• 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.

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.

See https://www.psr.org.uk/psr-publications for more detail.