UK Faster Payments: The End of the Beginning?

On 6 September 2010, the UK Faster Payments Service (FPS) took a significant step forward by increasing the transaction value limit for Direct Corporate Access (DCA) from £10,000 to £100,000 per transaction. In addition, Barclays – the only bank to offer DCA at present – and CHAPS Co, responsible for the day-to-day operations and management of the service, have entered into discussions to extend Faster Payments to 24/7 by early 2011. This will allow companies to make Faster Payments transactions at the weekend, as well as beyond the 3am-11pm window that they are presently restricted to. With these two developments, corporates may consider giving Faster Payments a second look.

Launched on 27 May 2008 without much fanfare, the FPS has gained little traction in the world of corporates. Much of that has to do with its origination: in May 2005, the Payment Systems Task Force, chaired by the Office of Fair Trading (OFT), announced that the banking industry had to reduce clearing times on phone, internet and standing order payments. The FPS went beyond the remit and delivered a real-time payments infrastructure for the UK.

Originally the OFT focus was on consumer payments, but the 13 founding banks and building societies quickly saw that there was also a business case for the corporate side and as a result developed DCA. DCA allows a company to generate a payments file out of its enterprise resource planning (ERP) system in the back office and send the file directly to the FPS, in a very similar way that Bacstel-IP provides access to Bacs.

But it was a faltering start, not least because FPS was launched just as the banks hit a rocky patch. Norman Taylor, product manager at Experian, says: “It is disappointing that not all banks sponsor DCA, which is direct connectivity to VocaLink [the FPS infrastructure provider]. Barclays went down the route planned for all banks, but has done it alone.” Despite this, Barclays is on target to hit its goal of having 100 companies on DCA by the end of this year.

But the inconsistent roll out has created patchiness in terms of reachability, which has been a major drawback for the banks attempting to market FPS, whether they are using DCA or their proprietary banking channel. As Mark Hale, director at PricewaterhouseCoopers (PwC) Consulting, explains: “Payments is a network business, where the ability to reach all participants in a universal scheme is an important part of the value of a proposition. Where reach is not universal in a market, it makes marketing a proposition much more difficult as well as weakening the service experience if caveats about reach need to be applied.” In 2009 PwC and VocaLink released a report, called ‘Tomorrow Happened Yesterday’ , which lays out business case from both the banks’ and corporates’ perspective.

Although he believes that increasing the cap makes it more amenable to corporate flows, in terms of the number of trade and transactions eligible by amount, it is widely known that the banks are managing much lower limits internally. “Upping the limits will make the scheme more attractive to the corproate market by making more transactions eligible for the scheme. However, the actual impact will vary by service provider since they currently competitively offer different limits as part of their individual market propositions,” he says.

The raising of the limit hasn’t had much effect for Barclays, according to Marcus Bateman, senior product manager, corporate payments product, cash and trade, Barclays Corporate. “The fact that we are receiving very few, if any, payments over £10,000 shows that other banks have not raised their internal channel limits. Therefore, there will be a muted reaction if other banks are not offering it.” He adds that it may take some time before the market sees the effect of the cap change, mainly because customers recruited to date are those working in expectation of a £10,000 limit.

But things may be changing quicker than expected. James Benson, head of market at Direct Debit Limited (DDL), reports that in the past five weeks DDL has onboarded three new customers – two in payroll and a franchise company – and they all approached DDL specifically because of its Faster Payments module. He believes that the increase in cap may be a driver because companies in the payroll space, for example, would gain competitive advantage over those that pay in a three-day clearing cycle.

Where is the Business Case?

The first movers onto the FPS are somewhat diverse – Barclays’ Bateman lists small building societies, merchant acquirers and payroll companies, particularly those that operate in the weekly payroll space – but demand for it has come primarily from those who see great benefit in reacting quickly and don’t want to pay the high price of CHAPS.

Figure 1: Faster Payments Service Proposition Matrix

Source: ‘Tomorrow Happened Yesterday’, VocaLink in association with PwC

There is a lot of activity from companies where the immediate disbursement of funds is fundamental to their business models, for example Mazuma Mobile. The company gives cash for mobile phones: a customer sends the phone and the next day the Mazuma credits their account with Faster Payments. This is great customer service in an environment where there is still a lot of mistrust in conducting business online.

Nick Senechal, service line strategy director at VocaLink, agrees that right now Faster Payments are being used by a significant number of corporates that need to make a large number of payments immediately. “Payday loan companies, for example, are another segment that have moved to Faster Payments because their proposition is immediate financing,” he adds.

He believes that this situation will begin to change as more businesses start to operate more in a real-time environment. “Further down the line, the potential for a higher level of STP [straight-through processing] and automation can be realised with real-time payments. It can be integral to a form of delivery versus payment (DVP), or payment at the moment of delivery. In slow payment economies, companies obtain credit terms from suppliers and extend credit terms to customers. But there is a lot of pressure on that model and everyone can see the attractiveness of improving the efficiency of the economy. Faster Payments can also cut out huge administrative costs because there would be immediate invoice reconciliation.”

PwC’s Hale agrees with the proposition that Faster Payments is relevant to the corporate market and gives a concrete example: “Think of a construction firm that has run out of supplies – it rings up the merchant supplier but the merchant wants cash on delivery and therefore won’t deliver until it receives payment. With Faster Payments, this can be done immediately and the builders can get the supplies in a few hours. Faster Payments has the potential to take the risk out of traditional supply chains.”

The change in business processes can create huge benefits in STP, as mentioned by Senchal. Companies that are now operating with mainly internet transactions have seen vast improvements in trade and contract management, and they have optimised the workflow. What took two days or more to send over the contract, can now happen almost instantaneously. Companies are now asking: why shouldn’t the payment occur at the same moment?

On the flip side, companies are also facing up to the fact that changes in the way payments are made also have a knock-on effect in terms of business processes and procedures. Bateman explains: “In the old Bacs world, payments land in bulk at the start of the day but with Faster Payments they will trickle in 24/7. Therefore, the treasurer’s cash flow is much more linked to when customers are online. And they need to think of what the consequences are in an online world. If they get an instant payment, how long is it reasonable to wait for the balance to show on the customer’s account? In the old world, a company could cite batch and statement printing processes and could take couple of days. With Faster Payments, customers know that the money is moved instantaneously and won’t be as patient in waiting for the balance to show on their account.”

But the benefits outweigh the challenges, and DDL’s Benson believes that companies will want real-time payments. “With the economic uncertainty most companies are facing, getting better control of their cash flow is paramount. If a corporate is dealing in multimillion pounds in volumes of transactions, they can use the FPS to process up to the minute until the end of the day, just in case they had a rejection or needed to make a payment quickly,” he says.

Market Developments

In this age of regulatory overdrive, it would be surprising if there weren’t at least one regulation that had some impact on the adoption rate of Faster Payments. In this case there are two in the near future: the Payment Services Directive (PSD), which will see by 2012 all interbank transfers credited to the beneficiary within one day; and the end of central cheque clearing by 2018, which will see cheque payment processing via other mechanisms.

Figure 2: Faster Payments Migration Volumes 2018 – High Adoption Case

Source: ‘Tomorrow Happened Yesterday’, VocaLink in association with PwC

Experian’s Taylor argues that the big issue on cheque side is that it is not just an overnight job to switch from cheque payments to another mechanism. “It is a big deal because a company has to automate its business processes and applications and the result is a sizable project rather than a quick fix to change from cheques to electronic payments. Those waiting in the wings in terms of Faster Payments are developing a strategy for replacing cheques by 2018.”

He highlights the importance of producing electronic messages alongside the Faster Payment: “You need to tell people you have sent it. Printing and sending a letter through the post is fine with Bacs, but with Faster Payments the use of sms text messaging is coming on strong.”

Beyond regulations, VocaLink’s Senechal believes that a big driver in personal adoption will be mobile banking. “The Payments Council was looking at developing a mobile offering by 2012. Although that went off the boil for a bit, it is now very much back on the agenda,” he says.

Richard Sanders, solution consultant for northern region, wholesale solutions, ACI Worldwide, makes the point that many of ACI’s customers in other markets are very interested in the Faster Payments model. “Within SEPA [single euro payments area], the Middle East, South Africa and Australia – across the world people are developing Faster Payments initatives. We have to be prepared that these other models may also impact UK Faster Payments. They may do things better and smarter, and the UK may have to come back and revisit the scheme,” he says.

Figure 3: Faster Payments Migration Volumes 2018 – High Adoption Case

Source: ‘Tomorrow Happened Yesterday’, VocaLink in association with PwC

Conclusion

Most companies are not interested in a three-day clearing or instantaneous clearing – what they are interested in is certainty of when it leaves their account and when it arrives in the beneficiary’s account. They want to be sure they can manage cash more efficiently.

Craig Ramsay, wholesale solutions lead EMEA, ACI Worldwide, says: “I think we have reached end of the beginning of Faster Payments. It is clearly a network of the future, clearly has more to offer, and certainly has some of the things we need. Does it need more schemes to handle different types of payments? Yes. Does it need channels beyond internet and phone? Yes. Does it need to have more banks to support it? Of course it does.”

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