Faster payments: Learnings from Lloyds Bank
The UK has led the way when it comes to instant payments, and the world is following The Faster Payments Service (FPS) was introduced in the UK in 2008 and, as of 2016, 18 countries now have some type of instant payment clearing system in place, with 30 or more in various stages of development. Today, more than 2.3 billion faster payments are made every year, which will no doubt skyrocket with the top two currencies, the US and the Eurozone, making moves to join the world of instant payments in the near future. Fundamentally, Faster Payments were designed to slash payment times between different banks’ customer accounts from three working days under the BACS system, to typically a few seconds.
In the UK, we have seen, improved levels of innovation, competition and the development of new services supported through the advent of Faster Payments and a substantial shift toward day-to-day business being carried out using immediate payments: employers paying salaries, businesses paying procurement bills – the government is even using FPS to settle some of its benefits payments. The process has fostered new payment habits among the public and businesses, with payments increasingly being made out of business hours, including public holidays, often using mobile technology. On Christmas Day 2015, the average amount transferred via Faster Payments was £450 and over half a million payments were processed.
The convenience benefits for customers are obvious, but they do come with a number of challenges and the banking world has watched the UK’s adoption of instant payments closely.
An expectation of innovation
In this evolving world of payments, consumers are looking for their transactions to be instantaneous. This will mean that both corporates and banks will need to work together to be ready to meet consumers’ needs. Consumers won’t be happy if they have to wait three days for a payment to reach their bank after already waiting three days for an equity settlement. Corporations will feel it is crucial to have a banking partner that recognises that instant payments are the future, with expectations that they will become ubiquitous within 10 years – dominating global retail and corporate payments. They will expect their banking partner to act early to invest in reliable, resilient technology and take a lead role in the development of the service going forward, even if ultimately this is an investment that may never pay off directly.
While there may be some synergies and efficiency gains to be made from internal reorganisation, the investment required is substantial in the short to medium term, so the key motivation has to be that adopting real-time payments is the right thing to do for the client and for the wider economy. One of the interesting discoveries for Lloyds Bank when we were pioneering instant payments in the UK was the level of work involved in upgrading our internal infrastructures in order to receive transaction messaging and process that transaction within 14 seconds. Unexpectedly, this proved to be an even bigger challenge than building the bridging infrastructure to connect all of the FPS banks together.
The most difficult hurdle, however, was resolving counterparty risk, which is likely be an area demanding dedicated time and resources for any bank preparing to be part of an instant payments scheme. It’s vital to outline a clear procedure and chain of responsibility in case one or more counterparties is unable to fulfil the obligations.
Benefitting from others’ experience
Across the wider industry there are challenges too. Today, globally, emerging instant payment schemes are each adopting different models using differing technologies that may adhere to different standards. This lack of co-ordination between developers suggests that a truly global instant payments infrastructure is still some way off, despite many Eurozone countries building their own instant payment solutions, outside the Single Euro Payments Area (SEPA). And although some may hail SEPA Instant Payments as a precursor to a global instant payments system, it’s difficult to imagine this as SEPA is essentially a single currency scheme that sits largely in the same time zone. Instead, a global instant payments system is most likely to emerge as other countries build bridges between their different schemes.
At Lloyds we’ve seen FPS quickly become a nationally significant infrastructure for the UK.
If I had one message for banks currently involved in rolling out instant payments in their home markets, it would be to talk with their partner banks in the UK to share our knowledge and experiences. As pioneers in instant 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 banks.
Steve Everett is Managing Director and Head of Product & Propositions, Global Transaction Banking at Lloyds Banking Group