.jpg)
The UK Faster Payments scheme will put the UK in a leading position in payment systems, say its proponents; but it is not without its problems. It will cost the banks a bomb to implement and make security more difficult to manage, so what’s in it for them?
Imagine making a payment as quickly as an ATM transaction — punching in the numbers and in a blink of an eye the money moves into another account and a confirmation is sent. That is what the UK Faster Payments Scheme is all about: reducing the present three day cycle down to close to 15 seconds. For consumers and corporates, the advantages of speeding up the clearing and settlement process are easy to see, but it is more difficult for the banks to find a straightforward business case.
FPS focuses on internet, phone and standing order payments, which accounts for just 7% of automated payments volumes but are rapidly increasing as people move away from other traditional payment methods such as cheques. The remaining 93% of automated payments are “bulk” transactions generated by organisations like direct debits, such as bills, or direct credits, such as wages.
Sandra Quinn, director of corporate communications at Apacs, the UK payments association, explains what the banks are trying to accomplish with FPS: “The type of payments we are talking about transmitting are only 7% of the existing automated payments suites — so in numbers terms, we are not talking about a vast number. But the industry is saying to everyone out there that we are innovative, we are interested in our customers, we are putting our money where our mouth is, and we are providing a service for customers that will suit them in the future.
“There will always be a stage when you need to bite the bullet — you know that the future development will be a faster payments service and at some stage you just have to do it. That time is now,” she adds.
Marion King, chief executive of Voca and chief execute designate for the newly combined VocaLink, agrees that the banks have the bigger picture in mind. “When they decided what changes to make, the banks could have just gone for an overnight service which would have had the desired effect and would have satisfied regulators. But they decided not to do that — they decided to prepare for the future, invest for next generation of payments services in response to customer demand because customers want to transact 24/7. Their online banking is growing, online transactions are growing and here we have the payment methodology to go forward to be well served to respond to those demands. I agree that regulatory intervention was a trigger, but the banks have thought beyond that question.”
Regulatory nudge
As King says, the push for faster payments did not originate from the banks’ side. Prompted by the Cruickshank Report, published in March 2000, which criticised the UK banking industry in areas such as standing orders and the three day float, the industry had to smarten up its act. Quinn says: “You can’t say that [the banks] came at it totally of their own volition — this was a result of the Office of Fair Trading Payments Task Force decision. We recognise that it would have been difficult to get where we are now without the Task Force. That is not to say they pushed us but they helped make that decision easier.”
As a result, thirteen banks, which make up 95% of UK payments, have signed up to the scheme — Abbey, Alliance & Leicester, Barclays, Citi, Co-operative Bank, Danske Bank, HBOS, HSBC, Lloyds TSB, National Australia Group, Nationwide Building Society, Northern Rock and Royal Bank of Scotland Group. At the beginning of 2006, Apacs selected Immediate Payments, a joint venture from Voca and Link, to supply a new central infrastructure for faster payments in the UK. The bid beat Visa, the only other vendor to submit a tender.
The banks are committed to going live in November this year — and they seem to be on track and on time. Craig Bloom, managing director of Immediate Payments, says that the central infrastructure will be in place and proven by the end of April; then the banks will begin connectivity testing to prove that their system works with the system in the centre.
All of the functional and non-functional testing, like process procedures, is expected to be completed by the end of September. Other banks will be able to join after the go live date or use one of the member banks to provide the service.
The OFT was so happy with the industry’s progress that in February it wrapped up the Payments Task Force, the specific body allocated to deal with the problem, 18 months earlier than planned. It will be replaced with the Payments Industry Association, an independent body open to all payment service providers in the UK, to facilitate wider consultation with non-bank stakeholders.
But there are a couple of reasons why the three day clearing has not been abolished up until now: the banks earn some overnight interest on the money and the extra time gives them time to detect fraudulent activity. Both problems are hurdles the banks need to leap over.
Looking at the first problem, Dave Chance, business solutions manager at EFD (formerly eFunds), thinks that a lot depends on the bank’s core business. “If you have a large retail customer base, then the cost of moving from a three day cycle to an almost instantaneous cycle is going to have a big impact on your float. If you are more corporate facing, with mostly CHAPS [electronic bank-to-bank same-day value payment] traffic that you are able to move across, then this could work out to be a considerable cost savings. It’s where the banks fit and what kind of customer base they are trying to attract.” Link is using eFunds’ Connex Open Enterprise software to power FPS.
In terms of fraud, Nesic Dragoljub, head of professional services, Thales eSecurity, says: “By reducing the three day clearing cycle to two hours and ultimately 15 seconds, the time one has to detect fraudulent activity is much less. In 15 seconds, one will have to understand whether the transaction initiated is genuine, whether it is the intended sender of funds behind the instruction or someone raiding the account with a fraudster waiting next to an ATM on the other side to take the funds out. From that point onwards, it is very difficult to track down once it gets converted into liquid assets — cash. So there is a real threat. That will push the UK to improve the quality of authenticating bank users.”
Citi, one of the founding members, is not too worried about either issue. Tony McLaughlin, managing director, Citigroup Global Transaction Services, says that the float issue will have a negligible impact on Citi because it never played that game. He also thinks that preventing fraud can’t be based on hanging onto the money. “The three day cycle might have given some people psychological comfort about being able to prevent fraud, but it is much better to design proper access controls to the systems and proper controls about the transactions. Instead, people should be focused on the introduction of two factor authentication for electronic banking. At Citi, we already have two factor authentication in place. Upgrading security systems is a much more effective way of preventing fraud than waiting out a three day cycle.”
Voca’s King says that it will be offering a centrally managed fraud solution using sophisticated profiling software. “I am confident that the security on this service will be second to none and cater for the speed that the payment transacts. I have no concerns in that area and we have that covered in terms of the programme and the design of the architecture. Clearly we work closely with the banks and as a consortium as well so this is a secure service.”
System changes
But how much will the banks have to do to their own systems in order to connect to FPS? “We have a bit of IT work to do — we have purchased a gateway into the Faster Payments platform and we are changing our core payments system. For Citi it is a moderately sized IT project and not a huge IT undertaking,” says McLaughlin. Last November Lloyds purchased an enhanced version of ACI’s Base24-es software to provide a gateway between its existing payments hub and the central Faster Payments infrastructure.
Quinn says that the price tag does depend on the individual bank’s needs. “When we first talked about this, we talked about a basic central system cost of £10 to £15 million. But the overall development cost was much higher because the majority of the work was at the individual bank end. Central service is not the difficult part of it, but it is what the banks have to do to make sure it is up and running so they can offer that service to their customers.”
For Citi, the money invested is a price worth paying. It sees FPS as part of its competitive stance in the UK market. “Firstly we want to participate more in domestic flows within the Western European markets. Secondly we have a joined-up approach with our transaction service business, which provides services to governments, financial institutions and corporates, and also our consumer business which is seeking to increase its presence in the UK retail banking market. And thirdly, which is slightly more medium or long term, is our strategy around mobile payments. We have a vision that over a relatively short period of time mobile payments will be ubiquitous in the UK and other countries,” says McLaughlin. Citibank will be looking to recruit indirect members and enabling corporates and other customer segments to use Faster Payments.
But will Faster Payments give competitive advantage to UK banks in Europe? King thinks so and is already planning the next move. “Clearly the focus initially is on the UK and still the bulk of payments and transactions happen within a country. However, that being said, the volumes of cross border payments are increasing as we go forward and behaviours change. The Single Euro Payments Area will enable easier transition of payments across borders. So this service is leading edge, ahead of the game in terms of having a single message streaming message service in real time, and it is my intention, as chief executive of VocaLink going forward, to provide this service beyond the UK and certainly to start with Europe.”
No comments:
Post a Comment