Set up in 2008 by UK Faster Payments, the Faster Payments Service (FPS) was launched to enable one-day payments for consumers, but banks quickly recognised the benefits the service could bring to businesses. Available 24 hours a day, seven days a week, FPS is capable of moving funds between consumers in under 10 seconds.
Launched just over a year later, Direct Corporate Access (DCA) allows corporates to make payments to a beneficiaries account within two hours. Despite taking slightly more time than the consumer-side FPS, DCA offers an alternative to the more expensive one-day service CHAPS provides for high value payments and the three-day Bacs bulk processing cycle – and, importantly, corporates know exactly when the payment is made. Although 12 member banks now allow corporate customers to receive Faster Payments, only Barclays Corporate currently offers DCA.
From the treasurer’s point of view, Faster Payments can alter the way they manage cash flow. The difference is likely to be most marked for companies that receive a large number of individual one-off spontaneous payments from consumers, rather than bulk payments. On the flip side, as a payer, cash flow can be improved by the retention of cash until the last possible moment. For recipients, getting the most up-to-date information – several times an hour instead of the daily files available via Bacs – could also be a boon.
However, although retail channels are now fairly well established – Barclays Corporate understands from customers using the service that about 98% of payments sent to retail customers are addressable via Faster Payments – many corporate treasurers are still hesitant to use FPS.
Faster Payments Adoption
According to UK payment industry figures,1 Faster Payments volumes grew with 107 million occurring during 2Q10, amounting to £42.1bn, compared with 69 million, worth £25.2bn in 2Q09, a rise in volume of 64.5% and in value of 59.9%. Meanwhile, CHAPS same-day sterling payments volumes declined by 2.6% between 2Q09 and 2Q10.
Specifically looking at consumer payments, 82% of online and telephone banking payments (57 million) were made using Faster Payments and 57% of standing order payments (51 million) used this method of payment during 2Q10.
In terms of the FPS, the UK payments industry anticipated a leap in corporate interest when the cap on single and forward-dated payments changed from £10,000 to £100,000 in September 2010. However, so far it has not spurred corporate adoption.
In fact, although the cap was increased, in practice these are capped at a lower level by individual banks. Although there are several banks offering a £100,000 level, including Barclays, Lloyds TSB, HSBC and Bank of Scotland, there has not been much demand for making payments above £10,000. But it is early days, and raising the limit – thereby making more transactions eligible for DCA – should attract more corporates to the scheme in coming months.
However, the cap is not the only issue that corporates are concerned about. A key issue is irrevocability. Some corporate are concerned that by sending immediate payments which cannot be recalled in case of error, they are leaving themselves open from a risk management perspective.
Another issue is availability. DCA is currently only available 24/5 and between 3am and 11pm, despite the fact that the FPS is available 24/7. In order to manage this problem, Barclays and CHAPS Co, the DCA service operator, are currently in discussions to extend FPS to 24/7 by early 2011.
However, the biggest problem is reachability. Corporates are aware that not all banks offer Faster Payments – and that the limits also widely vary. A corporate wants to be sure that when it makes a payment, that it reaches the recipient. The lack of reachability has also discouraged banks from marketing the service. One factor that will help improve reach is the fact that the Payment Services Directive (PSD) will require the sort codes of the 2% banks not currently able to receive Faster Payments to be FPS-addressable by the end of 2011.
The Business Case
Corporates have to be able to argue a business case for using FPS to make payments instead of the cheaper Bacs. Using FPS for regular payments, such as monthly salaries, is currently not necessary but can be useful in terms of managing cash flow more tightly. Other potential uses include weekly wages, which are by definition more time-squeezed, expenses, temporary staff, suppliers, as well as immediate customer refunds. Faster Payments can also be used in place of cheques as contras against cleared funds to enable businesses to avoid late payment charges.
Barclays Corporate is currently focussed on customers with a specific business proposition requiring quick release of funds. Several sectors are finding applications in situations where real-time reimbursement is an important part of its business proposition, such as Mazuma Mobile, a company that offers cash for old mobile phones. Insurance firms have also embraced FPS, with reputational benefits for speedy payouts. For credit acquiring companies, being able to pay their customers – particularly small businesses – more quickly gives them competitive advantage among their peers that pay by Bacs, for example.
In the near future, businesses will need to become more aware of the change in customer expectations with regard to the speed with which they receive payments. As FPS becomes more widely used, customers will wonder why their payment is held up, since they know that it is the corporate or bank, rather than the clearing process, that is causing the time delay.
However, implementing FPS is no short-term fix for larger organisations, since it represents both process reorganisation and potentially a change in the customer proposition itself. For this reason a wholesale redesign of a corporate’s payment processes could be necessary to allow FPS to replace not only the Bacs/CHAPS payments used previously but also cheque payments, which are due to be phased out in the UK by 2018.
Direct Corporate Access
In order to make a payment through DCA, the customer’s enterprise resource planning (ERP) system generates a bulk file to VocaLink, which splits files into individual payment instructions and posts the transaction to FPS on behalf of the recipient before sending a confirmation report to the customer. The customer’s account is debited once, with an adjustment made if any of the payments are rejected. The disaggregation and acceptance process takes up to 30 minutes, with beneficiaries receiving access to the funds within two hours of acceptance.
Many Bacstel-IP (the high-speed connection used to transmit Bacs payments) products can be upgraded with DCA-approved software to enable a Faster Payments module at a low incremental cost. As an extension to the existing Bacs Approved Software Service (BASS), the same smart cards and hardware security models (HSMs) used to secure Bacstel-IP also work on Faster Payments.
Barclays Corporate currently has more than 100 customers using DCA and this customer base is growing month to month. Barclays also has a proprietary corporate FPS host-to-host service, Direct File, for top-end corporate customers who want to do a mixture of international and CHAPS payments.
Smaller customers can also submit payments through a registered, DCA-enabled bank sponsored payment bureaus and to use a bureau/DCA version of the approved BASS software. Currently bureaus can only offer this service to Barclays customers. As more banks offer DCA, this will, in turn, encourage a higher level of customer adoption.
To tackle the impending regulation to make all bank sort codes FPS addressable, Barclays is taking steps to bring its agency banks into the scheme. All agency banks had the option to receive Faster Payments from the outset of the scheme, but were not necessarily ready to take this payment type.
Once enabled to receive Faster Payments they will also be able to send Faster Payments. Barclays recently extended DCA and launched two agency-specific Faster Payments products – one that routes the payment through Barclays and one that goes directly to the central infrastructure from its agency clearing banks. Barclays Corporate is currently the only bank to offer DCA functionality to its agency banks.
The FPS infrastructure, along with DCA, has come a long way but needs to offer more functionality – and more widely – before more corporates will be persuaded to take the leap. With that, and the promised new regulation, the UK should have the Faster Payments infrastructure originally envisioned by the industry.
1UK Payments Industry Statistical Release, September 2010.
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