Many of us in the United States who follow the continuing evolution of the ACH network have been interested in the United Kingdom’s “Faster Payments” initiative. FP just hit the one-year-since-launch milestone. I spoke with David McFarlane, Company Manager, CHAPS Clearing Company about FP. I was surprised by much of what he said: FP is not what you (or at least I) thought!
To start with, although it is conceptually correct to think of FP as an “ACH on steroids”, the U.K. Banks decided to put FP under the leadership of CHAPS Co, which runs CHAPS, the U.K.’s real time gross settlement network, rather than under Bacs, which runs Direct Debit and Bacs Direct Credit, the U.K’s ACH equivalents.
This would be like putting a new ACH-like payment service in the United States under the stewardship of the Fed (manager of Fedwire) or The Clearing House (manager of CHIPs), rather than NACHA, the manager of the ACH system. Whew! I don’t know enough about the politics of U.K. payments systems to make any other comment here than “interesting”!
About Faster Payments
So what is it? It is a real time, multilateral net settlement system. “Real time” means that each transaction is individually processed through the network – there are no batches. That makes it indeed like our Fedwire. Transactions can be processed any day, any time – it is a 24/7/365 network. Settlement, however, is not gross, but rather net. There are three settlements on every banking day.
FP supports only credit payments: meaning the person (or company) who has the money is “pushing” it to the person (or company) who is getting money. The primary use cases right now are consumer bill payment and smaller value B2B payments. Since launch, there is a cap of £10k per ad-hoc transaction, and £100k per standing order instruction transaction.
The network, like CHAPS and BACs, is interchange free: there is no compensation from bank to bank defined by the network. Bank pricing to their end customers (the consumer and the biller/merchant), of course, is up to the bank. Network pricing to the bank is designed to cover both processing and development costs (up to 2015), and makes it somewhat more expensive, today, than a BACs transaction.
Here’s an interesting side note related to bill payment. A whole layer of processing infrastructure that exists in the United States simply isn’t there in the U.K. I’m referring to the back-end bill payment capabilities provided by CheckFree, MasterCard RPPS, and others in the United States. These entities know how to get a payment to a biller. They are paid not by the biller but by the front-end entity (banks or third parties) who is capturing the bill payment order from the consumer. In the U.K., the billers simply put a bill pay code on each bill, and that is enough for the bank (or third party’s bank) to know how and where to make the payment.
Today, FP transaction volume is running at about 800,000 transactions per day. This compares to 100,000 transactions per day within two weeks of launch. When scaling the proposition around four or five years ago, the then-conceptual project set aspirational intentions of around 400 million transactions in the first year of operation with the capacity to increase to 700 million transactions per year, within a further five years. Or from around 1 million transactions a day to 2 million transactions a day. So the project is almost half way to that initial view, and the feeling is that it is a success.
Getting here required massive development efforts on the part of banks and the switch (which is run by VocaLink, the same entity that processes for Bacs and Link, the UK ATM network), and corresponding efforts in rules-setting, branding (more on that later) and risk management. Frankly, I was expecting to hear that the demand came from billers or merchants. But it sounds like the real driver was a regulatory push, responding to consumer advocacy organizations. The impetus was a Treasury-sponsored report in 2000, followed by a report in 2003 by the Office of Fair Trading (the competition authority) saying, essentially, that interbank clearing of electronic items, then averaging around 3 days, was not fast enough – and pointing fingers at banks as dragging their feet in making improvements.
The decision to make FP a separate payment service – with optional participation by banks (rather than enhancing the core BACs service) was a way of dealing with long-standing criticisms of U.K. payments systems as “moving at the pace of the slowest bank”. (Sound familiar?) Currently, 13 banks are participating in FP, including most of the big ones and a scattering of smaller ones. Some both send and receive; others receive only at this time. Over 90% of transaction accounts are now covered on a receive basis. (There are around 80 financial institutions operating at various levels on an indirect agency basis through the settlement banks).
Brand and Its Discontents
At Glenbrook, we’ve been thinking, talking and writing a lot lately about brand with a capital “B” (think “we take MasterCard” and brand with a small “b” ( think “pay by card”). So it was fascinating for me to see that FP may evolve, over time, to a capital B brand. CHAPs is encouraging banks to use the FP brand and logo, and one possibility under discussion is that billers also use it in communications with consumers. CHAPs is also working with banks to standardize messaging to consumers.
This may be a lesson that U.S. bankers can learn from. Someone needs to simplify the payments systems and their capabilities for consumers. Our banks have been so caught up in their competition with each other that they have resisted efforts to collaborate on new consumer payments brands. Many feel that the strength of the Visa brand (an example of a brand banks did collaborate on), for example, is actually bad, as it (from this point of view) detracts from the strength of the bank’s brand. So who is doing this (using brand to simplify access) in the United States? Well, for one thing, our friends at PayPal. PayPal has successfully positioned a cross-bank brand on top of the U.S. ACH system.
I asked David about consumer confusion with changing payments times. After all, one of the benefits of BACs (and of the ACH in the United States) is the standardized settlement timing. Consumers and other end parties have a common understanding of the timing of payments. David acknowledged that managing this has been challenging at times, but pointed out that the network benefits (speed, certainty) were helping to offset this. Branding and messaging obviously also play a role here.
FP Future Directions
So, where from here for Faster Payments? David discussed several initiatives that are in various stages of consideration or planning.
Debit transactions. I had assumed, incorrectly, that Faster Payments supported debit transactions – this is where the merchant or biller receiving payments initiates a transaction to debit the payee’s account. These are not currently supported by FP. One possibility is that a redirect-to-consumer’s bank approach (such as is being done in the U.S. with NACHA’s Secure Vault Payments) be introduced. This would be easier in the U.K. than in the U.S., because of the greater concentration of the banking industry. But David agreed that bank economics (possible loss of debit card interchange) would be a complicating factor.
Mobile transactions. A very appealing scenario is to use FP as the back end for mobile SMS transactions. This could be for person-to-person payments, or for small business payments (the “pay your nanny” scenario).
Finally, I asked David about whether or not “slower payments” will eventually shut down. He thought that unlikely in the near / mid term – for direct deposit of payroll, particularly, the current system “works really well”, and banks are not apt to devote time or resources to conversions of this process which does not appear to have a high priority. But, as he said “we do have the National Payments Plan to help inform decisions about when things should change.” Hey, where is the U.S. National Payments Plan?
David sent the following stories on to me as real-life illustrations of how FP is being successfully used in the U.K.
- An SME (a design-and-build consultancy) had problems in goods on site on time from suppliers where there is no account relationship. Whilst on the phone sourcing the required materials the supplier is usually unwilling to commit without funding up front. Whilst on the phone to the supplier the goods are ordered, the supplier is asked for their bank details, a faster payment is submitted and received by the supplier whilst on the call. The supplier can see this on his bank account, delighted with the speed of response the materials arrive on site and on time. Commerce is aided by the new FPS service.
- Emergency calls to the Bank of Dad: son has insufficient cash and insufficient funds on his debit card to settle Airport Car Parking Fee. Phones Dad. Dad not wanting to go to the airport submits a Faster Payment from his account to his son’s bank account (different banks). Son on the way out of the airport within 10 minutes!
- Another son of another father is in a T-Mobile outlet renewing his contract and phone. Has insufficient funds in his debit card to meet the transaction. Phones Dad. Dad initiated a Faster Payment to son (different banks again). Son walks out having completed all formalities shortly thereafter!