The Power of Now Cost-effective Real-time Payments with the Faster Payments Scheme A Guide for Payment Service Providers

Transcription

1 The Power of Now Cost-effective Real-time Payments with the Faster Payments Scheme A Guide for Payment Service Providers

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3 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 1970s Innovation continues with the first magnetic stripe bank cards, and SWIFT international payments born in s Cashback and early online banking bring even more convenience to customers Now A current account with a cheque book was at the cutting edge until 1967, when the first cash machine was introduced, with electronic payment scheme Bacs starting in Payments take days to clear 1980s The creation of the LINK cash machine network in 1986 is swiftly followed by the first debit card being issued in s 24/7 Real-time becomes the norm: the very first Faster Payment is sent in May 2008 The era of the smartphone: Paym (introduced in 2014) enables Faster Payments using just a mobile number no sort code, no account number Future By 2020, more than 10 million Faster Payments are predicted to be sent every day 10 million+ Cost-effective Real-time Payments with the Faster Payments Scheme 03

4 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: Standing Orders and Returns Forward Dated Payments and Direct Corporate Access (DCA) Single Immediate Payments 8 7 Volume (millions) Jul 08 Jan 09 Jul 09 Jan 10 Jul 10 Jan 11 Jul 11 Jan 12 Jul 12 Jan 13 Jul 13 Jan 14 Jul 14 Jan 15 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 The Power of Now

5 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 FPS Growth = 10% Conservative Scenario FPS Growth = 15% Likely Scenario FPS Growth = 20% % Market Share of Potential New Access Market 1 Total Market Without access to 24/7 real-time payments, millions 5% 6% 1,950 million 1,100 million 53m 120m 175m 270m 7% 2,540 million 8% 3,280 million Note: Today 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

6 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 real time Faster Payments gateway is too difficult and expensive for us on our own we cannot justify the business case. FASTER PAYMENTS HAS DEVELOPED A NEW AGGREGATOR MODEL Faster Payments has developed the New Access Model to address these concerns directly. The Aggregator Model (see page 8) will help smaller PSPs, removing the need to develop an in-house Faster Payment gateway, gaining the economies of scale of a larger PSP and offering a lower cost per transaction at lower volumes. As a smaller player we would not wish to be part of a loss sharing agreement that exposes us to the failure of a large bank. NEW SETTLEMENT MODEL ELIMINATES SHARED RISK The original Liquidity and Loss Sharing Agreement (LLSA) has been replaced by a fully cash pre-funded model, meaning settlement is guaranteed for all participating PSPs without any shared risk to or from other settling participants. Joining Faster Payments would involve yet another onerous, time-consuming, and costly annual assurance process. RISK-BASED ASSURANCE FOCUSES ON SYSTEMIC RISK A new risk-based assurance process is focussing solely on those elements of a PSPs design and operation that are critical for the management of systemic risks. It now concentrates only on those risks that could impact the delivery of service from other participants, and is being scaled to reflect the relative systemic importance of PSPs of different sizes and scale. 06 The Power of Now

7 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 Connected via new gateway aggregator model 1 Direct Direct Direct Faster Payments Gateway Aggregator Faster Payments Gateway Aggregator 2 Faster Payments Scheme Central Infrastructure 3 Direct Direct Direct Connected via own in-house gateway Direct Direct Indirect Indirect Indirect Indirect The sponsored indirect model Cost-effective Real-time Payments with the Faster Payments Scheme 07

8 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 Q Access through the aggregator model should be available from early in 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. AGGREGATOR 2016 The Faster Payments Scheme is also introducing a Technical Accreditation process for aggregators - effectively a 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: 08 The Power of Now

9 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) Total Cost per Transaction over 5 years New Access Model (real-time) In addition to guaranteeing 24/7 real-time payments for PSPs, the New Access Model is also expected to result in lower total cost per transaction over a specified range of transactional volumes (typically 1.5m 13m transactions per year, avaeraged over 5 years) Sponsor Model (same day/non-real-time) 1.5m transactions 13m transactions Though being more costly at low volumes, New Access does guarantee access to real-time payments Average Annual FPS Transactional Volume, Millions 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, illustrates how the unit cost generally reduces as volumes increase. Under the indirect sponsor model, unit costs are relatively flat with limited savings being achieved as volumes increase. The Aggregator model combines the best of both worlds: PSPs connecting in this way can obtain all of the customer proposition benefits of direct connectivity with a more competitive unit cost yet without excessive up-front fixed costs. 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

10 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 underpinned 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

11 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. s 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

12 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, Claim or Expectation maintains a 24/7 /365 system that meets Scheme SLAs PSP Supporting Argument has robust Incident Management capability able to cut over to disaster recovery site within scheme SLA has dual sites that are physically & logically separate PSP evidence Evidence of effective incident management processes in place Evidence of appropriate staff training Evidence of regular contingency site testing Documented Risk Assessment of Production and Contingency Data Centres 12 The Power of Now

13 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: 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 Take the next step by scheduling an initial discussion with the Faster Payments Access Programme on-boarding team: access@fasterpayments.org.uk Cost-effective Real-time Payments with the Faster Payments Scheme 13

14 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 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

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16 Faster Payments Scheme Limited 2 Thomas More Square London E1W 1YN