UK’s Faster Payments inspiring international interest
Countries such as Australia are enviously eyeing the UK’s Faster Payments system, with close-to-real-time payments revealing the traditional three-day infrastructure to be old-fashioned and slow.
Singapore mandated VocaLink, architect of the UK’s real-time payments system Faster Payments, to design its system last October, underscoring the international growth of the platform, analysts say.
However, expansion in the UK is likely to be more limited given the maturity of the market.
New entrants will join an exclusive club of countries with fast payments systems in place, including Poland and Sweden. Singapore’s offering will be a lighter, simpler version of what is used in the UK.
Euromoney understands that Australia has also expressed an interest, though it has no concrete plans to adopt the platform. Industry players there are attracted to the potential for real-time risk modelling for banks that such payments offer.
Banks are also thought to favour a system that includes a flexible, perhaps open-source, front-end for payments, which non-banks can plug into with their own systems, driving innovation.
More countries are sure to follow, though the investment required is considerable and the time to develop and implement quite long.
“By around 2015 there will be four or five new countries with faster payment-like systems, and another five to 10 countries with projects in development,” says Chris Dunne, payment services director at VocaLink.
Nevertheless, financial pressures on governments might moderate expansion of the platform, analysts say.
Banks have also anticipated the march of faster payments systems into new countries.
“Many have also designed their systems to be replicable, meaning they are well-placed if other countries introduce similar schemes,” says Peter Jameson, head of FI product and network strategy, global transaction services EMEA at Bank of America Merrill Lynch.
Most countries will not have to deal with the volume of traffic seen on the UK system. The UK also has some unique features in its payments infrastructure, such as standing orders, which don’t exist elsewhere. Therefore, most other countries are likely to introduce systems much closer to Singapore’s than the UK’s.
While the UK has been a world-leader in the platform, there is a mixed picture for growth: while corporate adoption is set to increase, financial constraints and alternative systems will temper expansion.
The UK’s Faster Payments has been a success in its five-year life, with an expected 900 million-to-950 million transactions expected through the system this year. Most of the traffic has come from retail accounts.
“Faster Payments was principally designed as a retail payments system, with the bulk of interbank or bank-treasury traffic remaining on Chaps, which is the appropriate system for those transactions,” says Jameson.
Nevertheless, according to Dunne, the system always intended to lure corporates. Pay-day loan companies, for example, have a business model that relies on Faster Payments – using Chaps would make it too expensive. Barclays is vocal in offering the service to its corporate clients.
The next phase of growth could also see the democratization of Faster Payments membership.
George Osborne, chancellor of the exchequer in the UK, recently expressed concern that the platform was controlled by only 10 full members, through which approximately 400 institutions direct payments, reflecting the concentrated nature of UK banking and the barriers to boost current-account portability.
He suggested that high barriers to entry for new full members were undermining competition.
“It is surprising that nobody has joined as a full member since the project went live,” says Richard Sanders, principal solution consultant EMEA at ACI Worldwide. “The investment needed to join is substantial but some of them must be reaching a tipping point, given the amount of volume going through the system.”
Not everyone shares that surprise. “The reason nobody has joined as a full member is they don’t expect to be able to make money in the market, while the maintenance cost of running a 24/7 system like that is very high,” says Julian Wakeham, investment banking partner at PwC.
“There is plenty of room for innovation at the front-end of the system, where money can be made, without becoming a full member.”
This is likely to focus on improving the customer experience, or designing schemes to offer protection in specific types of high-value transaction, where the irrevocability of the system might otherwise dissuade customers from using it.
For example, a third party could design an app that allowed a buyer to insure the purchase of a second-hand car through Faster Payments for a small fee.
Other innovations have been suggested for the UK system. One would be to introduce new currencies to Faster Payments, with euro payments potentially useful, though there is little demand for it, says Dunne.
A more likely development will be functionality, which would allow it to be used like a debit card for online transactions, putting it in competition with the likes of PayPal and WorldPay.