Developments in Faster Payments Simon Brooks Product Manager, Faster Payments Scheme Limited September 2016

Laying the Rails for Innovation Access Summary of Key lessons learned Faster Payments Service UK Payments Landscape Background Settlement Uptake Scope of the service Timeline Laying the Rails for Innovation Access Summary of Key lessons learned Questions

1. UK Payments Landscape

2. Background A major infrastructure change, driven by regulatory pressure Complex development , involving significant investment, revolutionising the UK’s automated payments infrastructure as a world-leading service Enables mobile, internet and telephone banking & standing order payments to move fast and securely, almost at the touch of a button Launched on 27th May 2008.  By the end of 2012 over 98% of phone and internet payments were being processed through Faster Payments

Implementation of Faster Payments 2. Background Implementation of Faster Payments Programme Activity Delivery project ran from December 2005 to May 2008 (30 months) Costs of the implementation The figure was anywhere between £500m and £1bn However this includes a lot of ancillary cost (upgrading of core accounting platforms to operate in real-time, for example), where individual banks allocated the cost of such “evergreening” activity against their Faster Payment project budget. Cost of central build 10-15% of the total

2. Background How does FPS work? Remitting Customer Choice of service Payment given to bank Receiving bank Beneficiary customer Confirmation of Payment Bank Executes Payment Sending bank 1 2 3 4 5 6 7 8 9 10 11 All of which takes place in anything from fractions of a second to days

System Design – Deferred Net Settlement System (DNS) Immediate payments made between participants (< 10 seconds) Irrevocable Credit risk passes from end customers to customer’s banks Multilateral Net Settlement 3x per working day, via Bank of England Real Time Gross Settlement (RTGS) system Participant and scheme credit and liquidity risk managed via 100% cash collateral arrangements (Prefunding) – a defaulter pays model Net Sender Caps contain risk transaction-by-transaction

4. Uptake Service offering Payment types Monthly Volume Average Value Single Immediate Payments (Synchronous) 74.3m £790 Forward Dated Payments (Asynchronous) 14.9m £1,846 Standing Order Payments (Asynchronous) 30.7m £315 Total 119.9m £799

4. Uptake - Faster Payments monthly volumes (millions) 2008 - 2016 Greater value and volume than paper cheque and credit

4. Uptake - Faster Payments monthly values (£billions) 2008 - 2016 Greater value and volume than paper cheque and credit

12 directly connected institutions 8 * 5. Scope of the Service 12 directly connected institutions 400+ indirectly connected institutions 55m current account holders 115m individual addressable accounts 110m+payments processed per month £250,000 transaction limit £10,000 - £250,000 customer limit* * Determined by risk appetite of each institution

6. Timeline August 2016 first new Participant to join the Scheme since the launch in 2008

7. Laying the Rails for Innovation Current Account Switch Service (CASS); real-time redirection of payments – delivered Autumn 2013 Paym – delivered April 2014 Overlay services – ongoing developments Weekly payroll Supply Chain Management – “just in time” stock management Request To Pay – Ongoing project New Access Model – First new Participant joined in August 2016 Aggregator Accreditation Programme

7. Laying the Rails for Innovation ‘Just in time’ Stock management Move from holding ££££s of stock to ordering as and when needed Frees up working capital Reduces need to discount surplus/obsolete stock Reduces risk, so can reduce margins (or increase profit)

7. Laying the Rails for Innovation The 7:15 train Mobile banking apps More people using banking apps Change in peoples banking habits More people doing their banking on the train than going to a traditional branch Change in the banking landscape

7. Laying the Rails for Innovation Into the future Scheme transaction limit review At launch, £10,000 for SIP and FDP, £100,000 for Standing Order 2010 moved to a flat £100,000 2015 moved to £250,000 Future increases planned at a Scheme level– The plan is to increase the Transaction limit to £1m in 2017 – Looking at testing to £20m It is a Participant decision as to what they offer customers (based on risk appetite, customer demand etc.)

7. Laying the Rails for Innovation Into the future Current market challenges Unlike other Schemes, FPS quickly exposes the downsides of indirect access Bacs & CHAPS services work, broadly, the same in terms of timings etc., regardless of method of access Existing connectivity models for Indirect Agencies stems from legacy developments (SWIFT/Batch file), and are not able to keep up with the need for speed Cost of developing the necessary connectivity currently prohibits all but a few from joining New Access Programme developed to address a number of these issues and make joining the Scheme more straight forward

8. Access Why access to real time payments is so important

8. Access Trigger points Current Account Switch Service (CASS) creates an opportunity for smaller banks to more easily grow their market share, but they need to have comparable services to the established banks Mobile will be something that “retail” banks will need to have in their proposition, along with real-time payment/receipt functionality Overlay services (Paym etc) will drive more demand Limit review will increase volume

8. Access Access to payments Payment Systems Regulator is keen to ensure there are no undue barriers to entry into the payment schemes; lots of Government and media attention Scheme have looked at how it can make access simpler without compromising the integrity of the service FPS requires a high degree of resilience/24*7 availability, which may require significant internal investment

Just some of the other considerations 8. Access Just some of the other considerations Accounting Platform Operational Support IT Support Availability Contingency Administration/Management function Compliance Risk Function Example - Why the Risk Function needs to be available 24/7

9. Summary of Key Lessons Learned The need for a clear end customer proposition; against which all functional and technical requirements are compared As broad a reach as early as possible Commitment from stakeholders to support the delivery of the agreed service proposition Involvement of fraud, compliance, risk and credit management SMEs at an early stage Early engagement with service users of all types (consumers, business, government) Technology will evolve over time and enhancements will need to be made as technology developments Communication strategy vital for successful execution of programme

9. Summary of Key Lessons Learned Communication strategy vital for successful execution of programme Chairperson of the Communications Working Group for the Industry Ensure there is a collective message Ensure that the message is consistent Ensure there is a communications plan that all participants sign up to Ensure that once participants sign up to the plan they follow it Ensure the messages are clear and concise Ensure that all participants are relaying the same message

10. Questions

Thank you