Payment systems are “an essential set of infrastructures that underlie the UK economy”. By 2024, it is estimated that only one third of payments made in the UK will be in cash. If the recent pace of technological advancement and disruption in financial sectors continues, use of digital payment systems may increase even beyond this estimate. Despite this, the current UK payment infrastructure has remained complex and difficult to change, as it developed organically over years and on a variety of platforms. The Draft Strategy is the latest in several attempts, made over the last 15 years, to innovate the payments market. Each previous attempt has underlined the same root problems. However, as proposals proved time-consuming and expensive to implement, and required agreement between Payment Service Providers (PSPs) and other stakeholders, each has failed to effect significant change. It was as a result of these attempts that the Forum was setup by the Payment Systems Regulator, a group of 22 payments sector experts, drawn together to deliver a strategy to unlock competition and innovation in payments.
The Forum envisions a new architecture for retail interbank payment systems in the UK:
- with simple open access for all PSP’s that want it, connecting them easily and at low cost
- built using standards aligned with other countries’, making it easier for overseas players to enter the market and for UK businesses to expand
- providing a new data capability that will allow more information to be sent with payment messages, enabling new and innovative payments products to emerge.
The Draft Strategy aims to address feedback received by the Forum from a range of stakeholders outside the financial sector. Consumers and businesses want greater control over automated payments, including real-time balance information and tracking options, to reduce the risk of fraud. Businesses and government departments want access to improved data and to facilitate payment identification and reconciliation.
The changes proposed in the Forum’s Draft Strategy are outlined below:
Short-term proposals (estimated 12 months to implement):
- Increase independent access to sort codes. Until recently a new PSP was required to ask an existing direct participant (often a competitor business) to provide them with a sort code, which could act as a barrier to market entry
- Enable aggregator access models to Payment Systems Operators (PSOs)
- Introduce governance frameworks to underpin the use of Application Programming Interfaces (APIs), to set rules for the use and sharing of data and to ensure consumers and businesses are protected
- Increase consumer awareness and education around financial crime.
Medium-term proposals (estimated 1-3 years to implement):
- Enhance guidance to clearly establish accountability and liability in Indirect Access Models. Direct access participants in payment systems usually hold accounts at the Bank of England and can settle payments directly over the Bank’s Real-Time Gross Settlement System (RTGS). PSPs without ‘direct participation’ access payment systems via a direct access participant, known as a sponsor or Indirect Access Provider (again this is usually a competitor). The current split of accountability and liability between players in the Indirect Access Model is unclear
- Consolidate PSOs, namely Bacs, the Cheque & Credit Clearing Company and Faster Payments (FPS). LINK and CHAPs would remain separate
- Establish standardised PSO participation model and rules for simpler market access
- Establish common technical standards for identity verification, authentication and risk assessment
- Define a Simplified Core Payments Platform, including moving the UK to modern payments message standards (ISO20022), open access APIs and a layered platform architecture (which would allow changes to be made to individual layers of IT systems, without the changes affecting other services or users)
- Enhance sanctions data quality and financial crime intelligence sharing.
Longer-term strategic proposals (estimated 3+ years to implement):
- Implement the Simplified Core Payments Platform
- Introduce ‘Request to pay’, a new payment instrument enabling businesses and consumers to create and send payment requests
- Enhanced data and increased data sharing and analytics. This would include introducing the capability to attach data to a payment to allow the recipient to easily identify what it relates to simplifying reconciliation, and providing assurance it will reach the intended recipient and real-time transaction updates
- Introduce a Central Know Your Customer (KYC) Utility.
The Forum considered including account number portability within its Draft Strategy. However, following a cost/benefit analysis, it determined that the resources and time required to introduce this would be better invested in its other proposed changes at this time.
From its Draft Strategy, it is clear the Forum has embraced the role technology will play in the payments sector. Its proposed vision continues the trend across the sector of increasingly focusing on transparency, financial inclusion, and the needs and empowerment of the consumer. It also attempts to strike a balance between increased openness and security, and data sharing and protection. Regardless of the outcome of the consultation, it is clear that future innovation will be easier and more forthcoming if the industry can collaborate to bring about change.
Those wishing to respond to the consultation questions raised within the Draft Strategy have until 14 September 2016 to do so. The Forum will conduct a cost/benefit analysis over the summer and publish its final strategy document in November 2016.