Future of Payment Review: six-months on – Digital Payment Infrastructure

Joe Garner’s Future of Payment review published in 2023 on behalf of the UK Government reflected the complexity of the current instant payment UK environment. The situation has allowed the UK’s early leadership in global instant payments to decline. The UK is starting to fall behind in terms of person-to-person payments made by bank account transfers. UK is ranked 9th in terms of the number of account-to-account transfers per capita, and it predicted to fall to 17th by 2027.

Additionally, as payments have become increasingly digital over recent decades, payments systems also have taken on a greater degree of importance to national infrastructure. £107 trillion flowed through out UK payments systems in 2022 – equivalent to 44 times GDP. Dynamics of payments changed with COVID showing a sharp reduction in cash – largely the change went to contactless debit card and Faster Payments.

To better understand the fragmented payment environment the twelve-month review is broken down into: New Regulations, Digital Payment Infrastructure, Fraud and Financials.

2. Digital Payments Infrastructure

Former Federal Reserve Chair Bernanke noted:

The Bank of England needs to open its ears, its mind, and its wallet, as the data tools it used were out of date and unfit for purpose in the modern world.

A similar comment could be made given the New Payment Architecture (NPA) program is nearing its 10th year. What is really needed is for Faster Payment to become world’s best instant payment and data channel. 

Major Initiatives

UK Finance estimates the cost to deliver the Payments roadmap over the next 5 years is between £10bn and £20bn. At the same time financial service companies estimate that 91% of budgets are pre-allocated to regulatory projects. There are three major initiatives:

1. NPA: is the planned new build for payments in the UK based on ISO 20022 global message standards. The Federal Reserve’s FedNow, the US instant payment system, went live in 2023 using ISO 20022. ISO 20022 is a global standard for financial information providing a rich and consistent data accompanying payment.

The UK initiative to implement NPA, starting in 2015, and delayed due to replacing/renovating legacy systems Bank/PSP infrastructure that is:

• Old: designed before real time with 90% banks using batch processes.
• Archaic: computer languages, e.g. COBOL, used extensively.
• Costly: implementations of NPA will be expensive and risky for all.

PSPs are balking at the sheer cost of NPA (central infrastructure and back office) and questionable payback.

The question is do we really need to replace Bacs and CHAPS?

Bacs volume slowed to 1% while the value grew 5% in the year to 2/2024.

CHAPS volume slowed to 1% and value dropped 10% in the same period. CHAPS Retail and Commercial (pacs.008): volume accounted for 76% of the total volume and 25% of the value. Many of these payments could use Faster Payments and if so, could challenge CHAPS financial model.

as compared to Faster Payments volumes grew 14% and value 13%.

Today Faster Payments has the limit of £1 million per transaction. However, the markets rely on CHAPS guarantee of payment for completing transactions. The fees though are widely different, e.g. £25 CHAPS payment to buy a property vs. free for a Faster Payment. The money appearing in the payee’s bank account could be the guarantee.

2. Central Bank Digital Currency: A digital pound, if given the go-ahead, does not replace cash and gives more choice when making a payment.

3. Open Banking: estimated to have cost £1.5 billion and has given the UK a global leadership role. 11% of UK consumers and 17% SMEs make average payments of £450 per transactions totalling £4.5 billion per month.

EU has seen an increase of 400% over four years in Open Banking with 64 million users expected by 2024. The need for additional chargeable services is imperative as UK and EU want virtually zero payment fees.

Total payments have grown over time to £47.5billion in 2022. But there have been rapid shifts – most notably from cash and cheques to Debit Cards and Faster Payments.  Faster Payments has grown progressively since 2008 and will soon be the second consumers favourite payment channel after the Debit Card. By 2026 FP will over taking Bacs and Cash.

India’s new Channels

New Bank Account instant transfer methods in India are attracting high usage and immediate acceptance countrywide.

India: has identified the need to move from a cash-based economy to ‘digital India’. For payments this meant building a real-time person-to-person system. This included build out from a national digital ID scheme. An integrated technology stack to provide end-to-end journeys. QR code-based proposition that did not require the vast micro small business market to have access to point-of-sale terminals. 

India has incorporated digital identification into the new systems.

National ID has been a controversial topic in the UK. However, CoP does verify who is really asking for payment. Many financial apps on mobile phones are using face identification.

Simplifying instant payments

India and USA have invested in a real time payment systems, like UK Faster Payments. India, for example, and are deploying better customer interfaces e.g. no need to enter account details/sort codes and improved APIs (Application Programming Interfaces) for connectivity.

One of the problems the UK has in CoP is that the actual API has not evolved over the past seven years. The time was used getting all PSP's online and re-platforming the CoP index by Pay.UK.

There is a lack of a standard corporate/bank APIs to allow integration with Corporate ERP (General Ledger) systems where the financials of the company are kept.

Digital payments will continue to become easier and more convenient. eWallets are being used 47% of the time. Human activity needed to make an instant payment is diminishing. Instant Payments is becoming a commodity and is very use full as it stimulates every country’s economic by 1 to 2% instantly.