With the value of Faster Payments becoming clearer to both banks and corporates, this article highlights the success factors needed for implementation, such as data validation and interfaces to infrastructure.
In May 2005, the Payment Systems Task Force1 (PSTF) announced its intention to introduce a new technology infrastructure to speed up the clearing times of Internet and telephone banking payments as well as Standing Order payments in the UK. Its aim is to provide at least same day or next day clearing for most transactions2 depending on the time of day the payment is initiated. The announcement from the PSTF came in the wake of increased consumer criticism about the existing three-day settlement period and the resulting loss of interest on the transferred monies incurred. Furthermore, the new infrastructure would comply with the draft European Commission's Payment Services Directive (previously known as the New Legal Framework) that requires all ACH clearing in the EU to be completed within two days. Since May 2005, APACS, the UK payments trade association, has led the development program, which has a tight completion deadline of 30 November 2007.
In December 2005, APACS selected LINK Interchange Network, the real time payments processor whose infrastructure powers the UK's ATM network, and Voca, the provider of payments services, currently responsible for processing the UK's direct debits and direct credits, to supply the new Faster Payments service. As well as allowing banks the opportunity to make Faster Payments, direct corporate access will also be supported.
In the absence of a requirement to adopt Faster Payments, the initial volume of traffic may be relatively low, with early adopters seeking to enter this market through the lowest cost route possible. Inevitably this may lead to banks and corporates satisfying the mandatory requirements of the initiative but not seeking to exceed them. In our opinion there are a number of factors that should be considered by organisations as they develop Faster Payments investment strategies.
Firstly, demand for remote banking services continues to grow strongly. At the time of the initiative's announcement, Paul Smee, APACS chief executive, said: "This new service will not only affect Internet payments but also phone and standing order payments. These together accounted for 7% of all automated payments last year. While this figure is low, in a few years' time, as online banking continues to grow, customers will want to make more of these payments. So, the timing for this massive change and investment is just right."
This, in turn, could encourage a third factor to emerge. The Faster Payments initiative may drive banks and corporates to provide more competitive services to their customers. Some have already indicated that competitiveness and not compliance is the primary driver behind their approach to the Faster Payments initiative.
Finally, some commentators believe that the current three-day clearing service for credits will disappear totally within four years of Faster Payments becoming available. If the direct credit marketplace is to be transformed within such a short timescale, it is imperative that banks and corporate organisations make investment decisions today that anticipate future transaction patterns in 2010 and beyond.
A number of factors will influence the success of the Faster Payments initiative. Clearly APACS faces a considerable challenge in coordinating the introduction of Faster Payments with participating banks within the timescale laid down by the task force. In turn, the banks will need to undertake changes within their own systems to accommodate the initiative's requirements. This comes at a time when the banks have a plethora of single euro payments area (SEPA)-related initiatives to comply with.
Two outcomes may result from these pressures. First of all, the number of banks and building societies that choose to connect directly with Faster Payments may initially be quite small. The 12 participating banks are fully committed to the new service. agency banks and building societies to connect directly to the Faster Payments infrastructure.
Secondly, 30 November 2007 is the completion deadline for the Faster Payments infrastructure. The interface to facilitate direct access to this infrastructure for corporate organisations may not be available before 2008.
All of these factors will affect the volume of transactions processed through Faster Payments in the early months of 2008.
A central feature of Faster Payments is the requirement for transactions to be processed in near real-time. Although the actual processing time per transaction from the point at which the transaction is initiated is expected to be no more than 15 seconds, banks will set varying time periods (possibly two hours) between the transaction being completed and the funds being available for withdrawal. Member Banks have, understandably, focused on the increased risk inherent in a near real-time system.4 But fraud is not the only concern. Eliminating transaction errors is also central to the success of Faster Payments, both to sustain public confidence in the system and achieve rapid transaction times with the minimum of payment errors.
Historically it has been assumed that the best way to reduce errors is through building a delay into the process post-transaction and pre-settlement. However, from the customer's perspective this gives an impression of poor service levels and implies that the banks are abusing their position by earning interest on customer funds during the process. From the banks' perspective, sorting out problems after the event is undoubtedly a more expensive way to resolve transaction errors than preventing them from arising in the first place.
To help optimise the performance of Faster Payments, submitters will be required to check the beneficiary's sort code against the industry Sorting Code Directory (ISCD) but only encouraged to undertake a basic modulus check of the account number before transmission. This is done to determine the accuracy of the submitted details and that the destination account can accept Faster Payments. Even limited validation checks will reduce the likelihood of transaction errors, as has been proved with the mandatory requirement to validate payments submitted to Bacstel-IP. However, Bacstel-IP also showed that validation early in the transaction process resulted in the greatest reduction in error rates. In addition, unlike Bacstel-IP where payments may be recalled, submissions to Faster Payments are likely to be non-revocable. All these factors increase the importance of introducing highly effective validation processes prior to submission. By not making modulus checking mandatory and by not specifying where in the process validation should take place for optimum effect, the authors of the Faster Payments specification may significantly reduce the efficiency and effectiveness of the entire system.
The experience of many Bacstel-IP submitters demonstrated the value of adopting more advanced validation checks on transactions prior to transmission than were required in the system specification. This generated significant advantages in terms of reduced costs (data maintenance and transaction repair costs) and improved customer service. Similarly, many submitters to the Faster Payments service will consider that the lack of a more complete validation requirement in this initiative may undermine their performance objectives. Some submitters will want to adopt more advanced solutions that address, for instance, the validation of customer bill reference numbers, accommodate BIC and IBAN routing information, validate at account level as well as sort code level and offer real time data updates.
There is one further difference between Faster Payments and Bacstel-IP that should be noted. Responsibility for submitting payments to Bacstel-IP lies wholly with the Direct Debit or Direct Credit Originator. With Faster Payments this responsibility is, on occasion, externalised to the consumer. By validating the account data at the start of the process, an element of 'self-service' can be introduced whereby partial responsibility for the accuracy of the transaction passes from the bank to the person entering the data. In the case of telephone banking this will be a bank or call centre employee in conversation with a customer. But in the case of Internet or mobile banking it is, of course, the end user or customer sitting at his or her own system. This will significantly increase the likelihood of payment errors and emphasises the importance of validation early in the transaction process.
Research into telephone and Internet banking has shown a high level of confusion among consumers as to which data should be entered into the various fields when making a payment.5 This is particularly the case when making a bill payment where the consumer is required to identify the correct customer reference from among several numbers printed on their bill. Effective validation within the banks' core systems is essential for these transactions to ensure not only that the account can accept Faster Payments but also that the reference number is correct, allowing the payment to be reconciled to the correct customer account by the biller.
Impact on Customer Service
The effectiveness of the banks' validation processes may prove crucial in establishing consumer confidence in Faster Payments.
As well as rapidly reducing the cost to the banks of resolving payment errors, advanced data validation systems that are well researched and well maintained can considerably enhance the perception of customer service for both corporates and consumers. For instance, validation systems that provide accurate and timely on-screen warnings of inaccurately entered data are far more effective in establishing trust and confidence than a simpler back-end solution that only rejects a transaction when it fails to meet limited validation criteria.
With the introduction of Faster Payments, member banks, agency banks, building societies and corporate organisations will all need to develop new interfaces to the Faster Payments infrastructure. Ensuring that industry-leading customer and bank data validation software is an integral part of these interfaces will prove vital in minimising the number and cost of transaction errors. Ultimately it may prove to be the benchmark by which real-time banking and the success of Faster Payments is eventually measured.
1 Chaired by the Office of Fair Trading, The Payment Systems Task Force was established in 2004 to identify, consider and seek to resolve competition, efficiency and incentive issues relating to payment systems. The members of the group include: Office of Fair Trading (Chair), APACS (Association for Payment Clearing Services), Bacs Payment Schemes Limited, Barclays Bank, British Bankers' Association, British Retail Consortium, Building Societies Association, CHAPS, Clearing Company Limited, Cheque and Credit Clearing Company, The Co-operative Bank, Federation of Small Businesses, HSBC, Lloyds TSB, National Consumer Council, The Royal Bank of Scotland Group, Which? (formerly Consumers' Association), Bank of England (sitting as observers), HM Treasury (sitting as observers).
2 Telephone and Internet banking payments will be made in near real-time while Standing Orders must achieve same-day settlement. Limits will apply on the size of individual transactions that may be processed through Faster Payments.
3 Soon to become 13 with the addition of the newest Bacs Member, Danske.
4 "Faster Payments will increase the risk of fraud, by its very nature. A delayed clearing and settlement cycle (whether it is one, two or three days) gives banks time to authenticate the validity of the source and destination of a payment, and also to detect patterns of payments which may indicate criminal activity - before the money can leave the banking system. A real-time service removes this time and increases the attractiveness of the banking system as a whole to perpetrators of electronic fraud." Dovetail Systems.
5 Research by Experian Payments suggests up to 25% of payments currently received by billers contain invalid reference numbers and that validation software can reduce this significantly.