Faster Payments Service

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Faster Payments Service (FPS) is a banking initiative in the United Kingdom to reduce the time taken for 'low value' payments made person-to-person and business-to-business - which currently take three working days using BACS - to near real time, essentially as if the two accounts were in the same bank. The CHAPS service already exists to provide faster payments for high value transactions (by close of business that day) but FPS will focus on lower value transactions for consumers and small businesses.

Thirteen banks and building societies, accounting for 97% of UK payments traffic, are committed to the new service from launch. Other financial institutions will be able to join later, either as full members or to access the system through agency arrangements with a member – just as they do with other payment systems.

The new infrastructure for Faster Payments launched on the 27 May 2008^[1] as banks begin to roll out the service to customers, although many users reported that they were able to process very small value (1p) transactions as fast payments during the prior week as banks tested the system in a live environment.^[2] Initially only non-scheduled payments (representing about 5% of the final number) will be allowed to go through the new service.^[3] Thereafter, from 6 June 2008, full functionality will be established for future-dated and standing order payments. In practice, the new service will continue to be restricted by individual member banks to their customers and continue to run alongside the existing payments system for a number of months. A Sort Code Checker tool was released by APACS, shortly ahead of the launch, which shows whether a specific sort code has been activated to receive Faster Payments.

There have been no official announcements regarding the cost per transaction of FPS. However, it is expected to be around £1.00^[4] – though this is likely to apply only to businesses seeking to migrate from Bacs and seems unlikely any charge will apply to individual customers.

1 Background
2 Delays
3 Organisation of FPS
4 How Faster Payments work
5 Technology
6 References
7 External links

[edit] Background

The development of the Faster Payments Service infrastructure has been a complex project involving significant investment.

In November 1998 the UK Treasury commissioned a review (The Cruickshank Report) of competition within the UK banking industry, which reported on 20 March 2000. Among its recommendations was primary legislation to establish an independent payment systems commission (PayCom) in place of existing interbank arrangements. The following day, the Chancellor, Gordon Brown, announced that legislation would be introduced to open the payment systems to increased competition.^[5] In the wake of the Report, the banking industry was consulted by government and its progress monitored both by the Competition Commission and the Office of Fair Trading (OFT).

By May 2003, whilst the OFT was able to report some improvements in the area of payments systems (such as changes to BACS - since rebranded as 'Bacs'- and governance of APACS), a number of competition concerns remained ^[6]. In December 2003, in place of the Report's proposed legislative approach, the Treasury announced instead that the OFT would take on: "an enhanced role in relation to payment systems, for a period of four years" to resolve outstanding competition problems "in advance of any legislation"^[7] - essentially self-regulation. In March 2004 the OFT announced the formation of a joint government-industry body - the Payments Systems Task Force under its chairmanship ^[8].

By May 2005 the Task Force announced an agreement had been reached with the banking industry to reduce clearing times on phone, internet and standing order payments ^[9]. This committed the banking industry to develop a system that would clear electronic payments in no more than half a day - resulting in payments received the same day if made sufficiently early. Implementation groups where then given six months to bring forward detailed proposals.

In October 2005, the contract to provide the central infrastructure for this new service was awarded by APACS to Immediate Payments Limited, a joint venture company set up by Voca and LINK who have since merged to form VocaLink.

In December 2005, the Task Force accepted a recommendation of APACS to go for a still more ambitious target on payment times ^[10]; one that would ensure access to funds within a couple of hours of any payment being made and also permitted payments to be initiated by bank customers 24 hours a day, 7 days a week - to be introduced by the end of (November) 2007. This stage also marked the formal dissolution of the Payments System Taskforce. Thereafter a permanent body was established, the Payments Industry Association^[11], responsible for governance of all payments systems - including Faster Payments, which took over the outstanding work of the Taskforce.

[edit] Delays

In August 2007, APACS announced a delay in the introduction of Faster Payments - beyond November 2007 - to May 2008^[12], with the precise date being confirmed subsequently. The confirmation made clear, for the first time, that Faster Payments would not be introduced 'wholesale' and the service would only be made available to participating banks in stages. In turn, individual banks would decide when they would first make the service available generally to their customers and what, if any, additional restrictions they would apply themselves.

[edit] Organisation of FPS

APACS is responsible for the development and delivery of the Faster Payments Service, but once launched in May 2008 it will transfer day-to-day operations and management of the service to the CHAPS Clearing Company. (CHAPS Clearing Co. is a member-based organisation responsible for the CHAPS sterling high-value same-day payment system.)

The design of Faster Payments has been a joint project between Immediate Payments Ltd. (IPL), APACS and the thirteen founder member banks, based on a commitment made to the OFT Payment Systems Task Force in 2005. IPL, a VocaLink company, is supplying the central network for the Faster Payments Service.

The founding members signed up to introducing this new service from May 2008 are:

Abbey
Alliance & Leicester
Barclays [2]
Citibank
Co-operative Bank
HBOS [3]
HSBC . conditions, section 2 - _5.3.4
Lloyds TSB [4]
National Australia Group (Clydesdale Bank and Yorkshire Bank)
Nationwide Building Society [5]
Danske Bank (Northern Bank [6], N.I.)
Northern Rock
Royal Bank of Scotland Grp [7]

Following the initial launch of the central infrastructure, work is planned to provide a Direct Corporate Access Channel. This will ultimately enable businesses to submit large numbers of payments directly into the Faster Payments Service.

[edit] How Faster Payments work

When a customer makes a Faster Payment, it will generally work in the following way:

Sean (a bank customer) wants to send £35 to his friend, John. Sean must first to check that he is able to use Faster Payments from his bank account and that John’s account is able to receive this type of payment. He phones or logs on to his bank and instructs it to pay £35 today to John's bank account.
Sean's bank first makes normal checks on his identity. For example, they may ask him to provide a password or other security information. Sean's instructions are then taken: sort code, account number, reference details (e.g. 'John Smith') and amount to send, to ensure the payment reaches the correct account. The bank will also check that Sean’s account has sufficient funds. In certain cases, delays may occur if the bank needs to undertake its own further fraud protection checks. (Unlikely for an amount of £35, but not in the case of much larger amounts)
The sending bank then debits funds from Sean's account and submits his transaction to the Faster Payments Service. From this stage onwards, the payment cannot be cancelled.
The Service sends details of the transaction to the receiving bank, after checking they are properly formatted, and then debits the sending bank.
Once the receiving bank has received these details, it will check they are destined for a valid account, and will send a message back to the Faster Payments Service that it has accepted the payment.
The Faster Payments Service then credits the receiving bank with the funds, and tells the sending bank that the transaction has been made successfully.
Sean’s bank now marks the transaction as complete. Each sending bank will decide how this confirmation will be made available to its own customer. Once the payment has been completed, a confirmation message will always be sent between banks.
The receiving bank will credit John’s account with the money received and should be shown as cleared funds within two hours.

Whilst John should be able to access these funds after this period, at any stage either the sending or receiving bank may carry out additional checks on transactions, which could delay a small number of payments.

Banks will also be able to process their customers’ standing orders using the Faster Payments Service. Customers will be able to set up new regular payments, as well as continue to use existing ones, and these will work in the same way as they do today, except that they will be sent and received on the same working day.

There will be a maximum limit placed on the value of each payment sent through the Faster Payments Service, with the initial maximum value for standing orders set to £100,000 and for all other payment types to £10,000. Individual banks may, however, choose to set lower limits.

[edit] Technology

Faster Payments will support one-time payments, standing orders, corporate bulk payments, and return payments. The service is expected to handle a peak volume in excess of ten million transactions per day. The system is being designed by VocaLink with the backing of APACS and comprises networks of member institutions (banks) surrounding the core central system. The central system will handle the actual message switching in near real time, as well as manage the settlement of accounts at the Bank of England, and generate reports. The physical network will be handled by VocaLink and the system will be managed by the CHAPS Clearing Company.