28 November 2016
Payments for a Real-Time Economy
Payment efficiency is of the utmost strategic importance to any modern economy. Everyone expects to be able to pay who they want, when they want. With the decline of physical instruments, such as cash and checks, electronic payment has become the natural choice as a simple, safe, and convenient way to pay.
For over 40 years, the United Kingdom has been at the vanguard of payments innovation. Major milestones include the launch of the Bacs service in 1968, which offers universal connectivity and fund transfers between U.K. bank accounts, and the Faster Payments Service (FPS), which facilitates single, immediate, interbank payments using real-time technology.
The introduction of real-time technology represents the biggest advancement in payments in a generation. The appeal of FPS has driven uptake throughout the U.K. and stimulated innovation across the industry. The U.K. has embraced real-time technology as the bridge between financial services and the 24/7/365 society, attracting attention from around the world.
From Infrastructure to Instant Value
Real-time technology offers potential benefits to all parties within the value chain. Payment providers, businesses, consumers, and governments all see the financial and non-financial benefits of real-time technology to deliver frictionless, instant value.
By delivering instant value, real-time technology facilitates a higher level of service, creates new revenue streams, and enables new payment channels, while boosting efficiency, reducing costs, and mitigating risk. A real-time infrastructure empowers banks to launch new services that provide customer value and place the bank at the heart of the payment process. In the U.K., this has enabled banks to regain some ground, lost temporarily to other payment providers. Recent innovations include:
Paym – A mobile payment system provided by banks and other financial institutions in the U.K. The real-time technology allows instant payments to be sent to a recipient, using a mobile phone number as a proxy for bank account details. The service has quickly gained popularity with more than 2 million registrations to date. Paym, the Payments Council’s payments service, is run on VocaLink’s multi-proxy platform.
Pay by Bank app – A real-time payments system that integrates banks’ systems and the world of e-commerce. Consumers and businesses will be able to use the Pay by Bank app to conduct e-commerce and mobile commerce directly from their bank accounts with the highest of standards in simplicity and security. Small businesses and merchants will be able to improve their cash flow and tighten control, while offering a more engaging user experience. The Pay by Bank app leverages VocaLink’s real-time infrastructure, providing consumers with a quick, simple, and secure way to pay.
Platform underpinning government agendas – Governments around the world are focused on the structure of the financial services industry and the value it delivers to the economy. Common themes in the calls for real-time payments include financial inclusion, modernisation of payment systems, reducing the use of cash and checks, and promoting competition within financial services. A real-time payments backbone helps a government in many ways. In the United Kingdom, the government is the biggest user of payments systems. Real-time payments allow governments to make emergency payments more easily, and cash is available immediately. This increases convenience for users and facilitates better budgeting.
The Real-Time Journey So Far
The origins of real-time payments in the U.K. were legislative, beginning with the Cruickshank Report in 2000, which called for a reduction in payment clearing times. In 2006, the contract to provide the central infrastructure was awarded to Immediate Payments Limited, a joint venture company set up by VocaLink Ltd.
In May 2008, the U.K. banking community launched FPS, which heralded a new era in payment processing. For the first time, single, immediate interbank payments could be made in real time between the customers of virtually all U.K. banks. The new service offered real-time benefits to all parties throughout the payment value chain in terms of the certainty, immediacy, and convenience of being able to make payments immediately by phone, online, or at a bank branch.
Since then, many have benefited from greater control and visibility of cash flow associated with real-time payment. Last year, VocaLink processed more than one billion transactions.
Across the globe, we’ve seen a surge in demand for real-time payments. We recently entered an agreement with National ITMX Co. Ltd., Thailand’s main interbank payments infrastructure provider, to introduce mobile payments through our Immediate Payments Solution (IPS). This technology will act as a strategic platform in Thailand, encouraging payments innovation.
In Singapore VocaLink implemented it’s new ground-breaking real-time payments solution, IPS. The FAST service, which was deployed in 2014, surpassed the U.K. platform in several ways: It included debit requests and push credits and was the first national real-time payments infrastructure outside of Europe to utilise the ISO 20022 standard, which facilitates electronic data interchange between financial institutions. These capabilities make Singapore one of the world’s most advanced payment markets because banks operating there are no longer constrained by processing limitations while competing in the payment products space.
The success in Singapore demonstrates the practical benefits of international collaboration and how partnership can precipitate innovation. It also validates the adage that the easiest road to success is to build on the sum total of everything learned and achieved in all markets. In this way, every real-time deployment enlarges the total sum of practical knowledge: The global payments industry is always “standing on the shoulders of giants.”
Our latest move is to take this knowledge to the U.S., where we have partnered with The Clearing House (TCH) to build and deliver the core elements of a new, world-class real-time payments system that will meet the complex needs of the country.
Our Partnership with The Clearing House
At the end of 2015, TCH selected VocaLink to help implement its plans to develop a real-time payments system, which will eventually connect with other U.S.-based systems to link all the nation’s bank accounts. It is poised to be the most comprehensive real-time payment system. As we leveraged our U.K. experience to build systems in Thailand and Singapore, we came to understand the demands placed on any automated clearinghouse in its quest to support an entire country.
When we look at the U.S., we see an exciting opportunity to revolutionise the way that money moves throughout the economy. We view our real-time solution as a critical national program that has the potential to have a major impact on the payments landscape here. IPS will allow payments to be made in real time and via multiple channels. Based on our existing solution, the system provides real-time, interbank, account-to-account transfers. It’s also future-proofed with a clear road map for development and provides TCH with a local solution that has global capabilities, anchored in the context of a wider payments framework.
When it comes to providing a solution that will satisfy the objectives for a modernised payment system, as proposed by the Federal Reserve System’s Faster Payments Task Force, we’ve left no stone unturned. IPS has an extensive set of ISO 20022-related messages. The richness of this messaging is different from anything we’ve achieved previously. Our system processes credit transfers (Pacs.008, payment clearing and settlement between banks), debit, request for pay, request for refund, request for information, confirmation messages (Pacs.002), and returned and rejected payments. We have also worked together with TCH to drive the product forward by implementing a number of new flows, including non-financial messages that help to automate previously manual processes. IPS can also send system- and service-related messages to participants regarding the status of the service and the availability of individual participants. In addition to these functions, we’ve also integrated support for multiple transaction channel, including mobile.
The beauty of IPS is that it has the ability to scale to meet the unique requirements of each country. In the U.S., we’re providing a solution that can be adapted for use by financial bodies of all shapes and sizes – from global financial institutions to local community banks.
So far, we’ve achieved breakthrough results with this system for the U.S. The entire process within IPS is proven to take milliseconds, and the participant-to-participant transaction can be completed in seconds. Core functions that will revolutionise the clearing and settlement process in the U.S., in terms or speed, automation, and accuracy, include:
- Providing participating banks with a multichannel, end-to-end, real-time account-to-account transfer service.
- Operating 24/7/365 with no downtime.
- Providing immediate availability of funds for receivers. The system has a sub-second processing time for high volumes of payments.
- Updating participants in real time on the completion of payments.
- Setting configurable transaction limits.
- Allowing for ease of integration with TCH, third-party services, and anti-fraud and anti-money laundering compliance processes.
- Supporting the move toward interoperability across the payments landscape by supporting multiple currencies and aligning with global standards.
- Reaching the largest possible number of financial institutions and accounts.
We have also introduced a number of messaging features that can drive additional value for participating banks, such as:
Request to pay – Enables corporations and individuals to efficiently and accurately request payment for bills and invoices. This feature also provides banks with valuable data to support financing for their customers. Invoice information identified before payment is received improves a bank’s understanding of a business’s cash management requirements and gives the bank the ability to deliver financing products at the point when a business customer needs them.
Request for refund – Removes inefficiency and operational costs for managing the recovery of money sent in error or sent as a result of fraud. This is a key learning from the U.K., where the recovery of funds is very manual, time consuming, and expensive.
Request for information – Manages the sharing of payment queries and other information. Doing this through the same system that delivers the payments creates efficiency for participants.
Remittance advice – Integrates richer data with payments to support opportunities for banks to help their customers manage receivables more efficiently and effectively. Too often, this valuable data is not tightly linked with the actual payment.
Participant Model – These features will be available to the entire financial services community in the U.S. The participant model for this system ranges from the largest banks to smaller banks and organisations that access payments systems via aggregators.
This combination of the fuller use of the ISO 20022 message set, tight integration of payment data, and the scale at which the system can operate will result in the most advanced payment system in the world. TCH’s initiative in this partnership shows what can be achieved by an organisation of ambitious and innovative participants and serves as a great example of industry-led change versus regulatory-led change.
Collaboration and Advancement
There are also many obstacles to overcome when moving from a batch-based system to real-time platform. Apart from fundamental requirements, such as systems security and availability, all business processes must be reengineered to support real-time operations. In practice, a core payments system cannot operate in isolation. It must be a part of a larger ecosystem that includes all overlay services and business processes. The move to real-time payments involves much more than technology.
Close industry collaboration is essential to ensure interoperability and standards between all parties. The U.K. payments industry has a history of collaboration and has operated a centralised payments clearing system for over 40 years; however, the move to real-time technology required collaboration on an unprecedented level. Major changes included: how to deliver and coordinate multiple stakeholders with varying priorities; how to get customer banks into the system; and the best way to utilise the mobile and online channels for payments initiation while not affecting the live service.
Many countries are currently looking for real-time payment systems. In some cases, such as the U.K., this is driven by legislation, while in others, such as the U.S., it’s driven by market development and a recognition that the payments systems for the most advanced economy in the world should evolve to support the continued growth of that economy. Whatever the drivers, the U.K. experience suggests that the journey to real-time payments involves a steep climb, but the view from the top justifies the effort. Fortunately, many of the tools and solutions that enable banks to fully take advantage of a real-time service have matured and the challenges are no longer as complex as they once were.
Learning from the experience of others does not place a ceiling on what can be achieved but a solid floor on which to build, improve, and advance. In the international payments community, every new development begins where the last deployment finished.