Faster Payments: The world's first 24*7*365 instant payments system

Newsletter 27 | 18 June 2020

Introduced in 2008, Faster Payments was the world's first 24*7*365 instant payments system.

Over 400 financial institutions offer Faster Payments (32 are directly connected), making it available to the vast majority of current account holders in the UK.

Time for a quick history lesson

Although now well established in the UK’s retail payment mix Faster Payments has only been around for just 12 years.

From the world’s first instant payment system (more accurately described as a Near Real Time Payment system) to 2.4 billion transactions a year in 2020, Faster Payments has a great story to tell.

Anyone closely involved in the development, launch and operation of the first new payment system in the UK for 20 years will have their own special key events but here are a few Faster Payments milestones identified by Pay.UK that are worthy of mention:

May 2008 – Faster Payments launched, the first 24*7*365 NRT system in the world.

  • 13 directly connected banks on launch day.

December 2008 – 10 million Standing Orders a month processed.

  • Removed ‘float’ from the payment cycle (previously Standing Orders were processed by Bacs with the funds being debited on Day 1 and credited to the beneficiary on Day 3. Rather than develop the Bacs system Standing Order processing was migrated to Faster Payments and ‘float’ disappeared).

  • At the end of December 2008, Standing Orders represented 25% of total Faster Payment volumes.

March 2012 - 10 million Forward Date Payments sent in a month.

  • 10% of total Faster Payment volumes.

April 2014 – Paym Launched.

  • UK banking customers are able to send money using only a mobile number for the first time

December 2014 – 100 million payments made in a month

  • 100 million Faster Payments sent in a single month across all payment types for the first time.

July 2015 – 5 Billionth payment processed

  • Less than 7 years after the first payment was processed, 5 billion payments had been sent via Faster Payments.

November 2015 – Transaction limit increased

  • The maximum value that can be sent by Faster Payments was increased to £250,000.

August 2016 – First new participants under a new access model

  • Metro Bank and Raphaels Bank both join using Faster Payments’ new and innovative new access model. They are later joined by Transfer Wise, the first Fintech to join the scheme.

  • Faster Payments went on to win an Industry Achievement Award for the New Access Model.

December 2017 – 1 billion SIP’s processed in 2017

  • For the first time 1 billion Single Immediate Payments (SIPs) were sent in a single year. The payment type makes up over 60% of total Faster Payment traffic. Total payments now exceed 150m per month.

January 2018 – Directly connected participants reach 21.

  • BFC Bank becomes the first new Participant in 2018.

July 2019 – Highest monthly value.

  • July 2019 saw the  highest monthly value ever seen through Faster Payments with £178.8 billion

December 2019 – Highest monthly volume.

  • December 2019 saw the highest monthly volume of Faster Payments processed to date with 226.7 million payments going through the system over the course of the month.

March 2020 – Highest quarterly volume.

  • Q1 of 2020 saw 661 million payments processed by Faster Payments, a 20% increase on the amount processed in Q1 for 2019.

  • The total amount of payments processed during this quarter was £518 billion, which is a 13% increase on 2019 Q1 's total.

How does Faster Payments work?

As described above Faster Payments is a Near Real Time ‘push’ payment system.

Although the scheme service levels suggest that payments will be made within two hours the design (a simplified diagram is below) enables the majority of payments to be made within seconds - this speed of processing justifies the more common description of an ‘instant payment’.

Source: Pay.UK

What is Faster Payments relationship with Pay.UK?

The UK’s Faster Payments scheme was launched on the 27 May 2008 and the scheme was initially operated by the CHAPS Clearing Company Limited.

On the 24 August 2011 a new company called Faster Payment Scheme Limited (FPSL) was incorporated and became the Payment System Operator of the Faster Payment scheme.

As an aside, it was my privilege to be the Managing Director of Faster Payments during the time CHAPS Co was the scheme custodian and then became the first Managing Director of newly formed Faster Payment Scheme Limited.

Along with the other UK retail payment schemes Faster Payments Scheme Limited joined Pay.UK in May 2018.

Pay.UK is the UK’s retail payments authority whose aim is to enable a vibrant economy by delivering best in class payment infrastructure and standards for the benefit of consumers and businesses everywhere.

Pay.UK:

  • Run the UK’s retail payments operations.

  • Deliver a variety of services relating to payments.

  • Are building the ‘rails’ on which UK payments move.

  • Enable £19.2 billion in payments very single day.

  • Are creating common standards based on ISO 20022.

Who can participate in Faster Payments?

There are three principal ways for a financial institution to participate in Faster Payments:

  • Directly Connected Settling Participants (DCSPs) – connect directly into the Faster Payments Central Infrastructure to send and receive payments in real-time, 24 hours a day. DCSPs set their own transaction limits and perform their own settlement with the Bank of England. This is often the best option for organisations that handle a high volume of payments and are eligible to open a settlement account at the Bank of England.

  • Directly Connected Non-Settling Participants (DCNSPs) – connect directly into the Faster Payments Central Infrastructure via a sponsoring Participant that performs Bank of England settlement on the PSP’s behalf. This is often the best option for organisations that are not eligible to open a settlement account at the Bank of England.

  • Indirect Agency – This option enables a PSP to connect to Faster Payments via a sponsoring Participant which manages the direct connection on its behalf. Sponsoring Participants provide various options to send and receive Faster Payments, and also perform Bank of England Settlement on the Indirect Agency PSP’s behalf. This option is beneficial for PSPs that find a direct connection is not commercially viable

How much can I send via Faster Payments?

The maximum value threshold for individual payments that can be processed through Faster Payments is currently £250,000.

However, individual banks and building societies set their own value limits for their personal and corporate customers.

On the 8 April 2020 the Pay.UK Board approved an increase in the Faster Payment Scheme Transaction Limit to £1m although a date to introduce the increased limit and the extent to which individual banks and building societies might utilise the limit has yet to be agreed.

Flavours of Faster Payments

Although to the recipient a Faster Payment is a Faster Payment there are really five ‘flavours’ of Faster Payments.

As is the payments industry tradition each flavour of a Faster Payment has a three letter acronym: SIPs, SOPs, DCA, FIM and FDPs:

  • Direct Corporate Access (DCA) - File submission of payments by business customers using the same software as Bacstel-IP.

  • File Input Module (FIM) - File-based payments submitted direct to the central infrastructure by Payment Service Providers (PSPs).

  • Forward Dated Payments (FDP) - Mobile, internet, telephone and file-delivered payments for a current or future date.

  • Single Immediate Payments (SIP) - Mobile, internet and telephone payments to move quickly and securely 24 hours a day.

  • Standing Order Payments (SOP) - Regular payments processed by PSPs on behalf of their customers; with the PSP submitting payments on the due date (or next business day) between 00:01 and 06:00 – so that beneficiary is credited early in the day.

Of the five flavours of Faster Payment the three most popular variants are Single Immediate Payments (SIPs), Forward Dated Payments (FDPs) and Standing Order Payments (SOPs).

Single Immediate Payments

Data source: Pay.UK

Single Immediate Payments (SIPs) are by far the most popular Faster Payment variants.

Pay.UK report that during Q1 2020, Single Immediate Payments (SIP) volumes increased by 26% when compared with Q1 2019, value transferred in Q1 2020 was over £335 billion, an increase of 16% compared to Q1 2019. 

Forward Dated Payments

Data source: Pay.UK

Forward-dated payments (FDPs) are one-off payments sent and received on a pre-arranged date, set up by the customer in advance. 

FDPs can be initiated via online banking, using a mobile device telebanking or in branch.

Pay.UK report that during Q1 2020, FDP volume increased by 7% and the value increased by 9% compared to Q1 2019.

The average value of a single FDP remains unchanged at just over £2,000.

Standing Order Payments

Data source: Pay.UK

The above graph details the transition of Standing Orders from Bacs to the Faster Payments system rather than growth of the payment instrument.

In some respects Standing Orders are a relic of 1970/80’s electronic payments. In 1986 943 million credit transfers and Standing Orders were processed via Bacs.

The problem for Bacs was that, whilst Direct Credit and Direct Debit payments invoked a simultaneous debit and credit, the Standing Order process involved the funds being debited on Day 1 and credited to the beneficiary on Day 3 (the benefit of the banks holding the funds is referred to as ‘float’).

Rather than develop the Bacs system Standing Order processing to remove ‘float’ the transactions were migrated to Faster Payments and the ‘float’ disappeared.

The improved efficiency provided by processing Standing Orders through the Faster Payments system has led to a resurgence in the use of this payment type. In the main this is due to the rise in online and app based banking providing an easy and efficient way to set up regular fixed payments to a person or organisation

Pay.UK report that during Q1 2020, Standing Order Payments (SOPs) volumes increased by 3% compared with Q1 2019, with value transferred increasing by 2% compared to Q1 2019.

Total Faster Payment Volumes

Data source: Pay.UK

The table above demonstrates the adoption of Faster Payments by individuals and businesses. Although Faster Payments benefited from a ‘gift’ of circa 300 million Standing Orders from Bacs the majority of the growth has been from non electronic payment substitution (i.e. cheques and cash payments) and ‘new payment’ growth stimulated by an increased use of Online and App based banking.

Pay.UK report that:

  • The peak Faster Payment usage in Q1 2020 happens between 1 - 2am and the least usage is around 11pm.

  • The Standing Order run takes place between 12am - 6am each working day, which is why there is peak traffic between the early hours of the morning.

  • The highest use of Faster Payments is on a Friday, the end of the month and the beginning of the month.

  • The least usage of FP is on a Sunday

Volume predictions for 2020 (by Pay.UK) pointed to another strong year of growth for Faster Payments with a predicted volume growth of circa 20%. As we approach the half year milestone it is clear that the COVID19 pandemic is having an impact on the growth of Faster Payment volumes.

The first quarter of 2020 suggested that the volume predictions were well founded as Q1 of 2020 saw 661 million payments processed by Faster Payments, a 20% increase on the amount processed in Q1 for 2019.

The total amount of payments processed during this quarter was £518 billion, which is a 13% increase on 2019 Q1's total.

The majority of the increased volumes are being derived from Single Immediate Payments (SIPs) with increase being 16% to £335 billion.

However in April 2020, Faster Payments processed 201.2 million payments, which is a 1% decrease on the amount processed in April 2019. These payments amounted to a total of £142 billion for the month, this is a 13% decrease on April 2019's total.

According to Pay.UK, the key factor for the continued growth of Faster Payments in Q1 2020 is due to the increased number of new participants that have joined the scheme, both banks and non-banks, made possible by the technological and regulatory changes, development of new access model and growing digitalisation in the economy.

Instant Payment Challenges

Given that the UK’s Faster Payments scheme was the first 24*7*365 NRT system in the world it is natural that when other countries are considering developing an instant payment scheme they look to the UK experience.

Earlier this year I was in the Middle East talking payments strategy. The UK’s Faster Payments system was described as ‘the granddaddy of all instant payment systems’, this made me proud of what we have achieved in the UK payment space (and my small part in it!)

What also became clear is that every deployment of an instant payment system faces the same broad challenges:

  • establishing a clear point of settlement finality.

  • the role of ‘alias’ overlays to stimulate growth in P2P payment adoption .

  • real time fraud and sanction screening in an ‘instant’ world.

  • applying the defacto ISO 20022 message standard.

  • the role of bulking / debulking of payments. 

  • identifying and measuring key SLA’s.

  • delivering uptime.

The same broad challenges are faced by each geography and it’s interesting to see how they are being resolved in each system.

Supervision, Regulation and Designation

Under the Financial Services (Banking Reform) Act 2013, HM Treasury has Designated the UK’s Faster Payment System. Under this Designation Faster Payments is subject to regulation by the Payment System Regulator (PSR).

The Payment System Regulator is an economic regulator whose role is to make payment systems work well for those that use them.

The PSR has three statutory objectives to help achieve this:

  • Service User Objective

  • Competition Objective

  • Innovation Objective

These three objectives are set out in the Financial Services (Banking Reform) Act 2013 (FSBRA). The PSR considers them in everything they do under FSBRA.

The PSR regulates the following participants in the Faster Payments system:

  • System Operators (Pay.UK).

  • Payment Service Providers (PSPs).

  • Providers of infrastructure for the systems.

The PSR has a range of powers under FSBRA, in particular in relation to regulated payment systems.

These powers include:

  • Providing directions, both generally and specifically in relation to participants.

  • Changing or establishing rules regarding the operation of payment systems.

  • Granting direct access to certain regulated payment systems.

  • Varying agreements between the operators and payment service providers.

  • Requiring the disposal of interests in an operator of a regulated payment system or an infrastructure provider in relation to such a system.

Faster Payments is also Supervised by the Bank of England (BoE). The BoE supervises Financial Market Infrastructures (FMIs) like Faster Payments because financial markets rely on the continuity of the services they provide. The BoE states that well-functioning FMIs improve the stability of markets and the wider financial system.

Resources

All information contained in this Faster Payments briefing has been sourced from public sources.

For more detailed information you may wish to visit:

18 June 2020.

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