The Faster Payments Service has allowed for a revolution in the way customers send money in the UK. As it celebrates its fifth anniversary, Sara Perria asks the company what results have been achieved and what lessons can be transferred abroad.
UK Faster Payments Service celebrated its fifth anniversary in May this year, coinciding with the news that it has become the largest real time payment system in the world.
Indeed, the reported 2.5bn transactions processed since its launch in 2008 are a sign of the innovative impulse given to the banking industry by the clearing system, in and outside the UK.
When it was first introduced, it represented a breath of fresh air, being the first new payment system to appear on the UK landscape after 20 years, allowing phone, internet and standing order payments to move "almost at the touch of a button".
The UK Faster Payments Service is regulated by the Faster Payments Scheme Limited, a not-for-profit body owned by 10 of the leading banks and building societies in the UK, Europe and the US. The service runs on the VocaLink real-time payments platform.
Chris Dunne, payment services director at VocaLink, speaks to Electronic Payments International about the implications of this anniversary.
EPI: What have the first five years been like?C.D: "When it launched back in 2008, Faster Payments was the first new clearing service in the country for probably 20 years, so it was born out of a desire to move away from the banks’ three-day clearing cycle, to something much better. The original aim was to make things work at least within the same day and take away float – namely the gap between when the money is taken out of my account until it is put into yours, and which the banks benefit from – The industry decided that rather than doing it the same day, it would make it as near as to real time as possible. So initiatives were taken to actually build a large-scale real-time infrastructure, and that is exactly what was built in 2008. At the time it was absolutely the first of its kind in the world at that kind of scale. Other services are popping up around the world and we are getting a huge amount of interest. So over the past five years it has really matured and volumes have really started to take off. It started off relatively low-volume and it has just grown and grown. We are certainly going to do over 900 million transactions a year."
EPI: Why in the UK?C.D: "Faster Payments was not regulatory driven, but it was certainly driven with one eye on regulation. The Office of Fair Trading had a group set up called the Payment Systems Task Force and they looked at payments: one thing they said was that float needed to be removed and payments needed to move faster. The only way to move money cost effectively between bank accounts back then, was to use BACS and direct credit, which is a three-day service."
EPI: How long did it take to develop the technology?C.D: The project started in 2006 and we launched in 2008, so there was quite a long period of working out exactly what the requirements were. Whenever you work on a large project it takes a long time to agree on exactly what it should look like, especially because you have a large number of banks who all have their particular view. So we worked with APAX, which now has been turned into the Payments Council. We won this service on behalf of a scheme company called Faster Payments Scheme Ltd., which is a bank-owned not-for-profit organisation. They gave us a contract to run the service for a number of years. It was quite an undertaking, technologically. It is made up of components that you find elsewhere, so we bolted in bits that we already knew how to operate, but it is unique in that it can transact a very high volume of transactions at low cost, in real time. The processor can run 717 transactions a second. Certainly from a consumer’s point of view, these things have to be almost immediate: if you are sitting on your online bank and you want to send money to me, then that will come by Faster Payments. So when you hit the button and you send money from, for example, Lloyds to a Royal Bank of Scotland (RBS) customer, then the message goes from Lloyds into our central infrastructure and out into the RBS infrastructure; then an acknowledgement comes back through the FPS infrastructure back to Lloyds, to say that that payment was successful. And that roundtrip typically takes less than 15 seconds, so a user knows that the money has arrived safely."
EPI: What’s the situation outside the UK and what lessons can be learned from Faster Payments’ experience?C.D: "Other countries now have real time or near real time retail payments services. An example is a service launched in Sweden where they have a real time service called Swish, which launched a few months ago.Other services use the RTGS system (Real time Growth Settlement System) like CHAPS in the UK. There were some services that used the RTGS system to make real-time same day payments, but they tend not to be very mass-market, because RTGS systems tend to work on high-value, low volume. The Swiss and the Mexicans, for example, have a system that uses their RTGS system. Norway is about to launch its own service but, again, it is a small country with about 5-6 million people, so they are able to build something fairly small-scale, whereas Faster Payment is very large-scale and it serves the entire UK, which is about 70 million people. This is why we regard Faster Payments as the world’s largest mass real-time or near real-time payments service."
EPI: What have been the challenges and what lessons can be transferred abroad?C.D: "One of the reasons Faster Payments was slow to take off initially was that, although we had built the infrastructure and it was up and running just fine, the banks had different offerings going out to customers. So, depending on who you banked with, you could send Faster Payments through to greater or lesser degree and some banks were not able to receive Faster Payments. As a result, we ended up in a situation where we had launched, but there was a big difference in the customer proposition. For example, if I was a customer with Barclays I could send up to £10,000, but if I was a customer with Santander I could send much less. Now the reach is universal across the UK, so I know that if I use it now, then you’ll get it in real-time. This wasn’t really the case until the start of 2012, as what we saw last year is a massive uptake in volume, obviously because the standing orders from BACS moved across in response to a regulatory train, which we called the Payments Services Directive, which forced the banks to all accept Faster Payments in their current accounts. So I think a clear lesson is that you need to make sure that the consumer proposition is clear and consistent to start off with, because otherwise there is confusion in the marketplace and people don’t really know how to use it."
EPI: Did you experience an increase in fraud when you first started?C.D: "I think that one of the other learning points is that when you launch a new service in the financial industry, it invariably attracts the interest of the fraud community. That is also one of the reasons why banks were trying to keep the initial sending limits low, because they wanted to see what sorts of risks were inherent to the system. But once people became more comfortable with how to stop fraudsters exploiting the system, the levels rose."
EPI: How is regulation shaping the current payments’ landscape in the UK? C.D: "The parliamentary commission on banking standards is going to publish its report in June and one of the things they are very focussed on is precisely opening up access to payments systems. They have highlighted that access to Faster Payments is very restricted. They believe that it is very expensive and hard to access. At the moment there are 10 direct member banks – everyone else has to connect through the other member banks."
EPI: What do you think about the UK government’s idea to create a dedicated regulator?C.D: "Our view is that, at the moment, the payments’ landscape is very complicated, as there are many different layers, As a result, innovation is very slow, and very hard to make decisions and we would welcome a strong regulator that comes in and provides a clear guidance and clear incentives to innovate and if you read the treasury consultation they identify an issue around a slow pace innovation; they have picked out a slow progress in mobile payments working as one of the issues to be dealt with."
EPI: Has this got to do with the structure or the cost?C.D: "It has to do with the way the scheme rules are set up: we deliver the service on behalf of the scheme and that scheme can effectively set the rules of the game and set the conditions of entry to the system. The risk, from the regulator’s point of view, is that those conditions are too hard to meet and there is too much of a high wall and quite a barrier entry for new banks and smaller banks to be able to play in that space and is unfortunately out of our control."
EPI: What are your plans for the next 10 years? How do you think you will develop?C.D: "We really want to see access to faster payments broaden; the volumes are going up nicely and we are going to do over 900 million transactions this year. Still, we think there is a lot of untapped potential in faster payments to be able to take on a lot of transactions that are currently cash or cheque or even, in some cases, debit card transactions online. This is why we see there is a lot of growth potential in faster payments over the next 10 years, as people start to use it as a replacement for other things. There are more and more innovative services out there that will start to use faster payments, as this is a really cheap and effective way of moving money almost instantly. In 10 years time we will be taking in multiple billions of transactions".