Last week, Project Regulator, which I lead on behalf of the Emerging Payments Association, hosted a special briefing on the new payments architecture organised by the inspirational and indefatigable, Anne Pieckielon, Director of Product and Strategy at bacs.
Anne, who is a firm believer in the benefits of genuine engagement, brought Paul Horlock, the CEO of the New Payments System Operator, Sara Ward and Ana Lasosa from the Bank of England and Adrian Burholt from Payment Strategy Forum together to address us on recent developments. The feedback session identified benefits of the changes but also barriers to competition and potential problems but my overriding take away was that while there is every intention to open up to new players and become transparent, we can’t underestimate the complexity of both the current architecture and the new plans to anyone outside the circle. So, this blog is the first in a series that will explain the key terms and players so that e-money and payment institutions can judge for themselves how they can take advantage of, and get involved in, these developments.
What is the payments architecture?
A new architecture for retail interbank payment systems in the UK is being developed that will allow for simpler access, greater innovation, increased adaptability and better security while maintaining the resilience necessary to meet the needs of the current and future payment service users. The payment systems are the rails on which money is moved. Bacs, Faster Payments and CHAPS are examples of payment systems that move money between accounts (interbank payment systems) whereas Visa, MasterCard and Amex facilitate payments by credit and debit cards. (Payments UK, the trade association for the payments systems that has now (mostly) been incorporated into UK Finance, has produced a very helpful website and guide to the payment systems and schemes.)
Each payment system is run by its own scheme, or payment system operator (PSO), with its own membership, governance, standards and processes. They have developed incrementally over a long period of time on different platforms and with differences in standards but with, in many cases, overlapping ownership. Despite a number of reviews over the years and the inclusion of a regulatory obligation to allow fair access to payment and e-money institutions arising from the first Payment Services Directive, it was not until the Payments Council’s misjudged decision to phase out cheques by 2018 without any clear alternative system that the government had the impetus to bring a payments strategy into regulatory oversight. This ultimately led to the creation of the Payment Systems Regulator, a subsidiary of the Financial Conduct Authority, with the role of an economic regulator and the objectives of ensuring that payment systems are developed and operated in the interests of the users, promoting competition and promoting innovation.
The Payments System Regulator
The Payments System Regulator (the PSR, not to be confused with the acronym PSRs, which refers to the legislation that implements the Payment Services Directive in the UK, the Payment Services Regulations 2009 and 2017) has direct authority over eight payment systems designated by HM Treasury. These eight are the payment systems considered to be of sufficient centrality to UK payments that any disruption in operation would be likely to have serious consequences for those who use its services (nearly all of us). They are two card-based and six interbank systems.
- MasterCard (owned by MasterCard Inc) – a card payment system.
- Visa Europe (jointly owned by Visa Europe and Visa UK) – a card payment system.
- Bacs (owned by Bacs Payment Schemes Ltd) - the scheme for regular bulk, file-based credit transfers and Direct Debits.
- CHAPS (owned by CHAPS Clearing Company Ltd) - the UK’s same day high value payment system for both wholesale and retail payments. CHAPS Payments are settled individually intraday in central bank funds.
- FPS (operated by Faster Payments Scheme Ltd) - Faster Payments enable real time credits: on-line, telephone and mobile applications.
- LINK (operated by LINK Scheme) - facilitates end-users’ access to cash via the UK’s largest ATM network.
- Cheque & Credit (operated by the C&CCC (Cheque & Credit Clearing Company)) - is responsible for managing the processing and settlement of cheques and other paper payment instruments in Great Britain.
- NICC (operated by the Belfast Bankers’ Clearing Company) – oversees the clearing of sterling cheques and paper credits in Northern Ireland, along with euro cheques drawn on Northern Ireland banks.
The Payments Strategy Forum
The PSR established the Payments Strategy Forum to bring together industry and service-user stakeholders to develop and agree strategic priorities to the long-term development of payment systems where collaboration is vital. The Strategy “A Payments Strategy for the 21st Century – putting the needs of users first”, was published in November 2016. The 17 solutions were grouped under one of four categories as those designed to:
- respond to end-user needs;
- improve trust in payments;
- simplify access to promote competition; or
- build a new architecture for payments.
This new payments architecture (NPA) for retail interbank payments is also called the Simplified Payments Platform (SPP). Between last November and this, the Forum has been undertaking the first design and implementation phase. So far the design includes:
- a layered infrastructure to create innovation and competition;
- a common messaging standard (ISO 20022) to support interoperability and enhance the use and value of payments related data;
- an infrastructure that supports competition in payment initiation and account information service providers (PISPs and AISPs) and third party service providers (TPSPs) such as independent software providers, bureaux and gateway providers;
- a flexible framework that supports the delivery of new end-user overlay services;
- a single clearing and settlement model for the Bacs, Faster Payments and, eventually, Image Clearing System (ICS); and
- a simplified payment model with only cleared transactions sent for clearing and settlement – simplifying and removing processes such as for ‘unpaids’.
The Forum consulted on some key design questions on the new payments architecture and other solutions in July. We now eagerly await its feedback, which it is due to announce on 11 December. We got a sneaky preview at the briefing.
- There is broad acceptance of adopting a centralised approach to settlement and clearing.
- Further clarity has been requested on how the NPA builds on existing industry and regulatory activity.
- Further clarity required on how Direct Debits will work, and be improved upon, when delivered over the NPA (e.g. enhanced data, process reduction).
- A better understanding has been requested on the wider eco-system impacts of changing to a push payment model.
More about that and another new entity, the New Payment Systems Operator, in my next blog.
If you would like to find out more about payments regulation, get in touch.
What is Project Regulator?
Watch this and get in touch if you would like to be involved.