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)

• 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.

To explain further, it is worth remembering that a payment is simply a transfer of value which, aside from a physical transfer of cash or the writing of a cheque, takes the form of an electronic payment instruction. These are either pushed (eg when a consumer initiates an online payment) or pulled (eg when a Direct Debit is taken from a customer account following an earlier mandate being set up).   The instruction (in its simplest form) will then result in a debit and a credit being applied to the Originator and Beneficiary accounts respectively.

There are three layers through which the vast majority of payment instructions will normally be processed and these can be summarised as follows:

• Service Channel: This is the medium through which the payment was initiated. Traditional examples include a bank branch, written mandate and telephone centre. There is then an overlap (at the point of initiation) with the next layer of:
• Systems & Infrastructure: This layer, in turn, comprises of three sub-layers:
  • The in-house computer systems and software (through which payment instructions are processed) at both the originating Payment Institution and the beneficiary Payment Institution. Aside from the core Accounting systems (which are debited and credited on behalf of the customers on both sides of the payment transaction), examples of other types of systems that could be involved include those associated with Identity Validation and Anti Money Laundering Checks.
  • The underlying national Payment Systems which process the payment instructions submitted between the Financial Institutions.
  • The networks that inter-connect the Payment Institutions, the Payment Systems and the Central Banks (both domestically and internationally).
• Settlement: In an earlier post, I covered the concept of Settlement Finality and the legal framework that covered it. All payment instructions need to “settle” in a legally protected manner in order that they may be irrevocable. For the major payment systems in most countries, this will involve the use of Central Bank accounts where the majority of banks hold their reserves.   The timing of the point of irrevocability will vary; for a cheque credited to an account within the UK, that is normally six days after it has been paid in (see explanation here), whereas for some real time payment systems it can be on the same day (or within a few hours). If Payment Institutions provide irrevocability ahead of the actual point of legal settlement then they normally take financial risk on between themselves at that point (unless central bank funds have been earmarked to cover potential loss allocation).

Notwithstanding the layers outlined above, what is always key to remember is that a payment simply comprises of two elements; the instruction (either pull or push) which sets out who is being debited and who is being credited (and at which Financial Institutions) and the underlying settlement where the payment becomes irrevocable. Everything else in between is simply infrastructure and processing.

So, what has the above got to do with Fin Tech and disruption? Well, it boils down to the straightforward question of how much further can disruptive technology be successfully applied in the three layers?

Service Channel Disruption

The service channel layer is the place where most disruption has recently taken place. Historically, branches were where consumers performed the majority of their banking operations as they paid cheques in and settled bills. As time passed, additional services and electronic payment systems were added (eg ATMs to withdraw cash and, in the UK, Bacs (and Direct Debit) and CHAPS offering timed and same day urgent payment processing). Most were industry funded initiatives, which all key players participated in. They evolved in a similar but piecemeal fashion in most countries.

Moving the clock forward, the Banks (in their role as Payment Service Providers) began to offer new channels by which their clients could carry out their business. This started with telephone based call centres (which could operate outside of normal banking hours and saved customers needing to travel to a branch). Next came Internet Banking access and the ability to not just perform basic banking operations but, additionally, to subscribe to new products (eg savings accounts). Then came mobile banking allied, in a number of countries, to Faster Payment solutions which meant that consumers could, via their bank, move money to selected beneficiaries both quickly and at a time that suited them 24×7.

Most latterly, disruption has begun to occur where new players have begun to introduce additional/competing channels (or overlays) which piggy-back onto existing infrastructure and services. A good example would be Apple-Pay where an existing payment service (ie a credit, debit or store card) is utilised via a convenient “consumer-friendly” App. No new payment type has been invented, merely a different way of leveraging an existing service. Another example is the emerging breed of digital only banks whose streamlined systems will leverage technology available on a user’s device (eg a smartphone camera for biometric identification) thereby simplifying their own systems and making it still easier for the consumer to initiate payments. The Banks will still utilise existing core infrastructure payment systems, but this will be all but invisible to their customers.

Infrastructure Disruption

Within the Financial Institutions, the key disruptive influence is the fact that the new banking entrants are able to access new technology and are not weighed down by the variety of legacy, inflexible, difficult to maintain and costly banking systems that are present within the existing players. Instead, their systems are modern, flexible and cheaper to maintain thereby providing cost advantage as well as agility when it comes to reacting to new opportunities.

At the central infrastructure level, there remains considerable appetite to change. However, the pace of change is slow due to the need for the market to move as a whole with any change (eg for ISO20022 migration) and the need for the Payment Systems to remain secure and resilient. It is sometimes easier for wholesale change to take place rather than piecemeal change (eg the recent announcement by The Clearing House and Vocalink re the creation of a new Immediate Payment System in the US). Disruption here is measured in the medium to long term as opposed to the short-term.

At the Network Infrastructure Level, there is even less Disruption. Security and resilience is key and the appetite for change by participating Financial Institutions in this area is limited. SWIFT remains a core trusted provider for these entities. Whilst private trusted networks and the use of the internet for financial transactions using proprietary security techniques continues to evolve, concerns around security remains a key inhibitor for growth. The prevalence of news reports around hacking and the extraction of data does little to encourage disruptive change in this area.

Settlement Disruption

The area where least disruption has thus far taken place is around Settlement. This is primarily due to the fact that, whilst settlement can take place on a bi-lateral basis between parties (as they net out their trades), most Institutions will wish for their transactions to settle in one way or another in Central Bank Money for the reasons outlined above. News, however, continues to circulate around developments in this space (for example, the press report in December 2015 around Goldman Sachs’ patent application for a cryptocurrency settlement system”). However, the disruptive impact to date is very modest.

Coming back therefore to the underlying question of how much further can the Payment market become disrupted, the following are likely to be key factors:

• Whilst there remains considerable consumer appetite for continued simplification and smart connectivity, the experience of Apple Pay in terms of new users continuing to use the service (ie retained traction), highlights consumer fickleness and the challenges that new entrants face.
• Whilst a percentage of consumers are eager to try new technology, surveys continue to indicate that the silent majority of Payment consumers are either comfortable with their existing product providers or are reluctant to change in case they find themselves with a worse provider. Whilst the UK’s Account Switching programme has had success in making it less onerous to move banks, the latest statistics published (see here) highlight that, in Q3 2015, 14% fewer bank switches took place than in the same period the previous year.
• As highlighted in an earlier post, timed payments (ie those due to take place on a certain future date) make up the majority of all payments initiated (in the UK, it is over 80%). As such, it could be argued that the scope for consumer driven disruptive progression is less than 20% of the market (unless substantive underlying change to the timed market was to take place).
• Regulation acts as a natural inhibitor in terms of how streamlined Payment Service Provider infrastructure and services can become given the need for security, resilience, audit, sanctions and AML checking. The text backing the US Financial Crimes Enforcement Network (FinCEN)’s fine on Ripple Labs in May 2015 (see here) highlights that “Innovation is laudable but only as long as it does not unreasonably expose our financial system to tech-smart criminals eager to abuse the latest and most complex products.” It is also worth noting that regulation can also act as an enabler. In Europe, the second Payment Services Directive (PSD2) mandates that existing Payment Service Providers will need to open their systems for Third Party Provider access. Member EU states must be compliant with this new Directive by the end of 2017.

Whilst there is capacity for innovation and change (either disruptive or via natural evolution), in conclusion, I would suggest that:

• Within the Service Channel layer, there will be a limit to how much further innovation/disruption can make a straightforward payment instruction even simpler and easier to initiate. What this means for the number of new initiatives being announced and how many of them will therefore falter and fail through lack of critical mass take-up remains to be seen.
• Within the Infrastructure Layer, more innovation and change is likely at both the Financial Institution and Payment System level. Traditional Banks will continue to improve and streamline their legacy systems to compete more effectively with the new breed of Payment Service Providers whilst, centrally, new Payment Systems and initiatives such as ISO20022 will undoubtedly move this Layer forward. However, this will not be an area of rapid change given the substantive change it entails.
• At both the infrastructure and settlement layers, Distributed Ledger Technology has the potential to be a substantive disruptor in the longer-term. Well publicised Use Cases include domestic and cross-border post-trade processing. Additionally, its inherent ability to mitigate key areas of operational risk (via its potential benefit around resilience with multiple data instances present) is attractive. The fundamental question is the degree to which this new area of technology will gain regulatory traction and widespread adoption. For me, this is therefore the key “wait and see” disruptor.

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.