Time to get set for immediate payments


As the 10th anniversary of the UK's Faster Payment Service nears, Mark Curran, Payments Technical Services Director, Lloyds Bank, examines the latest developments in immediate payments – and outlines how financial institutions can prepare for a real-time environment.

Mark Curran

Payments Technical Services Director, Lloyds Bank

Mark Curran

At the time of its launch in May 2008, the UK's Faster Payment Service (FPS) was the first new payment system to be introduced in Britain for over 20 years. It was also the world’s first immediate payments system.

Today, the success of FPS is inspiring the development of similar schemes across the globe. Singapore went live last year with its Immediate Payments G3 scheme, and from the US to Australia and the Eurozone, similar systems are in the pipeline.

The challenges facing those building new systems are daunting – but not insurmountable. Having FPS as a blueprint is a huge benefit, and those UK banks closely involved with implementing it almost a decade ago will have many insights and ‘lessons learned’ to share.

Voice of experience

One of the interesting discoveries for Lloyds Bank when we were pioneering immediate payments in the UK was the level of work involved upgrading internal infrastructures in order to receive transaction messaging and process that transaction within 14 seconds. On the surface, it seemed that this would be just a small part of the puzzle and that building the bridging infrastructure to connect all of the FPS banks would be much more challenging. In reality, the opposite was true.

By far the most difficult hurdle, however, was how to resolve counterparty risk: the linkages between banks in the scheme should one counterparty fail or be unable to settle. For those banks currently preparing to be part of an immediate payments scheme, this is likely be an area demanding dedicated time and resources.

A new perspective

In addition, there are significant mind-set barriers to overcome when moving to immediate payments. People tend to focus on the technology but in some respects it’s the easy part. The cultural shock can be much trickier. Shifting away from traditional Monday-to-Friday 9am-7pm banking, to running 24 hours over 365 days a year takes some time to get used to – for banks and customers alike.

"People tend to focus on the technology but….the cultural shock can be much trickier."

Also, concerns over loss of revenue from traditional transactions and the costs and risks involved in constructing the new service are also big challenges for banks to surmount. Hopefully, however, the success of FPS in the UK will go some way to allaying these fears.

Furthermore, banks will need to be prepared to second-guess scenarios, taking a proactive rather than reactive approach to scheme development. While the technology behind immediate payments is relatively easy to develop, for example, the rule-set that sits behind it needs a lot of work. As such, developers of instant payment schemes will have to plan ahead for every eventuality rather than trying to solve problems on the hoof when they happen.

Towards global standards

In addition to the challenges facing individual banks, immediate payments will present some pain points for the wider industry, too. Among the most significant will be standards – or rather a lack of them.

Today’s nascent immediate payment schemes are at varied stages of development and they are all adopting different models using differing technologies and, we suspect, may adhere to different standards.

So, while domestic customers will benefit greatly from the faster remittances of these new immediate payment schemes, in a world that is becoming ever-more integrated, the lack of co-ordination between developers suggests that a truly global immediate payments infrastructure is still some way off.

That may come as a disappointment to consumers and businesses ranging from SME’s through to large corporates and financial institutions, since they are now finding greater need to move money around the world, and do it quickly. Today, in the case of corporate customers making payments to multiple countries, there are several counterparties involved and the process can be time-consuming and costly. Something needs to change – but there are great difficulties to overcome in the creation of a truly global instant payments system. It’s an excellent vision, but the journey will be bumpy.

A joined up approach

Timezones, for instance, are a significant headache. If, for example, we sent a payment today from Lloyds Bank at 14:21, with a value date of 14:21 plus 14 seconds, that then had to be sent on to Australia, there are complexities regarding timestamps – not to mention accurate and timely currency conversion. No system is currently being built to deal with these problems, and this will be a real impediment to global immediate payments.

And although some may be hailing the Single Euro Payments Area (SEPA) Instant Payments as precursor to global immediate payments, since it will be the first cross-border scheme of its type, it will deal primarily in the Euro – so it is essentially a single currency scheme that sits largely in the same timezone.

A genuine precursor to a global immediate payments system will most likely come as other countries start to join up, building bridges between their schemes. But for a variety of reasons, we are a number of years away from that. It is going to take SEPA two or three years to build momentum, so too the US, while Australia is yet to launch.

Moreover, those countries will need to embed their own schemes domestically before they even look into expanding and joining together.

The end game

What we have witnessed in the UK is that FPS, despite a slow start, quickly became a nationally significant infrastructure.

It took a few years to grow as people became used to the idea and were no longer intimidated by being able to press a button on their PC, phone or tablet and send up to £25,000 via the internet. But volumes are now up to 2.35bn transactions a year at FPS, with rapid growth in the commercial and banking industries.

We are seeing a real move toward day-to-day business being carried out using immediate payments: employers paying salaries, businesses paying procurement bills – even the UK government’s Department of Work and Pensions are using FPS to settle some of their benefits payments.

With this level of success, however comes a great deal of responsibility. As such, we would encourage banks currently involved in rolling out immediate payments in their home markets to engage in dialogue with their experienced partner banks in the UK, in order to glean knowledge and experiences from FPS implementation to help avoid any pitfalls in future efforts.

Immediate payments: action plan

  1. Do not underestimate the internal challenges. While external collaboration will require a great deal of focus, leave room for manoeuvre in immediate payments implementation plans for changes to internal infrastructure too.
  2. Prioritise counterparty risk. Outline a clear procedure and chain of responsibility in the event of one or more counterparties in the immediate payments scheme being unable to fulfil their obligations.
  3. Keep an eye on global integration. While domestic schemes are the focus for the near future, global immediate payments are the end goal. As such, banks may want to consider building a flexible infrastructure to accommodate the joining up of domestic schemes in the future.
  4. Learn from your UK partner banks. As pioneers in immediate payments, Lloyds Bank is in a unique position to help newcomers understand some of the challenges they may face as customers demand more from their bank account transactions.
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