Today’s episode of the FinTalk podcast takes a deeper look at Faster Payments, which many of us now use every day. We invited Tom Hay, Head of Payments at Icon Solutions, who was previously one of the lead architects who designed the central processing system for UK Faster Payments on to the show to explain the history of Faster Payments and where this fits into what’s next for banking. Listen to our new FinTalk podcast episode or read the transcript of our conversation below.
- What is Vocalink?
- What’s the deal on its ownership?
- Why do payments take a long time?
- What are faster payments?
- How fast are they really?
- What are the barriers for banks transitioning to instant?
- What’s next for banking?
What do we actually mean by “faster” payments?
Bacs, the old fashioned payments scheme worked on a three day cycle. If I wanted to pay you for example I would make that payment instruction on one day, then that night it would be sent to your bank, they would have a day to think about it and then on the third day the money would appear in your account. It would be three working days before you go the money and if it was over a weekend it could take an awfully long time before it got to you.
Why so long?
It was a legacy from the initial days of Bacs when there wasn’t online communication between banks, it was all handled by magnetic tapes. At the end of the day the banks would transfer the information onto magnetic tape, give it to a motorbike courier who would zoom over to Bacs HQ then they would collect together all the mag tapes and push them in through the main frame. It was a very physical and manual process, but as things became electronic the tech moved on the process did not – so it was still taking three days even though in principal it could have been flipped onto next day or whatever. So that is why it did and still does take three days.
At the time faster payments was being debated – one option on the table was making payments ‘faster’ but just next day. One of the schemes was called ELLE – ‘early for late, late for early’, so if I submitted early it would get to you early and vice versa. But the other option was why not make it absolutely instant, so the payment happens in seconds, like it does in the card world.
That was the option that the industry went for – driven by one or two vocal proponents saying let’s build something useful in 10 years’ time and look to the future rather than build something that works for the next couple of years.
When it comes to transitioning to Instant Payments, how much is cost a barrier for banks?
Most banks process payments in batches at set times. By contrast, Instant Payments is an online system that requires continual input, process and output of data. Put simply payments must be processed as they are received.
This transition has major associated demands and challenges. Banks need to both change their internal infrastructure to handle real-time as well as connect to the relevant national payment scheme or schemes. Critically the implications aren’t purely technical - there are major operation requirements to ensure governance, not to mention business considerations around how the core system will power forward-looking products and services. Sophisticated routing decisions have to be instantly taken, fraud and anti-money laundering checks now need to be handled instantly, and exception-handling processes require automation.
The problem for mid-sized and smaller banks is they only have a sledge hammer to crack a nut.
For example, large global banks may already have a payment hub that they can use in their core markets, but such systems are difficult to customise and costly to deploy in smaller, subsidiary markets. They are expensive to license, inefficient at lower transaction volumes, and often hide additional professional services fees. The price tag increases further when middleware and database licenses and the requirement for heavyweight infrastructure are factored in.
So yes, cost is one of the biggest barriers, and it is particularly acute for smaller banks asking for a lower cost way to provide the speed of execution their customers need today, and the digital services they expect tomorrow.
What is the risk if the banks don’t embrace this?
When we started talking to banks in Europe maybe a year or so ago they were not sure about instant payments, asking what the business case was for it. That has changed completely in the past 12-18 months. There is a pan-European payments scheme in the pipeline at the moment and all the banks are saying forget about the business case, we have to get on board with this because if we do not offer instant payment and all our competitors are we are out of business. So instead of being a differentiator or a value-add it has become part of the table stakes. If you are a bank you’d better be offering instant payments or else you’ll get left tin the dust.
Full transcript on PaymentEye