After scanning the globe for the top level of payment industry deadlines and mandates, we’re hardly done with reporting on more initiatives in the EU and the UK. And on that note, a mea culpa regarding SWIFT. There are so many deadlines across so many geographies that we could devote an entire issue to SWIFT. We will do that in subsequent posts starting with a resource guide on Thursday, April 13. So with that in mind, let’s start with the UK and the New Payments Architecture project (NPA).
To steal a phrase from Gen Z parlance the UK’s New Payments Architecture initiative has taken the concept of payments modernization and “put it on blast.” It is nothing short of a complete overhaul of the UK’s payments architecture, creating consistent rules and best practices to accommodate instant payments, new payments products and overlay services like Confirmation of Payee (CoP). We have devoted a podcast to the specifics of the NPA, and those details could easily fill this blog post and more. For our purposes here, it’s important to know that Pay.UK is in the process of creating a “rulebook” for the overhaul. That rulebook, which has also been referred to as the NPA Contractual Framework will be a work in progress over the next year. It will “cover every aspect of how our customers interact with the NPA. It will help to ensure that the NPA operates successfully, with minimal risk, and that customers get what they need and expect from the new system.”
There is a strong element of “wait and see” regarding the NPA. For example, the vendor (or vendors) that will oversee the infrastructure changes has not yet been chosen. But that doesn’t mean banks can’t prepare for its inevitability. Bottomline’s modernization specialist Richard Ransom tells us that while it might be difficult without end-to-end specs, banks can begin to staff up for the changes expected from it and start to test the individual components of instant payments and ISO 20022 is a big part.
“There are some testing deadlines and plenty of testing to do, but until we know who the vendor is we don't know how that technical connection will work,” Ransom says. “So, the banks have access to simulators, which is not the same as connecting real team to real team. And so, I think the banks must be prepared for this. They need to make sure they’re staying current with developments from Pay.UK and make sure that their vendors are hooked into their projects as well.”
Open Banking has been operating under its own speed for six years now, with 7 million active users, and is positioned for further growth with 12.6 million now having a digital-only bank account. The focus in terms of milestones has centered on taking it to the next level. To that end, one big domino fell in late February when the Open Banking Strategic Working Group issued its long-awaited report “The Future Development of Open Banking in the UK.” While it doesn’t give any specific timelines, it does share data from three strategy “sprints” it researched: payments, data and ecosystem. The report is based on substantial gaps the group found in each area, and it’s worth a quick look:
Ecosystem reliability: Based on interviews and submission from almost 200 companies the group uncovered an API availability and performance gap. Some companies are happy with API performance, others expressed frustration by the “inconsistency of API provisioning and argued that further improvement was required to provide a more stable and reliable platform for open banking.”
Fraud: The group lauded solutions like Confirmation of Payee, which has helped stem the tide of authorized push payment fraud. Further security measures were open for debate. It pointed to divergent thinking in the group as “to the quantum of new fraud risk introduced (or reduced) by open banking payments. The evidence surfaced during the strategy sprint to support the different positions, although useful, can be anecdotal, not sufficiently representative of the whole market, or at too high a level to determine with confidence the extent, severity and root causes of fraud.”
Improvements to current standards: Here the group found a gap between current standards and what consumers need. It found improvements needed in three areas: 1) Requiring the use of more granular and consistent error codes and messages to help third party processors understand if something isn’t working and to communicate more clearly with end users; 2). 2) greater clarity as to whether a payment initiation has resulted in a successful payment and 3) enabling identification of participants in the payments and data flow.
As we’ve seen with the NPA, there is an amount of “wait and see” as the working report is considered by the broader Joint Regulatory Oversight Committee (JROC). Bottomline product lead for open banking Kush Shah tells us that banks can prepare by being aware of the advances made by groups like JROC and product innovations that will enhance their competitive position.
“There's a lot of ambiguity in the market about the actual direction we’re going to take,” Shah says. “We’re seeing a lot of suggestions on how we are going to advance and we as an industry will help to shape that. It will take time, but we can see the benefits of having to do so. With the way in which open banking is starting to thrive across both the UK and Europe, these discussions will be fruitful. But if we don't do make these decisions faster, we'll be left behind as a market in the UK.”
UK Economic Crime and Corporate Transparency Bill
The UK has a long and arguably successful history or mitigating corporate fraud and financial crimes. For example, The Bribery Act of 2010 created a new class of offenses for “corporate entities that fail to end bribery.” Note that these are not aimed at individuals who commit bribes, but companies. That’s important to remember because new legislation before the UK Parliament is intended to give the same treatment to corporate fraud and financial crimes.
That new legislation is now being considered by the House of Lords. According to the law firm of Armstrong Teasdale, itis welcome news as it has been difficult for prosecutors in the U.K. to hold corporates to account for criminal behaviour, especially in economic crime-related offences. “The introduction of a failure to prevent offence is attractive in that it overcomes such difficulties,” the firm stated recently. “The basis of a failure to prevent offence is, to have a defence, an organisation needs to prove that it has reasonable, adequate procedures in place to prevent an individual associated with it from carrying out a criminal activity.” The firm goes on to declare that “the Government’s plans to introduce the offence will hopefully walk hand-in-hand with proper guidance and effective enforcement to be a ‘game changer.’”
Bottomline senior product manager Mark Bish agrees. He says the bill is a significant step forward in holding corporates as well as banks accountable for constructing effective fraud defenses. It has ramifications for adopting solutions like Confirmation of Payee for corporates. If the bill passes it begs the question: If a company does not have CoP in place, and the company’s customers are burned by payment fraud, are they in violation of this law?
“It's not exactly a mandate to use Confirmation of Payee as a business but it does mean you have to put adequate steps in place to protect your customers,” Bish says, “and CoP has already proven its effectiveness in doing so in the banking world.”
SIC-5 instant payments changes
When it comes to payments Switzerland is the great outlier. It’s not technically part of the EU but it participates in its economy. Most of its major retail and hospitality companies accept the euro but the official currency is the Swiss franc. Now that the EU is updating its instant payments regulations, the Swiss are making their own moves.
These moves have deadlines and mandates attached. Like anything in which “payments” and “Switzerland” are mentioned in the same sentence – it’s complicated. To understand it, let’s start at the beginning. Efficient and fast real-time gross settlement (RTGS) instant payments are currently operative in the country between bank accounts established by the Swiss Interbank Clearing (SIC) payment system operated by the SIX group on behalf of the Swiss National Bank (SNB). Instant payments are also available, used mainly for person-to-person payments, via the TWINT initiative. However, to strengthen the instant payments rail in Switzerland, SIX and the SNB have mandated the inclusion of SIC RTGS payments to support a new proprietary SIC instant payments rail, called SIC Instant Payments. As a statement from the SIX Group puts it, “from a technical perspective, SIC has been able to process payments in real time for decades. But for instant payments to function across the entire payments chain, adjustments are also necessary in the operation and organization of the interfaces between the banks and SIX.”
So, by the end of this year, SIX is introducing a new infrastructure for instant payments. By August 2024, the biggest of the country’s banks will be mandated to process instant payments, with the remaining banks following in 2026. The SIX Group is leaning on its customers to make the new rails run stating: “Having the infrastructure is one thing. The readiness to use it is another. In this regard, the future success of instant payments depends on the ability of the consumer goods and services sectors to innovate. Instant payments involve much more than payments via mobile and e-banking.”
Bottomline’s Frederic Viard says the mandates will reinforce Switzerland’s instant payments system, which is currently used mostly for consumer transactions. It will hopefully make it attractive for business as well. “We have the technology in place, now we need to upgrade it so we can move to the next generation payment system which incorporates instant payment by design,” he says. “This is essential in my opinion to bring this mature economy into line with other payments systems, which are all moving toward instant. EU payments systems. You cannot afford to look like someone who has not thought about having an instant payment infrastructure when you see other countries, even less mature countries, move directly from cash payments to instant payment.”