The Power of Now Cost-effective Real-time Payments with the Faster Payments Scheme – A Guide for Payment Service Providers
Your customers demand real-time – can you afford to be without direct access to Faster Payments?
We live in a digital age where consumers and increasingly businesses expect everything to be instant, 24 hours a day, seven days a week. More one-off Faster Payments are now made out of traditional banking hours than during; offering customers instant payments only during business hours is no longer enough.
In the last decade customer requirements have been changing dramatically. Smartphones and tablets mean customers fully expect their current account provider to give them digital access to their funds 24/7 365 days a year, with the ability to make payments from anywhere at any time using any device or channel of their choice.
1960s
A current account with a cheque book was at the cutting edge until 1967, when the first cash machine was introduced, with electronic 1970s payment scheme Bacs starting in 1968. Payments take days to clear Innovation continues with the first magnetic stripe bank cards, and SWIFT international payments born in 1976 1980s
The creation of the LINK cash machine network in 1986 is swiftly followed 199 0s by the first debit card being issued in 1987
Cashback and early online banking bring even more convenience to customers 2000s
24/7 Real-time becomes the norm: the very first Faster Payment is sent in May 2008 Now
The era of the smartphone: Paym (introduced in 2014) enables Faster Payments using just a mobile number – no sort code, no account number Future 10 million+ By 2020, more than 10 million Faster Payments are predicted to be sent every day
Cost-effective Real-time Payments with the Faster Payments Scheme 03
Faster Payments has grown rapidly…
Since being introduced in 2008, Faster Payments has been growing rapidly every year, with more and more customers of all types – whether consumers, businesses or government – coming to rely on the convenience of real-time 24/7 payments.
Better business cash flow Thanks to Faster Payments, a UK high-street retailer is able to eliminate the need for its store room, converting it into expanded showroom space. When a customer in the showroom makes a purchase and pays, the retailer orders the hi-fi equipment on the spot, and pays their supplier via Faster Payments. Since the supplier has immediate receipt of the funds, shipping of the order is initiated immediately, for delivery the same or next day direct to the retailer or to the customer. The retailer is able to eliminate the need for stock – freeing up working capital, while the customer benefits from fast and efficient service, greater choice through a larger showroom with more models and better prices due to the retailer’s lower costs.
Faster Payments Volumes: 2008-2015
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10 Standing Orders and Returns Forward Dated Payments and Direct Corporate Access (DCA) 9 Single Immediate Payments
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Gaining direct access to Faster Payments is a really effective way for PSPs to offer customers real-time payments 24 hours a day, 365 days a year. The service has seen very strong growth since launch in 2008.
04 The Power of Now Strong growth forecast to continue
Increasingly Payment Service Providers (PSPs) are recognising their customers demand a digital banking experience which is able to provide an account balance and ability to send and receive funds in real-time at any time of day or night.
The importance of offering real-time payments will only increase: independent research predicts the size of the UK real-time payments market is likely to almost treble in the next five years, with annualised growth of 20% forecast, leading to 3.3 billion Faster Payments being sent in 2020 alone. FPS Transaction Volumes – Total Market vs Potential Market, 2020 Millions of Payment Transactions
Worst Case Scenario Conservative Scenario Likely Scenario FPS Growth = 10% FPS Growth = 15% FPS Growth = 20%
8% 7% % Market Share 6% of Potential New Access Market 1 5% 3,280 Total Market 2,540 1,950 million million 1,100 million Without access million 175m 270m to 24/7 real-time 53m 120m payments, millions
Today 2020
Note: 1 Existing direct members could additionally benefit from new access. A technical aggregation solution could be leveraged in any future enhancement to a PSPs IT infrastructure – the potential market for new access could therefore be substantially higher. Source: Accenture
This new competitive reality has prompted Faster Payments to develop a New Access Model to bring cost-effective direct access to its service within the reach of more PSPs than ever before. The message is clear: customers want their payments ‘now’, it’s important for you to act ’now’ to ensure you meet their needs.
Emergency cash A 19-year old student has just missed the last train from London Victoria to Sutton, where she lives. With a zero balance in her bank account, she calls up her mother who logs on to internet banking to send her funds straight away via Faster Payments. The student jumps into a taxi to go back home. Reluctant to stop at an ATM on the way, she notices that the taxi driver accepts Paym, and pays for the taxi journey using the Faster Payments enabled mobile payments service, Paym. All she has to do is log in to her bank’s internet banking app on her smartphone, enter the taxi driver’s mobile number and confirm the payment. As she gets home safely, she texts her mother, who smiles as the word “hero!” flashes up on her mobile screen.
Cost-effective Real-time Payments with the Faster Payments Scheme 05 Simplifying Direct Access
The benefits of direct access to Faster Payments are widely recognised – yet, up until now, the decision to connect has too often been perceived as a daunting one.
Presently, over 400 PSPs access the Faster Payments Scheme indirectly through some of the existing 10 direct participants. Most of these indirect access arrangements have been designed to provide batch delivery of sent and received payments; they have not been designed to provide an end-to-end real time experience for end customers. The Faster Payments Access Programme, which has developed the New Access Model, is simplifying the access options for indirect participants, with work in this area continuing in close dialogue with the Payment Systems Regulator and Bank of England, both of whom are supportive of the initiative to make it more realistic for a wider range of PSPs to directly connect to the service.
“Development of a dedicated “As a smaller player we would “Joining Faster Payments real time Faster Payments not wish to be part of a loss would involve yet another gateway is too difficult and sharing agreement that onerous, time-consuming, expensive for us on our exposes us to the failure of and costly annual assurance own – we cannot justify the a large bank.” process.” business case.” NEW SETTLEMENT MODEL RISK-BASED ASSURANCE FASTER PAYMENTS ELIMINATES SHARED RISK FOCUSES ON SYSTEMIC RISK HAS DEVELOPED A NEW The original Liquidity and Loss A new risk-based assurance AGGREGATOR MODEL Sharing Agreement (LLSA) has process is focussing solely on Faster Payments has developed been replaced by a fully cash those elements of a PSPs design the New Access Model to address pre-funded model, meaning and operation that are critical these concerns directly. The settlement is guaranteed for all for the management of systemic “Aggregator Model” (see page 8) participating PSPs without any risks. It now concentrates only on will help smaller PSPs, removing shared risk to or from other those risks that could impact the the need to develop an in-house settling participants. delivery of service from other Faster Payment gateway, participants, and is being scaled gaining the economies of scale to reflect the relative systemic of a larger PSP and offering a importance of PSPs of different lower cost per transaction at sizes and scale. lower volumes.
06 The Power of Now Which Faster Payments access model is right for me?
Payment Service Providers now have three main options to connect to Faster Payments: 1 Connect directly to Faster Payments via the new Aggregator Model 2 Connect directly to Faster Payments via their own dedicated in-house system 3 Indirectly connect to Faster Payments via a sponsor bank
1 Connected via new gateway aggregator model
Direct Direct Direct Participant Participant Participant
Faster Payments Faster Payments Gateway Aggregator Gateway Aggregator 2
Direct Participant Connected Faster Payments Scheme Direct via own Central Infrastructure Participant ‘in-house’ gateway Direct 3 Participant Direct Direct Participant Participant
Indirect Indirect Indirect Indirect Participant Participant Participant Participant
The sponsored indirect model
Cost-effective Real-time Payments with the Faster Payments Scheme 07 How does the New Access Model work for me?
The New Access Model sets out proposals to enable technology vendors to offer technical access to Payment Service Providers (PSPs) by providing a managed solution to either a single or multiple PSPs.
Aggregator Solution
• Financial Technology (FinTech) companies will be connecting directly to Faster Payments central infrastructure to provide hosted Faster Payments’ gateway solutions.
• The Faster Payments gateway ‘aggregators’ will be able to provide direct scheme connectivity and real-time participation for multiple client PSPs utilising their solutions.
• Ten leading FinTech companies have signed Letters of Commitment and are developing aggregation services to meet the New Access Model.
• Aggregators are preparing to accredit their platforms against the Faster Payments Service hosted accreditation service in Q4 2015.
• Access through the aggregator model should be available from early in 2016.
Benefits of the Aggregator Model
The multiple aggregators entering the market will ensure keen pricing and a quality focus for the service.
It will be for the aggregators to ensure compliance to Faster Payments Scheme messaging standards, not the client PSPs.
The Faster Payments Scheme is also introducing a ‘Technical Accreditation’ process for aggregators - effectively a AGGREGATOR 2016 ‘trust mark’ - so that as a PSP you will know that a particular aggregator has an accredited technical solution.
PSPs will be able to provide a ‘real time’ 24/7 service to their customers for both the sending and receiving of payments.
Compared to the indirect ‘sponsor’ model, PSPs will no longer have a dependency upon the technical performance of a sponsoring bank.
As part of the Access programme, Faster Payments has been in continued dialogue with a number of Vendor/Bureaux who are looking at providing various solutions for prospective participants looking to access Faster Payments. More information about their competitive solutions is available from: http://www.fasterpayments.org.uk/access-payments/vendorbureaux-solutions
08 The Power of Now How cost effective is the New Access Model?
Faster Payments commissioned independent economic analysis to assess the business cases for PSPs of the different access options, depending on the volumes they process.
Direct Participation (real-time)
In addition to guaranteeing 24/7 real-time payments for PSPs, the New Access Model s r
a is also expected to result in lower total cost per transaction over a specified range of transactional e y volumes (typically 1.5m – 13m transactions per year, avaeraged over 5 years) 5
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s New Access Model n a
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Sponsor Model t s
o (same day/non-real-time) C
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1.5m transactions 13m transactions
Average Annual FPS Transactional Volume, Millions Though being more costly at low volumes, New Access does guarantee access to real-time payments
Source: Accenture
This graph illustrates the comparative unit cost against volume for each of the three access options.
• The comparative ‘per transaction’ cost of each of the options, • The Aggregator model combines the best of both worlds: PSPs illustrates how the unit cost generally reduces as volumes connecting in this way can obtain all of the customer proposition increase. benefits of direct connectivity with a more competitive unit cost yet without excessive up-front fixed costs. • Under the indirect ‘sponsor’ model, unit costs are relatively flat with limited savings being achieved as volumes increase.
• But directly connected participants utilising their own gateway have high fixed costs, leading to a high unit cost at low volume which exponentially reduces as volume grows.
Cost-effective Real-time Payments with the Faster Payments Scheme 09 Demutualisation of settlement risk between PSPs
A key delivery of the Faster Payments Access Programme has been the demutualisation of settlement risk between participating PSPs.
New pre-funding model (since September 2015)
Pre-funding operates a Multilateral Net Settlement model with settlement undertaken three times per working day. Each settling participant is required to establish a Reserves Collateralisation Account (RCA) with the Bank of England, in addition to its normal reserves/ settlement account.
The balance on the RCA will underwrite the PSP’s financial liabilities to all other participants between settlements. This net limit is called the Net Sender Cap (NSC).
A participant’s NSC can never be greater than the balance in its RCA.
Payments undertaken within each settlement cycle are still ‘irrevocable’, and ‘finality’ occurs at the point of acceptance of the payment by the receiving institution.
The Prudential Regulation Authority (PRA) has agreed that the balance on the RCA counts towards a PSP’s minimum liquid assets ratio and the Bank of England will pay interest on the balance at the Official Bank Rate.
Pre-funding has many advantages over the previous Multilateral Net Settlement model, under which all settlement risk was under - pinned by a mutual loss-sharing agreement. In particular, the old system placed restrictions on the flexibility to change individual participant’s net sender caps and required pooled collateral to be provided under a Liquidity Loss Sharing Agreement (LLSA) – creating an implicit guarantee for smaller participants to underwrite larger participants’ transactions in the event they fail.
10 The Power of Now Focussed and efficient assurance
As a systemically important payment system, the integrity of the Faster Payments Service is of paramount importance to every organisation that offers the service and all end users. Ensuring a stable and consistently available end-to-end service plays a key role in underpinning the UK’s financial stability and economic success.
New risk-based assurance (from early 2016)
The Faster Payments Scheme operates a risk-based model, both in scope and depth.
The Faster Payments Scheme will only look for assurance in the areas that it sees as either being of particular systemic risk to an individual participant and where the risk is not clearly and transparently being managed and assured elsewhere.
Participants will not be asked to provide ‘chapter and verse’ descriptive responses; instead they will be requested to point to the relevant risk mitigant and supporting evidence.
The new assurance process concentrates only on risks that could impact the delivery of service from other participants – the approach is scaled to reflect the systemic importance of PSPs of different sizes.
The intent is for the whole process to be simple and efficient while at the same time ensuring there is no dilution of the overall Assurance.
Under the old assurance process, the Faster Payments Scheme issued two assurance questionnaires – one on general assurance and the other focussed on security to all direct participants, requiring descriptive ‘essay’ style responses to over 100 questions. This time consuming approach created a disproportionately significant overhead for smaller organisations. The new assurance process minimises the assurance burden on participants by focussing solely on the elements of a PSPs design and operation that are critical for the management of systemic risks.
Cost-effective Real-time Payments with the Faster Payments Scheme 11 Focussed and efficient assurance
A key objective of the Faster Payments Access Programme has been to minimise the assurance burden on participants while at the same time preserving the integrity of the scheme. This has resulted in a new risk-based approach being brought into play from early 2016, focussing on those elements of a PSPs design and operation that are critical for the management of systemic risks.
The New Three Layer Assurance Model How a PSP may address a Faster Payments security code of conduct requirement
Scheme Requirement, Participant maintains Claim or a 24/7 /365 system that Expectation meets Scheme SLAs
PSP Supporting Participant has robust Participant able to cut Participant has dual Incident Management over to disaster recovery sites that are physically Argument capability site within scheme SLA & logically separate
PSP evidence Evidence of effective Evidence of regular Documented Risk incident management contingency site Assessment of Production processes in place testing and Contingency Data Centres Evidence of appropriate staff training
12 The Power of Now Start your journey to true Faster Payments now
Find out more A more detailed technical description of the New Access Model is available in the Faster Payments: A Vision For A New Access Model whitepaper, available to download from the Faster Payments website: http://www.fasterpayments.org.uk/access-payments Faster Payments has also published independent economic analysis demonstrating the cost benefits of New Access Model for PSPs processing (or forecast to process) between 1.5m and 13m Faster Payments per year. Find out more in The Economics of the New Access Model .
Ask yourself the following questions
- Can you effectively compete without offering your customers a real-time payment capability? - Do you want to take full control of your customer experience and connect directly to Faster Payments? - Do you want real choice in who connects you to Faster Payments?
Yes! I’m ready The Access Programme is on track to meet its targets of having an initial three accredited aggregator vendors in place by the end of 2015, with a dozen new PSPs active by the end of 2016. Take the next step by scheduling an initial discussion with the Faster Payments Access Programme on-boarding team: [email protected]
Cost-effective Real-time Payments with the Faster Payments Scheme 13 About Faster Payments Scheme Limited
Faster Payments is the only UK payment system available day and night, 365 days per year, supporting the demands of personal and business customers. In 2014, Faster Payments processed 1.1 billion payment transactions with a value of £904 billion.
Faster Payments Scheme Limited (FPSL) is an independent limited by guarantee company established in 2011. The Scheme exists to develop, operate and enhance payment services based upon a shared 24/7 real-time infrastructure. FPSL's aims are to:
• enable a vibrant and globally competitive UK economy • allow Payment Service Providers (PSPs) to deliver services that are safe and secure, real-time, simple to use and economically efficient • stimulate and grow the UK payments market. FPSL is driven by the long-term needs and aspirations of customers, businesses, government, the third sector and all types of PSPs including challengers and incumbents. The Scheme operates on a fair and equitable cost recovery basis. It does not seek to make a financial return. The Faster Payments Scheme is recognised by HM Treasury under the Banking Act (2009) as a systemically important Financial Market Infrastructure, and as such is overseen by the Bank of England. Additionally, FPSL is designated as a Payment System Operator under the Financial Services (Banking Reform) Act (2013). The scheme publishes an annual self-assessment in line with international governance and operational risk standards set out by set out by the Committee on Payments and Market Infrastructures (CPMI) and the International Organization of Securities Commissions (IOSCO).
14 The Power of Now
Faster Payments Scheme Limited 2 Thomas More Square London E1W 1YN 020 3217 8200 www.fasterpayments.org.uk