Last month, the Bank of England and the Payments Systems Regulator (PSR) finally began the much vaunted process of merging the U.K.’s major payments operators, with the aim of revamping an old and clunky system, tackling fraud, and facilitating greater competition between the banks and emerging fintechs.
Going forward, the U.K.’s payment operators will all be managed by the New Payments Systems Operator (NPSO). Created last September, the NPSO has now officially assumed responsibility for Bacs and Faster Payments – which together process around £6.3 trillion worth of electronic payments every year – and will soon incorporate the Cheque and Credit Clearing Company in the next couple of months.
So what advantages will this new system bring to the U.K. payments market? The U.K. has traditionally struggled to find ways to break the major banks’ monopoly on payments, but the common messaging standards in place across the NPSO umbrella will make it far quicker and easier for new fintechs, such as e-money providers, to join the U.K.’s payments systems and provide alternatives.
“These days, the market is changing and you’re getting more fintechs challenging the banks, and for a new provider that wanted to join the payments systems, it was previously quite complicated and difficult,” says Neil Aitken, an NPSO spokesperson. “There would be three different operators they needed to speak to, with three slightly differing sets of rules. Now it’s all under one roof, it should encourage more competition which was the impetus and rationale for making this happen.”
To streamline Bacs, Faster Payments and the Cheque and Credit Clearing Company in this way, the NPSO is creating a completely new infrastructure called the New Payments Architecture (NPA). The advantage of this for retail consumers and startups is that the NPA’s open APIs will allow for the creation of innovative new overlay systems which exploit the existing payment rails to provide new services.
“A present-day example of an overlay system is Paym, which uses the Faster Payments rails to link an account number and sort code with a mobile number and name, enabling a new way of making payments using your mobile,” Aitken says. “That’s the kind of thing that can blossom in future with the NPA.”
To start with, following research conducted by the PSR with different consumer groups, the NPSO has plans in place to soon launch two new overlay services: Confirmation of Payee (which intends to reduce misdirected payments and fraud) and Request to Pay (which allows the payee to send messages to the consumer to ask them to either pay all or partial amounts of their payment on a particular day).
“Consumers told us that they want more control of their payments, and more safety associated with them,” says Dora Guzeleva, Regulatory Policy and Strategy manager at the PSR.
Confirmation of Payee is part of several systems being initiated by the PSR to tackle payments fraud through the NPA. It will allow consumers to enter the account number, sort code, and the name of the person they think they’re paying. Before any payment is processed, the system either returns a match or the name of the person they’re actually paying.
“There are various case studies which show that this system might not solve all fraud, but it should help in certain circumstances,” Guzeleva says.
In addition, the PSR hope to reduce financial crime through a solution called Payments Transaction Data Sharing and Data Analytics, which is being incorporated as part of the NPA. At the moment, all financial institutions using the U.K. payments systems have been limited in their ability to track known fraudulent accounts or abnormal activity, as they can only view payments which take place through their own system. Instead, this new solution will give them access to the global transactions related to a particular account.
“If there’s an account which has previously been dormant for five years, and it suddenly gets a flood of several hundred payments from many different payment service providers, at the moment each individual provider wouldn’t be able to tell that something unusual is taking place,” Guzeleva says.
The PSR hopes that being able to analyze the global data will allow financial institutions to use artificial intelligence to monitor patterns of payments, generate Suspicious Activity Reports and quickly shut potentially fraudulent accounts down.
It’s early days, but by modernising the U.K. payments system, which had previously changed very little since Faster Payments was introduced more than a decade ago, it is hoped that there will be multiple advantages for consumers and providers across the spectrum.
“None of these new opportunities and innovations in the payments space would be possible without bringing everything under one roof and creating the NPSO,” Aitken says. “So that’s why it matters.”