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Jacqueline Powell: Hello, and welcome to the Payments Podcast. I'm Jacqueline Powell, and today I'm joined by Marcus Hughes and Richard Ransom, who are both subject-matter experts at Bottomline. Now, in today's episode, we're going to provide an update on the latest plans for the New Payments Architecture, which is also referred to as the NPA, as many of you know.
Now, NPA was first announced more than five years ago. It was aimed at modernising the UK’s retail payment systems, but, after a series of challenges during this time, the programme has since been redesigned and is once again underway. Today, we'll discuss the revised programme and how this affects UK banks and businesses. That brings me on to welcoming our guests. Marcus and Richard, thank you for joining us.
Richard Ransom: Hi, Jacqui. Thanks for inviting me.
Marcus Hughes: Hello, everyone, a pleasure to be back.
Jacqueline Powell: Marcus, let me direct my first question to you. Can you tell us what was originally planned for the NPA? Hopefully, this context will make it easier to understand what has changed and what the redesigned NPA will involve.
Marcus Hughes: Certainly. The New Payments Architecture, programme is driven by the Payment Systems Regulator. Their objective is to modernise UK payments and make them more secure. So, their plan is to replace our rather complicated legacy systems and provide the UK with a more stable and resilient payments infrastructure.
Back in December 2017, a group of payments experts, called the Payments Strategy Forum, published the New Payments Architecture ‘Implementation Plan Blueprint’. At the heart of these plans was a new central infrastructure for payments, which would replace legacy systems, such as BACS, the Faster Payments Service, and cheque clearing.
Probably the most significant aspect of the NPA’s plans was to replace the BACS three-day clearing cycle. BACS Direct Credits and Direct Debits, as well as Faster Payments, would all be replaced by a new credit transfer instrument, which would clear in real time, 24/7.
This new credit transfer instrument would use the ISO 20022 file format in order to replace the BACS Standard 18 format and the ISO 8583 format, which is currently used by Faster Payments. Finally, all payments users would migrate to this new central infrastructure between 2021 and 2023, but, as we all know, this has not happened yet.
Jacqueline Powell: That doesn't leave much time for migration, then, does it? Richard, over to you, please. Can you bring us up to speed on what has been done so far in the NPA programme?
Richard Ransom: So, Jacqui, the first big step was that the New Payment System Operator was established. The NPSO, whose role was to create and run the central infrastructure, was then rebranded as Pay.UK at the end of 2018.
As a move towards consolidating payment systems, Pay.UK took control of all the UK’s existing retail payment systems. That is, BACS, Faster Payments, and cheque clearing. Bringing these organisations under the umbrella of Pay.UK makes coordination easier and will help migration to the NPA.
Jacqueline Powell: I expect that that consolidation is quite a task, and the NPA was clearly a highly ambitious programme. Marcus, in your opinion, how has the programme changed since its original plans?
Marcus Hughes: Exactly. The problem was that the NPA was too ambitious in its original form. The project ran into a series of challenges and delays, to the extent that the Payment Systems Regulator paused the programme for about 12 months, to complete yet another stakeholder consultation.
In August 2021, the PSR ruled that Pay.UK should narrow the scope of the central infrastructure contract. This means that the first phase of the NPA will focus now on updating the current Faster Payments Service. As a priority, therefore, FPS will be migrated to the NPA’s central infrastructure, and it will adopt the ISO 20022 messaging standard.
The PSR also ruled that the delivery of the central infrastructure must be managed through a competitive tender. Although some scope enhancements above the mandated focus of FPS are possible in principle, they can only be progressed if the PSR does not object to these proposals.
What's more, the PSR has insisted that stakeholders should be allowed to contribute to future planning. This includes engaging with open banking regarding alternative solutions to BACS Direct Debits.
I think it's likely that large banks and large users of BACS Direct Debits, such as telecoms providers and utilities, they're going to feel a sense of relief that the NPA’s scope has been narrowed by the PSR.
These two groups are probably happy that they no longer face the near-term upheaval to the BACS schemes, especially Direct Debits, which are still functional, despite being one of the oldest and slowest clearing systems in Europe, with their three day-clearing cycle.
On the other hand, FinTechs, and payment institutions, and some of the challenger banks, are likely to be quite disappointed that, under the revised and narrower NPA plans, the opportunity to win new business from incumbents is much reduced.
Jacqueline Powell: Okay, so several changes, then. Thanks, Marcus. Richard, back to you, please. Can you share the new timetable for delivering the reduced scope of the NPA?
Richard Ransom: Although the scope has been reduced, it's still a massive undertaking and a huge project. There are many, many moving pieces, so I can outline some of the main milestones. I’d emphasise that vendors who are bidding to build this infrastructure are still under evaluation, so these dates are still tentative.
The vendor selection, the first thing I talked about there, is expected in Q1 calendar next year, with an MSA signed by Q2. Under current planning, Design, Build and Test period will run from Q3 2022 until Q4 2023. After this point, customer banks will have to go through certification testing, which will continue until Q2 2024. This certification testing will also impact vendors who will be connecting to the service, supporting banks and non-banks alike.
The group testing will run from Q2 2024 until Q1 2025. So, that go-live timing range of the NPA is placed between Q2 and Q4 2025, but it's worth highlighting, the PSR’s implementation deadline is 1st July 2026. What we're seeing in the project is that other bits might be squeezed, but the July 1 deadline is still staying fairly fixed.
Over recent years, Pay.UK has been heavily criticised for the NPA’s delays, which has resulted in the Payment System Regulator’s decision to reduce the scope. The latest timeline suggests we're still a long way from the end of this journey, with Faster Payments not due to migrate to the NPA until the second half of 2025, earliest.
Jacqueline Powell: Those milestones are helpful, Rich, thanks. Now, Marcus, I am led to believe NPA will introduce new payment types, too, using the new ISO 20022 file format, which is a fantastic step forward. Can you expand on this for us, please?
Marcus Hughes: In total, six new payment products have been sketched out, but the NPA will only include one of them when it launches. That's the priority payment. This is a standard bank-to-bank or PSP-to-PSP payment, which replaces today's single immediate payment, as provided by Faster Payments Service.
The priority payment will also replace the lion's share of standing-order payments, and also future-dated payments, which use FPS today, but I emphasise that the priority payment is the only payment type which is going to be available at the launch of the NPA. But I think it's also useful to summarise the characteristics of other new payment types which are being discussed, as I think this helps us understand the likely direction of travel of the NPA in future.
First, we have the instant payment. This is a new retail or e-commerce instrument, which will require a response from the recipient in near real time, for added confirmation. Then we have the same-day payment. This new payment instrument optimises processing capacity and cost, by providing some same-day clearing rather than real-time clearing. This payment type is expected to replace some standing-order payments and some future-dated payments.
Third, we've got the multi-payment. This is a single payment message but with multiple individual credits. This is important because it may eventually be used to migrate some BACS Direct Credits to the NPA, since they have a number of similar characteristics, with both instruments providing a single debit and multiple credits to different beneficiaries. But the new multi-payment is, of course, in real time, 24/7, so, unlike BACS Direct Credit transfers, which have that three-day clearing cycle.
Fourth, we've got the bulk payment. This enables customers to submit large payment files to the central infrastructure. Bulk payments can be used for priority payments or same-day payments. Finally, last but not least, we have the multi-day bulk payment. This is really a variant of the proposed bulk payment.
It would allow corporates and PSPs to submit payments to the NPA for bulk processing, but with improved efficiency and liquidity management, as well as pre-notification of settlements. It's anticipated that this will be useful for large volume users, like corporates and government agencies.
With the multi-day bulk payment, the actual payments are processed over a three-day cycle and will be available to recipients early in the morning of day three. Many listeners will see this has similarities to the traditional BACS Direct Credit.
All of these six new payment types will use ISO 20022 format. This means the new payments can carry a richer amount of data in structured, machine-readable format, which is going to help processes like automated reconciliation. It's important to note that BACS are not officially in scope at present and that direct corporate access has not actually been approved for the NPA.
Jacqueline Powell: Thank you. Richard, back to you. I also believe the NPA is planning on introducing overlay services. Can you give us a little bit of insight into what these overlay services are and what they'll look like?
Richard Ransom: Yes. Although they're not part of the MPA’s core design, Pay.UK has already been involved in development of two significant overlay services. This was part of the original blueprint, that there would be new services available.
First, we have Confirmation of Payee, which most of us will have experienced when making personal payments through mobile and EBank. This is the name-checking service which was launched in 2020, has been implemented by most large UK banks and lots of other banks and payment services providers.
It offers end users the ability to check the name or an account before a payment is sent. This provides greater assurance that payments are being sent to the correct recipient. It is, therefore, a valuable tool in preventing Authorised Push Payment fraud.
The second overlay service to which Pay.UK has contributed is Request to Pay. Now, lots of other geographies have similar services, and the Pay.UK version, Request to Pay, is slightly different, but this messaging service offers a flexible way for bills to be settled between people, organisations, and businesses.
Billers can request payment for a bill, rather than sending an invoice, and customers can use their app to choose how they respond, either paying in full immediately, agreeing to pay by instalments, or making a single, deferred payment.
It is early days for Request to Pay, which has been slow to take off. It has been estimated that Request to Pay could eventually save the UK economy £2bn to £3bn a year in reduced billing costs.
One of the predicted benefits of the NPA was to create new opportunities for the payment industry to innovate on a single infrastructure, instead of having multiple connectors and different integrations.
The intention is that a third party will be able to use the central infrastructure to build more overlay services, to make people's experiences easier, richer, and more secure, and if you look to other geographies, like Australia, where their new payments platform has driven such behaviours.
Jacqueline Powell: Yes. Innovating on a single infrastructure is an exciting prospect. Thank you, Richard. Okay, so I might be a little bit off here, but it feels like the biggest gap in the NPA’s reduced scope is direct debits. Is that a fair assumption, Marcus, and could you comment further?
Marcus Hughes: Yes, I agree. The reduced scope of the NPA currently excludes direct debits from the programme, so direct debits will continue to operate under the existing BACS scheme for the foreseeable future, but I do think we should really keep a close eye on developments in open banking, where new payment instruments are emerging. This could have a significant impact on direct debits.
Back in October 2021, the Competition and Markets Authority mandated the nine biggest UK banks, known as the CMA 9, to develop a common API to implement variable recurring payments. These VRPs provide a new way to move variable amounts of money between accounts, without needing to obtain a new authorisation for every single payment.
That sounds rather like a direct debit mandate. However, the big difference is that VRPs operate in real time, 24/7, instead of using the BACS three-day clearing cycle and only being processed on business days.
So, although the VRPs have great potential to replace direct debits longer term, it's important to note that the new VRP system, which the CMA 9 banks have got to introduce, or had to introduce, by 30th July 2022, is going to be limited in scope. VRPs are only being mandated for sweeping, which means moving funds between two accounts belonging to the same customer.
For the CMA, there are, therefore, effectively two use cases in scope for sweeping VRPs. First, we've got personal finance apps and providers of high-yielding savings accounts will be able to use VRPs to fund these accounts by moving money from current accounts and low-yielding savings accounts.
Another key use case is smart overdrafts. This will allow customers to ask third-party providers to automatically prevent an overdraft in one account, by transferring funds from another account which has a credit balance. These new VRPs will initially travel on Faster Payments rails and will later migrate to the NPA.
Jacqueline Powell: Interesting, thank you, Marcus. Richard, given the CMA has restricted the scope for VRPs to sweeping, it would be good to hear your view on the implications of this, so what do you think?
Richard Ransom: The limitations of the CMA’s announcement have caused considerable disappointment amongst advocates of VRPs because they can see a much wider range of exciting use cases.
One example is e-commerce for online purchases from preferred retailers and marketplaces. Another example is moving money to accounts which are used to buy foreign currency, for example, or to make cross-border payments.
Another use case is transferring money into investment products, including pensions, and finally, moving money to accounts to purchase cryptocurrencies for online gambling or gaming.
To be frank, it looks like some of the incumbent, large banks have persuaded the CMA to adopt a narrower sweeping definition, which will reduce the negative impact of VRPs on bank revenues, at least in the short term.
There are also some doubts whether CMA will ever extend the mandate for VRPs beyond sweeping, into areas like paying for e-commerce and making regular contributions to investment accounts and pension plans.
Jacqueline Powell: Okay, thanks. Marcus, what's your take on VRPs extending into other use cases? Do you think it will happen, and, if so, how and when?
Marcus Hughes: Actually, I think it will happen quite soon. Adoption will be driven by market forces, not by new CMA regulations. The reason I say this is that, in May of this year, NatWest signed agreements with a number of payment service providers to offer VRPs as a new payment option for businesses and consumers who have accounts at the bank.
This is a really important development as NatWest is now the first UK bank to go beyond the CMA requirement for banks to provide VRPs just for sweeping. So, instead, NatWest’s new VRP offering will enable payment providers to give businesses a new option for managing customer payments for a range of services, including utility bills and subscriptions. This will really complement payment options such as direct debits and online card payments.
These VRPs will enable businesses to collect customer payments via the Faster Payments Service, meaning the payments can be received in real time. As VRPs are set up digitally, there's no paperwork to complete, either, so saving time, plus reducing the risk of fraud and manual error.
Arguably, customers will also benefit from more control over their finances, as they'll be able to set maximum payment amounts and make instant payment cancellations. So, VRPs are a radical change to open banking payments today because, until now, customers can only consent to single immediate payments. Now VRPs will enable customers consent to third-party providers taking payments from their account on a regular basis, without having to consent to each payment individually.
NatWest’s move marks a major step forward, potentially replacing direct debits. With a major UK bank taking such a radical step, market forces may well prevail, and other banks may feel obliged to follow suit and go further than the CMA’s mandate for sweeping VRPs.
Jacqueline Powell: That sounds really promising, Marcus, thanks. Richard, as we wrap up, I've got one last question and I'd like to direct it to you, please. Just to be clear, then, could you tell us what advantages variable recurring payments will have over direct debits?
Richard Ransom: I think something that Marcus mentioned earlier is that the big difference between BACS Direct Debits is that VRPs operate in real time, 24/7, whereas BACS DDs have a three-day clearing cycle and are only processed on business days. This can cause issues around reconciliation because you may not find out the reason for an unpaid direct debit until day five of the process.
In contrast, VRPs do not enjoy the big advantage of the DD indemnity scheme, which allows payers to reclaim DDs taken without authorisation. This is also a disadvantage of VRPs against card-on-file payments with credit card, which have become a lot more popular with the advent of subscription services like Amazon, Netflix, etc.
Indemnity is, of course, an important benefit of consumers, who can claim back funds which they believe have been wrongly taken from their accounts, but this indemnity scheme is a right which, in isolated cases, can be abused and is, therefore, a nuisance for businesses facing multiple reimbursements, some of which are not wholly justified.
As a result, [a segment of 0:20:37] businesses may well prefer the VRP and attempt to adopt this new instrument. Certainly, in conversations I have had with large billers, the unlimited effect of that indemnity can cause a lot of pain in the back office, trying to sort issues out that may have been claimed for direct debits which took place 10, 15 years in the past.
VRPs have several significant advantages for payers, compared to DDS. In particular, they allow the payer to set a cap on how much is debited in each payment, and to limit the total amount that's paid over a specific period. This feature offers VRP users greater control of DDs which are open-ended.
Another important advantage of VRPs is that the party getting paid will only receive cleared funds into their account on the payment due date. This is different to the DD scheme, which requires any unpaid DDs to be reversed from the originator’s account a few days after settlement.
With VRPs, the party getting paid, therefore, has a more accurate view of cash flow in real time on the payment date. VRPs have advantages compared to card-on-file payments, which I mentioned earlier, such as lower fees, instant clearing, with no chargebacks. VRPs have tremendous potential to be a viable replacement of direct debits, with a modern, real-time collection instrument.
There is an irony here in the NPA’s slow delivery in developing a modern replacement for the DD. As Pay.UK and other stakeholders look for cost-effective ways to bring DDs onto the NPA, VRPs will certainly look attractive as a highly practical way to modernise direct debit. So, I don't imagine it’ll be long before market forces seize this opportunity to modernise the way businesses get paid, driving wider adoption of VRPs.
That's why it's important for banks and businesses to be aware of these likely changes, have trusted solution providers who can help them adopt these new instruments in a cost-effective way, without disrupting their day-to-day business.
Jacqueline Powell: Right, gentleman, so that's a wrap, then. Firstly, let me say a big thank you for bringing us up to speed. Your update on the status of the New Payments Architecture has been super helpful for our listeners. We'll be back soon, with more educational insights on the changing payments landscape, but, for today, that's all from the Payments Podcast. Take care and see you next time.
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