news

Snippet 25/11/2016
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