One of the most ambitious payment services ever conceived, the
UK’s Faster Payments has exceeded its creator’s initial
expectations.
Following on from the success, an executive with service
developer and operator VocaLink discussed implications of real-time
payments with EPI and the company’s bold expansion plans.
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Back in 2005, 13 major UK financial institutions set
out requirements for a payments processing service that could
guarantee that payments made via internet, phone and standing
orders would be approved within a matter of seconds and be in a
recipient’s account within two hours.
Meeting these objectives on the scale demanded by the UK’s
retail payments market was arguably the most daunting challenge in
the UK payments industry since the introduction of electronic
payments.
It was a challenge entrusted to UK payments processor VocaLink,
a company that had already built a reputation as the operator of
the world’s busiest ATM switching platform. The result was the UK’s
Faster Payments Service (FPS) running on VocaLink’s Real-Time
Payments Platform.
Launched on 27 May 2008 FPS was initially limited to internet
and phone payments. Standing order payments became available on 6
June.
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By GlobalDataFPS has proved a roaring success, ending 2008 with transaction
volumes running at five to six times levels envisaged at that
stage, Paul Taylor, managing director for Europe at VocaLink, told
EPI.
“The public has been very receptive of Faster Payments,” Taylor
said.
FPS has been the subject of a gradual phasing in process by the
financial services providers involved, with an initial maximum
limit of £10,000 ($15,500) on phone and internet payments and
£100,000 on standing order payments.
Indicative of the potential scale of FPS, the UK industry body
APACS reported that in 2007 124.5 million internet and phone
payments valued at an average of £303 each and 347.3 million
standing order payments valued at an average of £321 each were made
in the UK. The number of internet and phone payments is forecast by
APACS to rise to 300 million by 2017 and the number of standing
orders to 422.3 million.
Based on the most recent figures available from APACS, FPS
processed a total of 11.66 million transactions in September 2008 –
6.28 million originated via phone or online and 5.38 million were
standing payments.
Transaction volume in September was up 47 percent compared with
August while total transaction value increased by 28 percent to
£4.85 billion of which standing orders represented £442
million.
Future of the ACH
While real-time retail payments represent a major step forward
in terms of customer service compared with the UK’s previous three
day settlement period, Taylor does not see faster payments forcing
automated clearing houses (ACH) into redundancy.
“There will always be a need for a low-cost bulk payments
service,” said Taylor. “Not every payment needs to be settled
instantaneously.”
However, real-time payments cannot be ignored.
“In the future I believe all ACHs will be required to provide
faster services,” predicted Taylor.
Indeed, the UK’s Faster Payments Service is already attracting
what Taylor termed “remarkable interest” from other European
countries.
The changing marketplace also presents Europe’s 31 ACH’s with
new challenges. All ACH schemes were once exclusive to their
particular country, now their activities are cross border,
explained Taylor. In a seaming prelude to consolidation, he noted
that ACH’s are owned increasingly by the same banks.
Inevitably banks will be attracted by the lower cost economies
of scale achievable by large ACHs.
“The cheapest ACH will get the business,” noted Taylor.
He added that five countries account for 80 percent of payments
in Europe.
Beyond consolidation, ACH’s have another choice: outsourcing.
This was the route chosen by Bankgirocentralen (BGC), Sweden’s ACH,
when in October 2007 it announced that it had selected VocaLink to
assume responsibility for processing.
BGC took a rational decision to retain ownership of the ACH and
identify a partner that could offer guaranteed lower transaction
costs and development of new services, such as those for the Single
Euro Payments Area (SEPA), commented Taylor.
This view was reflected in a statement made by BGC’s previous
CEO Eva Gidlöf when the partnership was announced.
“VocaLink is the leading European payment processor, with
products that are modern, currency independent and ready for the
European market with very competitive pricing,” Gidlöf said.
Owned by eight Scandinavian banks BGC reported 620 million
retail transactions valued at a total of SEK6.69 trillion ($880
billion) in 2007. Transition of BGC’s processing to VocaLink began
in May 2008 with completion anticipated in the beginning of
2010.
Just the beginning
Emphasising the significance of the BGC deal, Taylor said: “I
believe it is the starting flag for ACH consolidation in
Europe.”
From VocaLink’s perspective this would be a significantly
positive development.
Taylor explained that VocaLink offers complete end-to-end
processing incorporating ancillary services such as reformatting,
authorisation, direct debit management and reject handling. For
many ACHs it would be uneconomic to duplicate this fully
comprehensive offering.
In the UK alone VocaLink’s centralisation of services saves
banks a total of £200 million each year, noted Taylor.
ACH consolidation is not the only bright prospect for VocaLink.
SEPA also offers considerable scope for developing outsourced
services, said Taylor who added that VocaLink has already
contracted with a number of major non-UK banks to provide them with
SEPA direct debit services.
“Having seen low consumer demand for SEPA direct credits they
were not prepared to build an in-house SEPA direct debit solution
that can cost tens of millions of pounds,” said Taylor.
There is also no guarantee when it will become legally binding
for all euro payments to migrate to SEPA, he added.
Introduced in January 2008 SEPA direct credits have garnered a
market share of less than 2 percent. SEPA direct debits are due to
be launched in November 2009.
However, despite SEPA’s slow progress it has been a “huge
catalyst” for new product development, stressed Taylor.
“We have built services around the SEPA core-capability that
make it attractive,” he noted.
Of particular significance is a solution offered to
multinational companies who until now have been required to operate
liquidity accounts with banks in each European country in which
they operate.
This has had two serious consequences explained Taylor. Firstly,
despite undertaking vast transaction volumes multinationals have
not been fully rewarded by way of lower transaction costs.
Secondly, having separate liquidity accounts has meant that
multinationals know their overall liquidity position with, at best,
70 percent accuracy.
Taylor continued that a bank using VocaLink’s solution can
submit a multinational’s payments via a single channel. This
provides the multinational with benefits of lower transaction costs
and enables it to have a completely accurate picture of its
liquidity position in real-time.
VocaLink’s solution which comes with the added benefit of a
multi-currency capability also has wider applications. Because it
offers the benefits of bulk pricing it can enable a local bank to
compete on an equal cost-footing with multinational banks, said
Taylor. It can also provide a multinational bank with the ability
to compete on an equal cost-footing with a dominant bank or banks
in another country.
On the overall thorny issue of SEPA, which has been the subject
of much hand-wringing by European Bank officials and others, Taylor
stressed that a migration end-date is vital. However, he added that
an end date should be based on a consensus.
“The market must move holistically,” he stressed.
