly the most challenging piece of work and allows pre payment confirmation that the person being paid is the person for whom the payment was intended.   In the UK, the industry standard is for payments to be directed to their destination using just the beneficiary Account Number and Sort Code.   This, in turn, ties into the international IBAN and BIC routing code structures, neither of which contain beneficiary name details.  Pre-validation of payment instructions within Banks’ systems is normally limited to Anti Money Laundering (AML)/Sanction checks and routing data integrity checks.
• Request to Pay: Will enable flexibility in the timing of what are normally pre-programmed payments.
• Enhanced Data: This  will enable more data to be linked to Payment Messages for analysis for reference purposes and highlights the current challenges present in the UK retail payment systems in terms of the amount of data that can be transmitted in their message content.

Payments UK plan to publish a further update next year following further analysis on the above topics.

Turning to the Indirect Access Code of Conduct, this is a voluntary code and follows earlier consultation findings in this area being published by the UK Payments Systems Regulator.   The code sets out the obligations that Code Subscribers are expected to adhere to and who can benefit from these (the Code Beneficiaries).   It relates to domestic payments processed within five Payment Systems (Bacs, CHAPS, Cheque and Credit Clearing, Faster Payments and LINK).   The Code sets out four commitments:

1. Entitlement to an Agreement for the Supply of Indirect Access
2. Support Services & Communication of Important Information
3. Managing the Security of Supply of Your Service
4. Ensuring the Security of Your Information.

Accompanying the publication of the code, the Payments UK Website states “To ensure the Code is effective, it is being launched on an interim basis and Payments UK will be conducting a formal consultation on the Code across the wider payments industry in late 2015. Feedback from this consultation, along with any relevant information from the PSR’s market review into indirect access, will be considered in the further development of the Code for publication next year.”