UK set to become a Global Leader in Payments
Brian Weakliam - Founder & CEO of Bankhawk
Brian Weakliam looks at details of the changes which will revolutionise the UK payments.
Brexit, PSD2 and GDPR have dominated the recent agenda for corporates and their banks.
However, a whole new architecture is planned for payments in the UK to allow for the layering of tech and services by multiple providers to promote competition and innovation. All of this will have implications for legacy banking and payment systems and planned IT investments during an intense period of digitisation.
Open banking is expected to make a big impact in 2019. Payment service providers will be required to have implemented the Regulatory Technical Standards (RTS) on strong customer authentication and secure communication.
To meet PSD2 requirements, providers relying on Open Banking Application Programming Interfaces (APIs) will need to deliver Releases 3 and 4 under the Open Banking roadmap.
The Open Banking releases will enable account and activity functionality mandated under PSD2. This includes enabling bulk payments, future-dated payments and multi-authorisation journeys as well as meeting requirements for authentication and exemptions under the RTS.
All payment account providers will need to implement Strong Customer Authentication (SCA) under the RTS, and should be well on the way to delivering this, and deciding on their approach to applying exemptions from SCA.
At the same time, account providers should be developing their access solutions for third party providers (TPPs), whether they be relying on APIs (such as those designed by Open Banking) or on a screen-scraping based solution.
Those opting for a ‘dedicated’ interface will need to meet additional requirements under the RTS in order to benefit from an exemption, or will have to provide a fallback mechanism (based on access to the customer interface via screen-scraping) as well.
Whilst there has been a huge amount of discussion around Europe on SCA and dedicated interfaces, concrete guidance has emerged only relatively recently. Recent publications from the FCA and output from the API Evaluation Group give guidance on the key issues identified so far.
NPA: New Payments Architecture (UK)
The central pillar of the Payments Strategy Forum’s (PSF) blueprint for the future of UK payments (Dec 2017) is a detailed outline for a new payment’s architecture. This will replace the existing retail payment systems – Bacs, Faster Payments and Cheque and Credit Clearing / the Image Clearing System (ICS).
The NPA implementation plan is being overseen by UK.Pay (formerly the New Payment Systems Operator (NPSO)), the Bank of England and the Payment Systems Regulator(PSR).
The NPA is a very ambitious and forward looking programme and will have huge significance for both corporate and retail payments in the UK.
6 Key Features of the NPA:
- A layered approach with a ‘thin’ collaborative infrastructure to enable competition and innovation;
- A single set of standards and rules with strong central governance from UK.Pay;
- Common international messaging standards to enable access, innovation and interoperability;
- Security, resilience and financial stability;
- Emphasis on “push” payment structure;
- Flexibility to support new overlay services to work with the ‘thin’ central structure.
The NPA will provide a whole new payment system framework leveraging the existing UK retail interbank payment schemes and system. It will rely on innovation in the payments industry and regulatory developments. It should enhance user experiences and deal with legacy issues with existing payment systems.
The NPA will have a single clearing and settlement capability that will process messages for all types of payments. Existing and new “overlay” services will be provided by the payments industry on a competitive basis based on the platform of the centralised structure.
UK.Pay will be responsible for the development, management, rules and standards for these overlay services.
They will put the UK at the forefront of banking and payments innovation with clear benefits for consumers. It will encourage and support the already growing alternative payments sector. Corporates will need to make sure their banks have sufficient technical infrastructure roadmaps and ensure they are kept up to date.
There are also plans to switch to ISO 20022 which will have an upside for users in terms of its compatibility across platforms, enhanced flexibility and increased efficiencies in compliance with law and regulation.
The current intention is for the NPA to be implemented over a 4-5 year period with the introduction of push payment capability being the first priority.
Migration from Faster Payments and Bacs is planned to take place during 2020/21, followed by ICS in 2022/23, with the systems run in parallel for a number of years to ensure continuity of access and to minimise risks.
The Bulk Payment Redirection Service will continue to be critical for Corporates migrating to a new banking partner and will need to be supported by the NPA. It is not clear at this point how this service will be incorporated.
As part of the development of the new payments architecture the Bank of England has consulted on the introduction of ISO 20022 as the common global payments messaging standard to align payment messages across interbank payment systems in the UK.
ISO 20022 is a globally developed messaging standard for transmitting data. The intention is for it to create a consistent financial message standard for payments.
The current payment schemes such as Bacs, Faster Payments and CHAPS in the UK, and other high value payment systems globally, use different message formats. This means that re-routing payments using a different scheme, or sending and receiving international payments, is difficult.
Bank of England Consultation Paper on ISO 20022
In June 2018 the Bank of England published a consultation paper on the introduction of ISO 20022 which set out three key proposals:
- A Common UK Credit Message: UK.Pay (as the NPSO) operates Faster Payments and Bacs and has been working with the BoE to develop a “Common UK Credit Message” (CCM). CCM is a standard message which will be used across Faster Payments, Bacs, and CHAPs in the UK and will also be compatible with overseas payment systems that have adopted ISO 20022It’s capable of carrying richer information than current UK payment systems including the identity of payment originators and beneficiaries, and the purpose of the payment.
- Implementing the CCM in CHAPS: It is intended to make several pieces of information mandatory in CHAPS, such as the ultimate originators and beneficiaries, structured name and address fields, and Legal Entity Identifiers. This information is not currently transmitted in CHAPS payments messages.
- Migrating CHAPS to ISO 20022: The Bank of England has stated that the above mandatory changes will be introduced as part of the phased migration of CHAPS to ISO 20022, which will start no earlier than 2021.The actual timings will be based on feedback on the consultation paper. The CHAPS migration is part of the blueprint for the new RTGS in the UK.
UK.Pay will align ISO 20022 and the implementation of the CCM across Bacs and Faster Payments, which will also start no earlier than 2021.
While the switch to ISO 20022 will have an upside for users in terms of its compatibility across platforms, enhanced flexibility and increased efficiencies in compliance with law and regulation, it will require significant changes and investment across the payments industry.
The initial phase will be the core Clearing and Settlement layer which will support the overall architecture using ISO 20022. UK.Pay will align ISO 20022 and the implementation of the CCM across Bacs and Faster Payments, which will also start no earlier than 2021.
Given the complexity and the need for a multiphase rollout, full implementation is likely to be by 2024 at the earliest.
Corporates will need to ensure plans are in place so they can be part of this exciting new payments world and reap the considerable benefits. Banking partners should be challenged on their plans for the NPA.