12 September 2017
Payment Instrument in Profile: Faster Payments
When the Faster Payments network launched in the UK in 2008, there were just a handful of countries around the world processing account-to-account instant payments. Less than ten years later, there is not a major payments market in the world that either does not already have a real-time system or is drawing up plans to introduce one. From Canada to Kenya, instant payment services are being designed across the globe with the aim of transforming the way we make payments.
Unlike early pioneers of low-value instant payments, such as the 1970’s built Zengin network in Japan, where, from a consumer’s perspective, the real-time element was a design quirk rather than a design feature, the Faster Payments Service was built specifically to support existing and future customer demands. Indeed, there was a real sense during its design that is was not just about the here and now (as it was then!), but where we want to be in the future. This is important because while Faster Payments is currently one of the most used instant payments services in the world, it is nowhere near to reaching its full potential.
This also means when we review current Faster Payments performance, as impressive as it might be, the more interesting elements from my perspective are around what’s to come.
As you would expect from a newly launched payments service, growth rates for Faster Payments transaction were very high in the first few years. Initially, a large proportion of early faster payment volumes were the result of the migration of standing order payments from Bacs. By 2012, this migration was virtually complete.
In recent years growth has come from single immediate payments, such as a one-off payments we initiate from our bank account to pay a plumber or a P2P payment via Paym. Impressive, especially considering it is now nine years since it went live, Faster Payments is still the fastest growing payment system in the UK, growing 14.5 percent in 2016. At present, growth is primarily being driven by increased usage of remote banking channels, such as mobile and internet banking.
According to Payments UK, 77 percent of UK adults regularly use at least one form of remote banking service in 2016 . This is important because research shows that consumers who use remote banking service interact with their bank more than those who do not. For example, Mintel research reported that 79 percent of current account holders use online banking at least once a month, compared to just 36 percent who use in-branch counter services and 39 percent that use mobile banking. At the same time, 71 percent of current account holders agree that online banking is the most convenient way to manage their bank accounts.
“How often do you use the following bank services provided by your main current account provider?”
(Base: 1,982 internet users aged 16+ who own a current account
Improved convenience of remote banking has increased the frequency with which consumers interact with their banks, which is helping boost the number of Faster Payments transactions. The scale of this shift is highlighted by RBS’ 2016 Strategic Annual Report:
“Digital innovation means customers are doing more of their transactions online. We interact with our customers over 20 times more through digital channels than physical ones”
And it is not just consumers. Increased availability of Faster Payments across online business banking platforms has also resulted in a surge in usage from small businesses making instant payments to pay for invoices. For example, there was a 35 percent increase in B2B payments using Faster Payments in 2016. Many small businesses have found using Faster Payments via their online banking service is a simple and cost effective alternative to becoming a Bacs originator. There has also been a significant migration among businesses from cheques to Faster Payments. According to Payments UK, more businesses paid other businesses using Faster Payments compared to cheques for the first time in 2016.
The here and now
Let’s be honest, most people don’t care about the technicalities around how we make payments. Sure there is perhaps a vague annoyance and incomprehension as to why it can take three days from the time a payment is made to the time the money appears in our account, but most of us probably just think it is a retailer or bank being a bit slack rather than a result of the technicalities of the clearing and settlement cycle. It is also probably why you don‘t get much fanfare among people when the goal posts change and this starts to happen instantaneously. It kind of feels like it is as it should be.
The genius of instant payments, however, is precisely this. It has enabled subtle changes in how we make and receive payments that is paradoxically both game changing and unremarkable. Faster Payments enables government and businesses to completely rethink and improve their service offering around how they pay and receive payments across their customers, suppliers and citizens. This can be done, not only because the payment is immediate, but because it is also irrevocable. For example, Faster Payments gives immediate certainty to a transaction, you don’t have to worry about bouncing cheques or a direct debit being rejected, so goods and services can be released straight away. While the typical consumer or business may not understand that it is the Faster Payments infrastructure that makes these improvements in service possible, they are nevertheless attracted to the benefits on offer.
To illustrate this, I’ve listed a couple of ways Faster Payments is working behind the scenes, changing the dynamic in how we make and receive payments:
- Whether you’re an insurance company disbursing claims, the government sending funds to vulnerable citizens, or even a parent topping up their son or daughter’s bank account because they are stranded without any money, Faster Payments provides a huge social benefit in emergency situations ensuring money can be immediately sent to those in dire need.
- There are around 1.6 million temporary workers in the UK. Many will be paid weekly or irregularly. Due to the often precarious nature of temporary work, it is often unacceptable to have to wait 3 days for payment. The alternative would be for employers or agencies to either make payment in advance to ensure wages arrive on time or pay cash in hand. Faster Payments is the perfect solution for payment of agency staff, or any other service where immediate payment is required but is contingent on fulfilment of contract.
- Faster Payments is the infrastructure on which mobile payment service Paym is primarily based. Paym is a perfect cash substitute for informal payments, such as gift giving or splitting a bill, as it is instantaneous, convenient and risk-free.
Faster Payments is like a payment blank canvas. It allows bank and corporate innovators to completely rethink how we interact on a commercial level. Because of this, use cases continue to evolve and new opportunities are opening up all the time.
As I write this, I’ve just completed the gruelling process of moving house. Just like a bad hangover, I woke up the next morning (after completion), pleading with myself “never again!”. Aside from the stress and anxiety, each day seemed to bring some new way for money to inexplicably exit my bank account. One particular annoyance was the £30 charge to complete the purchase using CHAPS. OK so this may not seem much on the grand scheme of things (I’m still crying myself to sleep each night over the Stamp Duty!), but if I had been able to use Faster Payments to pay for the purchase of my new home, it would have been one less cost to worry about. So why do we still use CHAPS for house purchases? The main issue is transaction limits on Faster Payments. These limits were initially introduced to minimise risk on the fledgling service. However, as the service has evolved and we have developed greater understanding of the risks involved, transaction limits have gradually been eased. In 2015, the maximum transaction value that could be made on Faster Payments was increased from £100,000 to £250,000. While this is still below the £305,500 average house price paid in the UK, according to property website Zoopla, Faster Payments could theoretically be used for a considerable proportion of home purchases. The potential for this limit to increase further, for example up to £1 million, could mean that the vast majority of house sales could be done over Faster Payments. While this is unlikely to mean a great leap in overall Faster Payment volumes (the number of house transactions is very small by comparison), it would nevertheless be a welcome change for anyone contemplating moving house in the future.
Request to Pay is a hot topic at the moment and featured prominently in the Payment Strategy Forum’s (PSF) final strategy document in January. Request to Pay is the next generation in money management, allowing business and consumers to make just-in-time payments using Faster Payments’ real-time infrastructure. As Vocalink’s Chris Dunne highlighted in a story on CONNECT: “The ‘Request to Pay’ system could revolutionise payments for consumers, helping those on multiple and variable incomes to manage cash flow and supporting people with any payments challenges they face”. Request to Pay will be able to warn consumers and businesses about upcoming bills and allow them to change payment dates to suit their needs or even, to avoid defaulting, request a day or two extension from their biller. It provides the control that is currently missing in many of our day to day payments as well as offering higher levels of security therefore reducing remote purchase fraud. What is great about Request to Pay is it creates an entirely new and efficient means for paying bills and invoices for a small but significant percentage of consumers and businesses with whom direct debit is not a solution that works.
PSD2 arrives in January 2018 and Faster Payments could be the building blocks to support a new wave of digital and mobile payments. PSD2 will mean that banks will be obliged to open up their payment networks to third party providers (TPPs) through Application Program Interfaces (APIs), who will then be able to initiate payments on behalf of the payee directly from their bank account. These transactions will likely use Faster Payments infrastructure in the UK.
Another mobile payments service that uses the Faster Payments infrastructure is the Vocalink-developed Pay by Bank app (“PbBa”). If PSD2 and Open Banking represent a threat to banks as TPPs take the customer-facing role and potentially relegate these financial institutions to quasi utility status, PbBa offers a lifeline as it puts the banking brand back into the payment whilst protecting revenue streams. PbBa as both an online and in-store solution, enables consumers to make retail payments directly from their bank accounts and their mobile banking app. This means banks will continue to be front and centre of their customers payments relationship, offering simple and secure payments whenever and wherever you need them.
The competitive environment created by a combination of PSD2 and the launch of services such as PbBA is likely to be a boon for Faster Payments. For example, a recent study by Accenture claims that new Payment Initiation Service Providers (PISP) created by PSD2 will account for 16 percent of online retail payment volume by 2020. While this seems quite an aggressive forecast, PSD2 is nevertheless set to have a significant impact on the growth of Faster Payment volumes. A recent Ovum report argues instant payments will account for 17 percent of European online payments by 2022, rising to 29 percent by 2027. In the UK, it expects Faster Payments will account for 25 percent of online payments transaction volume (although this data excludes the use of Faster Payments to fund wallets for making online payments).
In this short review, I’ve had a look at past and present of Faster Payments as well as giving a few thoughts on how I think it will evolve over the coming years. While it is difficult to predict exactly how this latter part will play out, what I can be certain of is Faster Payments presents us with the building blocks from which new and innovative payment services, like PbBa, can develop. It is also the reason why similar services are being switched on all around the world as banks, regulators and other stakeholders recognise the potential beneficial impact that real-time payments can have on their economies. In this article I’ve focused solely on the UK, but there is a global dimension here too. A major bug bear of people sending money or transacting across different national borders is the cost, time and uncertainty involved in these payments. As more and more instant payments systems go live globally, often using similar payments architectures, a whole new raft of potential opportunities and use cases arise to enable real-time cross-border payments. This is why nine years on, Faster Payments is still such an exciting prospect in the future development of payments.
VocaLink designed, built and runs the infrastructure for the Faster Payments Service on behalf of Faster Payments Scheme Limited
 Payments UK, UK Payments Market 2017
[2} Mintel, Changing Channel Preferences in Retail Banking, October 2016
 Payments UK, UK Payments Market 2017
 Ovum: Instant Payments and the Post-PSD2 Landscape, June 2017