by Daniel Bardini, Managing Director, Financial Messaging at Bottomline Technologies
Globally, more than 60 countries are already live with real-time payment schemes or due to launch imminently. There’s an expectation to process half a trillion real-time payments transactions over the next five years, with a predicted growth rate of 40% globally between 2020 & 2024. The speed and agility that real-time payments offer provides a genuine alternative to traditional digital payments such as ACH, RTGS or cards.
No more so than in the UK which has seen 32 banks participating in the Faster Payments Scheme (FPS) since launch in 2008, processing 2.4 billion transactions in 2019 alone. This volume is a rise from 2 billion transaction in 2018 worth £1.7 trillion. These numbers are set to climb further with the agreement to increase value limits to 250K per individual.
How can UK banks, fintechs and e-money providers access UK Faster Payments?
There are three ways to access UK Faster Payments, depending on what best fits your organisation’s needs and strategy;
- Directly Connected Settling Participants (DCSPs) – connect directly into the Faster Payments Central Infrastructure to send and receive payments in real-time, 24 hours a day. DCSPs set their transaction limits and perform their own settlement with the Bank of England. This setup is often the best option for organisations that handle a high volume of payments and are eligible to open a settlement account at the Bank of England.
- Directly Connected Non-Settling Participants (DCNSPs) – connect directly into the Faster Payments Central Infrastructure via a sponsoring Participant that performs Bank of England settlement on the Payment Service Provider’s behalf. This option is the best for organisations not eligible to open a settlement account at the Bank of England.
- Indirect Agency – this alternative enables a Payment Service Provider (PSP) to connect to Faster Payments via a sponsoring Participant which manages the direct connection on its behalf. The Participant offers several ways to send and receive Faster Payments, and also performs Bank of England settlement on the PSP’s behalf. This option is beneficial for PSPs that find a direct connection is not commercially viable.
However, compliance and regulatory timescales and restrictions on UK Faster Payments (FPS) testing have limited the number of new entrants to the real-time Payments ecosystem via the first two options listed.
For Directly Connected Settling Participants, there are several challenges. Firstly, participants need enough volume and value to justify the cost of building the gateway. Then there’s hiring additional technical experts to implement the platform, plus the time required to adhere to the mountains of initial and ongoing compliance obligations.
For Directly Connected Non-Settling Participants,the obstacles start with the fact that most transactions aren’t indeed real-time (0-15 seconds), and can take several hours. Additionally, the charges imposed per transaction are very high. Many participants find they experienced more outages and are often at ‘the back of the queue’ in getting this fixed because the sponsor prioritises their own core systems first.
So, what’s the alternative? Smaller or challenger banks and financial institutions can benefit from the New Access Model – an option introduced in response to the global financial crisis in 2008. Designed to remove barriers, this model creates a level playing field for smaller financial institutions and PSP’s to connect to Faster Payments. It sits under the 3rd option of Indirect Agency, accessing FPS via API connectivity without the need for scheme approval.
A speedy, smart competitive advantage
Indirect Agency represents a real opportunity for previously excluded financial institutions. By offering real-time payments without compromising on speed, spend, performance and resources, it builds their customer base and challenges traditional players in the market. Making real-time payments accessible to everyone increases competition. It allows smaller banks and companies to enjoy the 24×7 faster payment rails for account-to-account payments. This access is made possible by using API Connectivity, which enables all users to send and receive money instantly through any digital channel.
Best-in-class solutions are SAAS-based, subscription models. This approach avoids expensive capital expenditure (capex) outlay and prevents unnecessary delay in adopting new services. The payment workflow should include extra controls and checks. For example, a ‘net sender cap’ to ensure all the money moving through this service is fully funded by the sender before making any financial transaction. These extra technical features guarantee that the service is accredited and fully auditable by the Faster Payment Scheme, Regulators and independent audit organisations.
This model offers several compelling benefits:
- Gain speed-to-market. Using a simple, cost-effective API interface means you go live with UK Faster Payments more quickly, and avoid long, costly development cycles and complex legal agreements.
- Eliminate regulatory upgrades. Staying compliant will be automatically handled by your indirect agency partner.
- Increase service uptime and confidence. Enjoy a higher level of stability and availability to the gateway.
The essence of Payments Modernisation
The conversation shouldn’t be about real-time in isolation. If we hope to meet customer demands and needs sufficiently, real-time forms the overarching ambition of how the future looks. This outlook means we need to strive for data-rich, integrated, standardised and innovative real-time payments capabilities that provide interoperability for banks and financial institutions globally.
Standardising the UK Faster Payments infrastructure (under the New Payments Architecture (NPA)) and the move from ISO 8583 to the global ISO 20022 messaging format facilitates this modernisation and adds data richness. New cross-border payment solutions like SWIFT gpi & Visa B2B Connect, as well as a collaborative approach to Open Banking/PSD2, means financial institutions have innovative tools available to help them to succeed in their digital transformation journey.
Alongside a plan to update legacy infrastructure, and to thrive in today’s fast evolving payments ecosystem, financial institutions need a reliable road-map for delivering real-time payments and innovative products to customers. Anything less isn’t good enough. Besides differentiating yourself from the competition and creating new revenue streams, offering innovative functionality and digitally-enhanced user experience is all about meeting customer demand, exceeding expectation and, in turn, increasing adoption and driving loyalty.
To find out more about Real-Time Payments & Payments Modernisation click here