In the latest episode of our FinTalk interview series we’re drilling down into the world of Faster Payments. We’ve invited Tom Hay, Head of Payments at Icon Solutions, previously one of the lead architects who designed the central processing system for UK Faster Payments to walk us through the latest on Vocalink, tease out exactly what we mean by Faster Payments and explore where this fits into what’s next for banking.
Listen to our new FinTalk podcast episode or read the transcript of our conversation below.
Topics covered in this episode:
- What is Vocalink?
- What’s the deal on its ownership?
- Why do payments take a long time?
- What are faster payments?
- How fast are they really?
- What are the barriers for banks transitioning to instant?
- What’s next for banking?
What is Vocalink?
Whenever you make a payment through internet banking or set up a direct debit, money has to go from your bank to the gas company for example. As you can imagine there are millions of these payments flying around each day. Rather than each bank paying directly to the other banks, which would mean lots of separate connections between banks, it is easier to have a central hub in middle. All bank payments go into that hub the hub then sorts them into the right order, sends them on their way and then settles with the Bank of England.
Vocalink is that hub. It sits between all the banks, transfers the payment messages and makes sure the money at the end of the day is settled at the Bank of England. They have been doing that for about 50 years so the tech has changed a lot but they now look after the Bacs (Bacs Payment Schemes, formerly known as Bankers’ Automated Clearing Services), Faster Payments and LINK (which is the domestic card payments ATM scheme).
And Vocalink is currently owned by the banks?
Yes but the regulator has fired a warning shot there. It is very likely MasterCard will take over Vocalink, which I am not sure is what the regulator had in mind but will definitely get rid of bank ownership.
What’s the problem with banks owning it?
It is perceived as a bit of a cartel and closed shop. The dozen or so bigger banks in the UK are all members of Bacs and Faster Payments but all the newer banks, the challengers – the Atoms and Starlings – find it quite difficult to connect in and become part of that club. It is also perceived that bank are operating a sort of monopoly so there no real competition. The idea is to open up access to the payments schemes and also to promote competition and therefore drive down prices.
Can you talk a bit about your work at Vocalink?
I’d been working in card processing for many years and in 2005 I moved into Vocalink – at that time that UK banks were considering a new way of doing payments, a faster way and that was partly in response to regulatory pressure. Various ideas were on the table, but the one that won out is the one that is now called Faster Payments. At its heart it was based on tech from the cards world because card payments are instant payments; if you take money out of an ATM, you get money three seconds after you put your pin in. The same thing was required in the account to account payments world.
LINK had put this idea on the table because they operate the card scheme. For Voca, who operated the Bacs scheme, it was all new but luckily I landed there and coming from cards and was able to explain. Working with LINK, Voca looked after the reporting and settlement or back office side, while LINK put in real-time switching: put the two systems together and that delivered Faster Payments. Because it was all so complementary the two companies ended up coming together to form Vocalink.
What do we actually mean by “faster”?
Bacs, the old fashioned payments scheme worked on a three day cycle. If I wanted to pay you for example I would make that payment instruction on one day, then that night it would be sent to your bank, they would have a day to think about it and then on the third day the money would appear in your account. It would be three working days before you go the money and if it was over a weekend it could take an awfully long time before it got to you.
Full transcript on PaymentEye
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