Access

The U.K.’s Faster Payments Service (FPS) has been very successful. The ability to send money from one account to another account instantly is actually quite transformational, but I still think that the full impact has yet to be felt. As we move into 2018 and the world of the newly-published Open Banking Standard, PSD2 and APIs then we will see instant payments built in to the applications that support our everyday lives. This morning when I caught the bus to work the cost of the bus ticket was charged to one of my credit cards, which meant that the bus company had to store my card information and that I had to remember the three digit code on the back of the card to complete the purchase. In the future, I will tell the bus company I want a ticket and put my thumb on the home button of my iPhone and that will be that. The money will be sent from my bank account to the bus company’s bank account with no delays, intermediaries or additional friction. As I said before, there will be a push for push.

Since it is such a big deal, it is of course important who has access to the instant payments networks. The government is very keen to see more competition in the retail payments space and for this reason it wants to facilitate access to core payment systems, such as FPS. The opening up of access has already started. You might remember that last year, access was opened up to a new kind of aggregated access layer under the “New Access Model”.

The New Access Model, first published in December 2014, sets out proposals to enable technology vendors to offer technical access to Payment Service Providers (PSPs) by adding to their existing accounting platform technology, or providing a managed solution to either a single or multiple PSPs.

From New access market for Faster Payments gains traction | Faster Payments

This new model gave technology companies with experience in payments the ability to create systems to connect directly to FPS and then offer this connection to other players. These new offerings, including VocaLink’s PayPort service, are a terrific step forward and they make it very easy for new entrants to get up and running. Earlier this year, in fact, PayPort made access for new entrants even easier through their partnership with Raphael’s Bank.

As a member of the Faster Payments Scheme, Raphaels Bank will be able to provide other payment service providers with access to the UK’s core payments infrastructure through VocaLink’s PayPort service.

From VocaLink Connect – VocaLink partners with Raphaels Bank on Faster Payments

So now, new entrants who sign for agency access with Raphaels can use PayPort to launch their services. But access may well be opened up even further. There are plenty of non-bank players out there who want to have access to the infrastructure and the UK’s Emerging Payments Association recently presented a report to arguing that, under the appropriate licence conditions, non-banks should be allowed access to instant payments infrastructure through the use of a new kind of limited pre-funded settlement account at the Bank of England. In essence, a Facebook or a Google would be allowed accounts that they would load up with a few million quid in the morning and then use throughout the day. Under this kind of option you would be able to send money from your bank account to a friend on Facebook messenger in a jiffy. Facebook and other tech players could use PayPort to connect to FPS, giving them integration and all the services they need at the drop of hat.

Tech firms are in talks with the Bank of England to secure settlement accounts, a privilege only currently on offer the banks. The accounts would help give the finance technology (fintech) firms access to the payments system, the infrastructure which currently underlies much of Britain’s financial services industry.

From Fintech firms want to open accounts at the Bank of England – Telegraph

Why am I highlighting this? Well, the interpersonal services that deliver instant payments at the moment (such as PayM, which has more than three million registered users) are just a toe in the water! Imagine what some of these new tech players will be to do with those services when they integrate them with social media, mobile apps, retail platforms, public services and other organisations and businesses. I’m looking forward to some real innovation in this space and opening up access under the right conditions will energise the whole sector and I’m going to be writing some more about this tomorrow.

Retailer pressures for direct-to-account payments

Back in the October edition of “Digital Transactions” there was a nice column by George Warfal from our friends at Edgar Dunn called “The Next Way to Pay” in which he says that “merchants are re-purposing their rewards cards as payment cards using the automated clearing house and gaining per transaction savings”. He goes on to say that this mode of operation presents a challenge to the current card network model, and I’m sure he’s right. In fact, if you take a look at the latest figures from the US ACH, you can see an explosion in the account-to-account (P2P) payments which, I think, is related to growth in mobile app-instructed transfers.

US ACH

As you can see, all categories of ACH transfer are growing, with the exception of the check-replacement volumes that continue to fall (including at POS), as you might expect. I expect this trend to be even more marked in Europe, where the arrival of PSD2 means that retailer direct access to payment accounts will be one of the defining trends of the next era of payment evolution.

Under PSD2 banks and other payment service providers (PSPs) must give so-called payment initiation service providers (PISPs) access to their customers’ accounts so as to facilitate transactions ordered at the customers’ request.

[From Expert predicts innovation in payments market after PSD2 reforms are finalised]

I wrote an article exploring this for the Electronic Payments Law & Policy newsletter, arguing that while banks have been rather nervous about the effects of the access-to-account provisions of PSD2, it is time for them to adopt a more positive strategy, disrupting themselves before others do so. One suggestion, therefore, might well be for the banks to create their own access-to-account payment service, a sort of next generation debit product.

The recent EUR21.2 billion deal agreed between Visa Inc and European banks over the sale of Visa Europe has led to increased calls for the banking industry to put the windfall to use to create a competing product to tackle the duopoly enjoyed by Visa and MasterCard.

[From Finextra: Finextra news: Visa/MasterCard EU dominance adds impetus to calls for bank-backed competitor]

Now, Visa and MasterCard are rather good at what they do, so it would really take something special to be better at it than them. It might, in some observers’ calculation, be better to focus on delivering products into new channels where Visa and MasterCard have to work harder, such as mobile and online. Creating a direct-to-account service, with appropriate security and consumer protection, delivered through the EBA Digital Customer Service Interface (DCSI) as an API for retailers and other service providers to use, could deliver a worthwhile new payment product that (rather crucially) keeps the information relating to the transaction under bank control.

The European Payments Council has released proposals for the design of a pan-European instant credit transfer scheme, with the aim of bringing real-time money transfers across the Sinlge Euro Payments Area (Sepa) by November 2017.

[From Finextra: Finextra news: EPC publishes proposals for pan-European instant payments scheme]

This is pretty interesting. API access to a pan-European instant payments networks would mean a really important new “push platform” for product and service innovation in the payment space. If George is correct about the pressure from retailers to move to direct to account solutions, then I can see that there will be plenty of new opportunities for services in that environment: banks can offer real-time, API-centric, value-added payment services that offer specific functionality for retailers.

Instant payments should be a platform not a product

Writing in the Journal of Payments Strategy and Systems, Steve Ledford (Senior Vice President for Product and Strategy at The Clearing House) makes a very important point about the future of payment systems. Steve is commenting on the global transition to immediate payments infrastructure (such as the Faster Payments Service, FPS, in the UK) in the context of the US discussions in response to the Federal Reserve consultation on the topic which Consult Hyperion, amongst a great many others, responded to. The Federal reserve, as you will recall, called for “a safe, ubiquitous, faster payments capability” and The Clearing House is one of the organisations that has responded to this call by announcing that it will create a national real-time payment system. Surely, you might think, it can’t be that much effort to create a low-cost real-time payment and settlement service in an era of laser beams, transistors and the thingternet. Well, yes and no.

[Gene Neyer, SVP Fundtech says] “The marginal cost of making payments is low. Much of the cost [today] involves risk management, exception handling, and research.” Faster payments are actually cheaper, but this is not to say they are risk-free

[From Faster Payments Could Help Speed Economic Recovery | Bank Innovation]

This a fair point. In the US, there are concerns about the impact on fraud of shifting to instant payments, particularly because the US favours evolving current infrastructure rather than building a new national infrastructure as was done in the UK.

Banks must therefore architect a solution to evolve ACH while the ship is moving. This is a much better approach than that taken by the UK of mandating faster payments… (one bank was losing 30M GBP a WEEK from fraud when launched).

[From Call to Action – Submit Response to Fed | Finventures]

Steve makes a number of observations on the need for security in such an infrastructure. He makes a number of very practical suggestions to satisfy that need for better security and suggests that tokenisation, credit-only transactions, imposition of robust access security, real-time anti-fraud/anti-money laundering/sanctions screening and network activity management might be a key elements in constructing an infrastructure capable of meeting the goals for real-time (or near real time) settlement. I’m sure he is correct about all of these, and they are all topics that I’ll return to in the future.

He then goes on to make what I think is a crucial point about the next phase of evolution. He says that instant payments are particularly well-suited to provide value beyond fast money movement because of their fundamental feature of real-time communication between senders, receivers and the relevant institutions. In other words, a perspective that sees money as just another kind of messaging. I rather like this because the ability to send remittance advice, invoices and other related documents along with payments means more efficient systems can be built on top of those payment networks.

I can’t help thinking about the case study of Venmo in this context. One of the reasons why it gained traction was that it interacted with social networks in a way that appealed .Venmo shifted $1.6 billion last year and are growing at an amazing rate. In fabulously interesting and entertaining discussion about twenty-somethings use of Venmo in the US, I noticed a curmudgeonly intercession from someone a bit like me:

this is a particularly american affliction, since other countries’ banks actually have functioning online payment systems

[From Read what happens when a bunch of over-30s find out how Millennials handle their money – Quartz]

This misses the point, and led me to wonder: why doesn’t Barclay’s create the bastard child of Venmo and PingIt and add the social networking capability to PingIt by using the hello-1965 alphanumeric remittance advice field to store a Snapchat-style pointer to a message posted by the sender, a message that will vanish in a day. Steve talks a little about this in his paper (using pointers to richer information – I seem to remember that FPS had a similar plan to develop some kind of data repository and then add pointers into that repository into payment message but I don’t know where that is now).

U.K. decision-makers chose to build a new system to achieve their objective of faster payments rather than speeding up existing payment systems. A decision to separate the settlement stage from the authorization and clearing stages of the payment process and to allow banks to continue to settle three times daily via the Bank of England made it possible to build and implement the U.K. FPS so cost effectively. With this simplification, the cost of constructing a new payment network did not differ very much from the cost of enhancing an existing system.

[From Costs and Benefits of Building Faster Payment Systems: The U.K. Experience and Implications for the United States – Boston Fed]

This is an entirely accurate summary, but I would add that there was a slight downside to this very conservative approach: by building the system using existing technology, costs were minimised but the ability to add new services was limited. IIn retrospect, by the way, and with the wisdom of hindsight, I think we can safely say that this capability should have been built into FPS in the first place, as it will be eventually.

Discussions are underway to migrate to the ISO 20022 standard.

[From UK Faster Payments]

Steve concludes by saying that moving money around in real time will be the baseline capability of the next generation of systems and that making the payment systems a platform for innovation spreads benefits beyond the participants, something that we at Consult Hyperion strongly agree with. As Steve says “payment systems should aspire to be adaptable enough to support the ever evolving needs of the future”. To my mind this is a recognition of the necessary “amazonisation” of payments, rebuilding around API-centric architectures. In Europe, the banks are being forced down this path by regulator: it’s a great time for them to start planning a response centred on seizing the opportunities!

On-ramps for the banking superhighway

Dgwb blog white border

In her 2012 book Bankrupt, Carol Realini put forward the idea of a “banking superhighway” for the US. This sort of thinking has been gaining ground although not, unfortunately, with everyone. The Federal Reserve is having a consultation about it at the moment (it’s just about to close in fact), following on from NACHA’s decision not to move forward in this area.


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