The changing landscape of the UK Domestic Payments Market


A combination of regulatory change, technological advancement and shifting social dynamics has informed the evolution in the UK payments landscape that we are seeing today.

About the Author

Tim Decker

Head of Payments Product Development, Global Transaction Banking, Lloyds Bank

Tim Decker

Regulatory body changes

UK informed changes

Post the 2008 financial crisis the UK Government has created new regulatory bodies and implemented new legislation to ensure that the strains seen in the wake of 2008 are not repeated. The regulation covers everything from transparency of payments to the ring-fencing of fundamental banking activities from those deemed more risky. We have also seen more collaboration between the Government, financial institutions and other interested parties to create oversight bodies whose sole purpose is to make the UK payments industry fairer, more transparent and easier to use.

The Payment Systems Regulator

The Payment Systems Regulator (PSR) is a UK payments economic regulator whose objectives include:

  • To ensure that payment systems are operated and developed in a way that considers and promotes the interests of all the businesses and consumers who use them
  • To promote effective competition in the markets for payment systems and services - between operators, payment service providers (PSPs) and infrastructure providers
  • To promote the development of and innovation in payment systems, in particular the infrastructure used to operate those systems

In late 2015, the PSR appointed the Payments Strategy Forum (PSF) to identify, prioritise and help deliver its objectives. The PSF’s goal of creating a more efficient payment system for all users led to combining elements of the UK’s payments schemes to work together, promoting collaborative innovation. The PSF has now published a strategy that will:

  • Create easier access to the current payment systems, foster more competition and enable innovation
  • Move the UK to a payments system that is simpler, more agile and responsive to the changing needs of users
  • Introduce measures to reduce the weaknesses in current payment systems that are exploited for financial crime

From 2018, a new payments architecture will be rolled out. It will introduce enhanced payments capabilities for UK consumers and businesses, including:

  • ‘Request to Pay’ capability, giving more control over payments to customers
  • ‘Assurance Data’ will give end-users reassurance that their intentions in originating or requesting payments have been followed through
  • ‘Confirmation of Payee’ function that will help avoid misdirected payments and prevent certain types of fraud
  • ‘Enhanced Data’, giving end-users the capacity to attach data to a payment to allow a recipient to easily identify what the payment relates to. This will enable much more efficient reconciliation of payments by businesses

The result of this will be a leaner, simpler single architecture – yet with much more choice.

In September 2017 in support of these objectives, the Bank of England and the PSR have also set up the New Payment System Operator (NPSO), which will consolidate the operation of BACS, Faster Payments and Cheque & Credit Clearing. 


By 1st January 2019, the largest UK banks will be required by law to separate – or ‘ring-fence’ – their core retail banking services from their ‘riskier’ investment and banking activities undertaken outside the EEA. The aim of this legislation is to enhance the resilience of these banks and to reduce the possibility of essential banking being disrupted in the event of such a bank getting into financial difficulty.

Ring-fencing will be implemented under the Financial Services and Markets Act 2000. This gave the regulators – the Prudential Regulation Authority (PRA) and Financial Conduct Authority (FCA) – the power to implement ring-fencing and to ensure ring-fenced banks could not undertake any ‘excluded’ activities. The PRA and FCA will oversee the entire change.

The banks covered by ring-fencing are determined by the size of their retail and SME deposit base, currently this means any bank with more than £25bn of core UK retail and SME deposits. Banks will have to let customers know how and when the changes will take place, and if there is anything they need to do. During this time, banks will also have to ensure that any outgoing payments, such as standing orders and Direct Debits, are made as normal. The same disruption-free experience must be offered for incoming payments to the new account.

Lloyds Bank’s Global Transaction Bank will remain inside the ring-fence to ensure as little impact to our clients as possible. Further details on ring-fencing can be viewed here.

“By 1st January 2019, the largest UK banks will be required by law to separate – or ‘ring-fence’ – their core retail banking services from their ‘riskier’ investment and banking activities undertaken outside the EEA.”

Open banking

As part of the UK Competition and Markets Authority (CMA) remedies, which are similar to PSD2 data sharing and payment initiation requirements (access to accounts), the CMA has mandated that from Jan 2018 the UK’s nine largest banks must, where authorised by customers, share data with regulated third parties. It is hoped that this will encourage comparison of services between providers, and inspire both switching and innovation of new services for both SMEs and retail clients within the UK marketplace.

Clearly, these third parties could over time become a competitive threat to incumbent financial institutions, but they also incentivise financial institutions to find new, innovative ways to meet evolving payments needs.

For additional detail on either open banking or PSD2 please see here.

Technological Advancement

As we have seen over the last 20 years, technology has been one of the greatest drivers for change in the payment arena. With the onset of blockchain and other distributed ledger solutions, the future looks bright indeed. Here we outline some innovation that is being implemented now.

The Bank of England (BoE) review of Real Time Gross Settlement (RTGS) systems

The Bank of England has committed to introducing a new RTGS System from 2020. It had been designed to meet the challenges posed by the rapidly changing payments landscape.

Key design features of the new generation RTGS include:

  • Broader access – The new platform will expand to include non-bank payment service providers, subject to appropriate safeguards. This will help promote financial stability as well as innovation and competition in the payment market
  • Wider interoperability - users will have greater flexibility to reroute payments, if necessary, and it will facilitate efficiency gains by providing the tools to enable participants to streamline their back offices. It includes the introduction of ISO 20022 messaging standards – reflecting the common theme across the wider international payments landscape of moving schemes to ISO 20022
  • Improved user functionality - the new RTGS will be technologically capable of near-24- hour operation during business days from the outset, with short settlement windows potentially available at weekends. It will also have the capability to be upgraded to full 24x7 operation subject to demand
  • Higher resilience and strengthened end to end risk management
The changing landscape of the UK Domestic Payments Market - European informed changes

The Image Clearing System (ICS)

Elsewhere, the UK is upgrading the cheque clearing system by introducing the ability for images of cheques to be exchanged between customers, banks and the clearing system. The new system will reduce cheque clearing time from ‘six weekdays’ to ‘next weekday’.

ICS will be introduced on 30th October 2017, when a phased roll-out begins. Full adoption is expected during the second half of 2018. Customers will still write out cheques as before but banks will be able to introduce products allowing customers to pay-in cheques by photographing them using their mobile or electronic banking application.

Lloyds Bank will be enhancing its capability for our corporate and financial institution clients to take maximum advantage of the benefits of this.

Correspondent banking

International payments from the UK mainly rely on the traditional correspondent banking model. This has served the industry and customers well for several years. However, in an age where expectations are for real-time transaction and information, it needs to be improved.

SWIFT Global Payment Innovation (GPI) is helping to address this need. It will introduce certainty of both cost and delivery for international payments, and will allow tracking of payments as they pass through the international banking network. When fully implemented, it will increase visibility and transparency, and will provide an alternative to the existing model.

“We face a period of unprecedented change in the UK payments market over the next three years.”

Social change

Branch-banking change

More and more customers are embracing electronic banking applications and smart apps to manage their finances. This has had a significant impact on the role of the traditional bank branch, where usage continues to change and banks are reviewing their branch networks as a result.

There is a continuing need for customers to be able to deposit and withdraw cash, pay in cheques and meet face to face with bank staff. As a result, banks, including Lloyds Bank, are responding to this challenge by introducing new branch technology to allow the automated deposit of bank notes, coins and cheques, enabling more efficient operation.

Lloyds Bank is also extending out our existing cash collection and delivery services to our FI Clients’ clients.

In conclusion

We face a period of unprecedented change in the UK payments market over the next three years. The changes focus on the customer and providing new and different options to enable them to make choices on how they make payments and transact.

These changes will see a rise in competition as regulation opens up the market to new entrants and new capabilities. These expansions will create the opportunity to build new and innovative payment solutions and add to the pace of change over time.

The challenge for all market participants is how we embrace and work with the changes to better serve our customers, and how we sustain and grow our role in the markets we operate in. Lloyds Bank is committed to supporting these changes, and is embracing innovation to deliver for customers and to sustain growth.

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