Payments are crucial to the economy. They enable economic transactions such as purchasing goods and services. For any economy to perform efficiently, a sound and well-functioning payment system is needed. Payment systems in the UK’s finance sector are deemed critical national infrastructure, i.e. facilities that are necessary for the country to function1.
The lay of the land
A payment system is a complex network of financial institutions such as commercial banks and fintechs, payment system operators who provide clearing facilities and a central bank. It is a common set of rules and procedures that enables the transfer of funds between two or more of its participants underpinned by infrastructure for processing a transaction.
Most payments are digital nowadays, initiated using mobile devices or an online banking channel. Participants within the payments ecosystem communicate payment information to each other by exchanging electronic messages, e.g. International Organization for Standardization (ISO) 8583 messages for Faster Payments in the UK.
There are two types of payment systems, retail and wholesale.
Retail payment systems process large volumes of low-value payments, e.g. direct debits, and card payments. Pay.UK is the recognised operator and standards body for the UK’s retail payment systems which consist of Faster Payment System (FPS), Bacs Payment System (Bacs) and Image Clearing System (ICS). In 2022, these retail payment systems processed 10.7 billion transactions for a total value of £8.7 trillion2.
Wholesale payment systems process payments which are typically high-value and need to be settled by a certain date and sometimes by a certain time, e.g. house purchases. The Bank of England operates the UK’s high-value payment system, Clearing House Automated Payment System (CHAPS), and the real-time gross settlement (RTGS) service which is the underlying infrastructure that holds accounts for banks, building societies and other institutions3. Each CHAPS payment in the UK is settled individually, in real-time, within the Bank of England’s RTGS infrastructure. In 2022, CHAPS processed 50.9 million transactions to a record £98.6 trillion2.
In recent years, there have been significant changes to the UK payments industry brought on by technological advancements, regulation, consumer behaviour and most recently the COVID-19 pandemic.
The rise and rise of digital payments
The pandemic accelerated the drive towards digital payments. The perceived risk of infection from handling cash compelled consumers, including businesses, to transition to card payments, especially debit cards. In 2022, consumers made a higher volume of payments of a lower-than-average value per payment using debit cards. Contactless technology responded to demand for frictionless payments making it easier to transact, especially as the contactless limit was raised yet again in October 2021 from £45 to £100.
In 2022, 95% of the UK population had a debit card, 50% of all payments in the UK were made using a debit card and 37% of all payments used contactless technology4. The volume of digital payments is forecast to grow.
With increasing volumes of digital payments, the underlying payments infrastructure needed tender, loving care. There are two ongoing programmes in the UK payments industry to ensure the infrastructure gets future-proofed for the economy:
1. The New Payments Architecture (NPA) programme by Pay.UK
2. The Real Time Gross Settlement (RTGS) renewal programme by the Bank of England
The NPA programme
Pay.UK plans to deliver ‘the biggest upgrade to the UK retail payment systems in a generation’ through the NPA programme. The plan is to replace the existing retail payment systems with a ‘New Payments Architecture’, which is a single central infrastructure that provides core clearing and settlement facilities for multiple payment types. The current timeline is to launch the NPA by 20265.
Pay.UK has been running a procurement process since 2019 to select a supplier for the provision of the central infrastructure. They were due to announce the results of this process in September 2023 but have been delayed. After securing the necessary regulatory approvals, Pay.UK will announce the chosen supplier and any ensuing impact on the implementation schedule will need to be assessed.
The NPA will use the international ISO 20022 messaging standard. FPS is planned to transition to the NPA first, with the following payment types: immediate payment, standing order payment and forward-dated payment.
The RTGS renewal programme
The Bank of England is currently renewing the RTGS service through a multi-year programme. The ISO 20022 messaging standard will be adopted to process high-value payments across the renewed service. In June 2023, CHAPS payments migrated to ISO 20022 messaging. By summer 20246, the new RTGS core ledger and settlement engine are planned to be introduced.
Key drivers of change for banks
Whilst change is not good or bad in itself, the speed at which it is happening across the payments ecosystem is creating opportunities and posing threats, especially for banks. Two immediate drivers of change are:
1. The migration to the ISO 20022 messaging standard
2. The forecast growth in digital payment volumes
ISO 20022 migration
Multiple standards co-exist in the payments ecosystem, e.g. ISO 8583 for Faster Payments and card-based financial transactions, the proprietary Bacs Standard 18, banks’ proprietary flat files and CSV files, and SWIFT MT messages, to name a few. The payments messaging landscape is fragmented, creating friction, weakening interoperability between participants, and increasing costs.
ISO 20022, first introduced in 2004 and published in 2014, has gathered pace to become the globally accepted messaging standard for financial transactions, including for exchanging payment instructions.
ISO 20022 can be 10 – 50 times as large as a typical card message. ISO 20022 attaches additional data fields to a payment transaction. This enriched data can be used to enable multiple use cases, e.g. to satisfy regulatory demand for transparency over end-to-end payment tracking especially for cross-border payments or creating new products and services for consumers. Leveraging the additional transactional data across the network should also translate into a better ability to tackle fraud across the wider payments ecosystem.
The ripple effect from the NPA and RTGS renewal programmes, which includes a migration to the ISO 20022 standard, is being felt across the payments industry. For example, banks must be able to receive incoming ISO 20022 messages for their existing banking infrastructure to process Faster Payments and send out outgoing ISO 20022 messages to the NPA.
Growing digital payment volumes
Consumers want a safe, secure and frictionless payment experience. Most banks are servicing this need with monolithic systems and on-premises infrastructure. These systems have grown over time to become unwieldy, and making changes is time-consuming and expensive.
In a transactional world moving at warp speed, where digital payment volumes peak and trough throughout the day, there is a need for scalability and flexibility, which the current banking monoliths cannot provide.
Banks need to consider how to overcome these barriers from legacy technology. For example, they can embark on a multi-year programme, overhaul their current infrastructure and accrue risk in the process, or transition payment processing to the cloud by partnering with a next-gen technology supplier. The latter option requires technology transformation experience to limit the impact on service delivery.
‘Do nothing’ is not an option for banks. Whether that is deploying tactical short-term solutions in the next couple of years to continue to participate in the payments ecosystem or working through longer-term modernisation of your banking infrastructure to leverage the enriched data from ISO 20022, and future-proof to cope with the growth of digital payment volumes.
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3 A brief introduction to the Real-Time Gross Settlement system and CHAPS | Bank of England
4 UK Finance, UK PAYMENT STATISTICS 2023, 14 September 2023
5 Pay.UK_NPA_Prospectus.pdf (wearepay.uk)
6 RTGS Renewal Programme | Bank of England