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Digital payments and regulations spark real-time payment reforms in U.K

12/12/2018

The rise of digital payments, new non-bank competition, fraud challenges, a need for improved resilience and the changed regulatory environment are spurring two major updates to the U.K.’s faster payments system.

The Bank of England is upgrading the U.K.’s Real-Time Gross Settlement (RTGS) system. Separately, the U.K. payments authority, Pay.UK, is developing a New Payments Architecture that will upgrade Britain’s Faster Payments real-time retail system.

Both Pay.UK and the U.K. central bank plan to implement the ISO 20022 standard to provide richer data for activities such as AML compliance and fraud checks for suspicious transactions.

The BofE wants to develop an RTGS service which provides access for a wider number of firms; interoperability and flexibility to reroute payments; improved user functionality to keep pace with changing demands, including potentially 24/7 operations; and better risk management for the CHAPS high-value payment system. The BofE isn’t alone, as the European Central Bank is also upgrading its RTGS platform.

Launched in 1996, the RTGS is used by U.K. retail and financial markets payment networks to settle transactions between their member banks and other financial institutions. Since November 2017, the BofE has directly managed the operation of the U.K.’s CHAPS, which runs on the RTGS rails.

The RTGS system settles £500 billion per day between banks and other FIs, a third of the U.K.’s annual GDP. Recently, in order to increase competition in payments services, the RTGS was opened up to non-FIs such as TransferWise so they can become direct members of Faster Payments.

Faster Payments was launched in 2008 but predates ISO 20022, while CHAPS was introduced in 1984.

Formerly called the New Payment System Operator, Pay.UK administers the U.K.’s core interbank payments systems: BACS automated direct credit and direct debit payments; Faster Payments; check clearing; and Paym mobile payments. Pay.UK was formed from the amalgamation of several separate payment schemes.

Threats

While new technologies are transforming the payments industry, they may lead to new threats to users of U.K. payments systems, and to the stability of the overall infrastructure. These threats include cyberattacks as well as operational disruptions, given the greater volume of transactions. So, given its age, the RTGS needs to have stronger protections and more resilient infrastructure.

In October 2014, the RTGS suffered a day-long outage which led to CHAPS crashing, with serious consequences for home-buyers and businesses.

In a statement, the BofE said that it plans to adopt ISO 20022 messaging standards for all RTGS messaging, including CHAPS payments. In June 2018, the BofE, the U.K.’s payment system regulator, and Pay.UK launched a consultation on how ISO 20022 will be implemented across the main U.K. payment systems including CHAPS and the New Payments Architecture.

The indicative timeline envisaged by the BofE is to appoint a technology partner for RTGS renewal by 2020, move CHAPS to ISO 20022 in 2022-23, and decommission the existing version of RTGS by 2024. The new version of RTGS would be fully operational by 2025.

Synchronized settlement

In August 2018, the BofE issued a call to technology vendors and FIs to explore mechanisms for implementing synchronised or atomic settlement in the renewed RTGS service and CHAPS. The BofE wants to overhaul CHAPS to accommodate new market entrants and offer added-value services.

Under synchronized settlement, the transfer of two assets is linked so as to ensure that the transfer of one asset occurs if and only if the transfer of the other asset also occurs. The BofE predicts that, for transaction types such as house sales, corporate transactions and cross-border payments, synchronisation could reduce cost and risk, improve efficiency, and support innovative new methods of settlement.

The BofE is considering whether to implement synchronised settlement as part of the RTGS rebuild. If so, the BofE would need third parties to create the platforms and products that will make use of it.

New entrants

The BofE has been criticized for its slowness in admitting non-bank payment services providers (PSPs) to RTGS so they can become direct members of U.K. retail payment systems. Delays are caused by the limited number of slots when the BofE can test the IT integration with new entrants, as well as regulatory processes. It requires PSPs to be regulated by the Financial Conduct Authority and to have either Electronic Money Institution or Authorised Payment Institution licenses.

As of December 2018, only a limited number of PSPs and challenger banks had been granted BofE settlement accounts. The BofE says one reason for its RTGS upgrade is to speed up time to access for new entrants.

Andrea Dunlop, the U.K.-based Emerging Payments Association’s chair and CEO of European merchant acquiring at Paysafe, said it takes at least a year to integrate fintechs with the BofE’s settlement system.

“The BofE is trying hard to address the needs of new players, as its current model is restrictive,” she said. “It realizes it needs to do things faster, as there are a lot of challenger banks coming into the market.”

Dunlop said the reason why fintechs become direct members of Faster Payments is to control the customer experience and ensure good service levels.

“This isn’t always easy to do when you’re being sponsored by a bank for Faster Payments access,” she said. “There’s also the issue of banks de-risking for AML compliance reasons, by declining to offer accounts to fintechs. By having direct access, fintechs will have reduced their exposure to being reliant on a third-party bank.”

Bob Lyddon, principal of U.K.-based Lyddon Consulting Services, says there are around 1,150 non-bank PSPs in the U.K. — 400 Electronic Money Institutions and Authorised Payment Institutions, and 750 Small Payment Institutions.

Published on PaymentsSource

Author: Kate Nelson