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Real time payments: The need for speed

Introduced in response to the global financial crisis in 2008 the New Access Model was designed to remove barriers and create a level playing field for smaller/challenger financial institutions and PSP’s to connect to Faster Payments.

In this episode on the Payments Podcast, we’re talking to Julian Sawyer, Chief Operating Officer at Starling Bank and Ed Adshead-Grant, General Manager for Payments at Bottomline about how and why the market and access model for real-time payments has evolved over the last 10 years.

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Transcript

Rich Williams: In the last 10 years the market and access model for real-time payments has changed drastically. This episode on the Payments Podcast will hopefully take you on a journey of why it’s changed, and how. I’m Rich Williams, host of the Payments Podcast, and today I’ll be talking to Ed Adshead-Grant, General Manager for Payments at Bottomline Technologies, and Julian Sawyer, Chief Operating Officer at Starling Bank. Hello to you both.

Ed Adshead-Grant: Good afternoon.

Rich Williams: So, Ed, let’s begin with you, if we may.

Ed Adshead-Grant: So, the new access model came about when there was the need to innovate in the industry. So, we’ve been working for many years in what people would call the ‘agency model’, which didn’t prove that competitive. New entrants were working through other sponsoring banks, some of the larger banks, and that service was not 24/7, and not particularly sharp for the typical consumer or corporate that needs to be serviced today. So, it was new ideas, a new way to give new access and better services to the Faster Payments solutions.

Julian Sawyer: So, I guess, to add some more colour to what Ed has said, the first 10 participants in Faster Payments started the scheme about 8-10 years ago, and that was locked down. So, the access model started to enable other banks to come on board. Starling Bank, for instance, was the 13th bank to join Faster Payments, and a number of banks have joined after that.

What that has done is, created an environment where other organisations, other banks, can join the scheme directly, and start to offer a different set of services into the market, and really to disrupt the incumbents that have been in there for the last 8-10 years, dominating the market.

Rich Williams: So, what has the progress of this been like the UK, and is there relevance for this globally?

Ed Adshead-Grant: So, Bottomline has been very busy in this space. If you look at the new entrants that have come in, about a third of the logos on the participant website, we’ve been involved with. So, it’s been very interesting, busy times.

I would say the actual success, if I was to put it in numbers is- probably one story with one of our customers where, previously, on the agency model, they were dependent on the work schedules of the sponsoring bank. They actually had up to 50 hours of outage, five-zero hours of outage within a month. Once we’d got them into the new access model that dropped to 36 seconds. So, it’s really an impactful model to put into the Faster Payment options.

That’s the UK, and then wider, we know that real-time, instant payments, immediate payments, however they’re called around the world, have started to boom, with over 25 different countries following a similar pattern of moving all of the old world of batch onto real-time, given the demands of the marketplace. So, a very exciting place, good place to be to invest and help customers move forward.

Rich Williams: Julian, some colour for yourself on this, please. Although the new model was backed by regulators encouraging access to Faster Payments service, it didn’t resolve the problem of restrictions or barriers to entry, around accessing the clearing and settlement system. Why was this?

Julian Sawyer: So, I think if you look at the direct model, and the access, and what is required, you need to have gateways, you need to have a lot of technology, you need a whole range of people, payment operations people, you need compliance people, etc. It is a big project for an organisation to do, and it is not applicable for every bank, every e-money institution in the UK to say they need to be directly connected into the scheme.

You’ve also got to have a Bank of England settlement account, which has been fairly restricted, in terms of those access… You also have what’s called the famous ‘slots’, which is the weekend that you’re allowed to go live, and those are allocated out to you, across all of the payment schemes.

So, while this has been a very big success, in terms of doubling, if not more, the number of participants within the scheme, there are still 400 banks in the UK, 2,000 e-money institutions that are not connected into the scheme. That’s where, really, the indirect model, and what we’re working with Bottomline on, is really going to try and transform that market.

Rich Williams: So, are you saying that this can be changed?

Julian Sawyer: It can be changed because, as I’ve mentioned earlier, the challenge with the indirect model was that it was slow. You had a lot of outage, and it wasn’t real-time payments. If you look at any fintech today, they are all wanting and needing fintech- they’re all wanting real-time payments to undertake their proposition.

So, what we’re doing is offering real-time payments in an indirect model, and that’s really changing the market. By doing that through a set of very simple APIs, with a very straightforward technology layer, enables us jointly to go to market and provide real-time access to Faster Payments in an indirect model, which means people don’t need to worry about all the settlement and collateral required at the Bank of England, all of the technology and the gateways, and also all the scheme compliance which, trust me, is actually quite a lot of work to do.

Rich Williams: Moving briefly on to open banking, and the new payment architecture, if we may, without going into too much detail on it, what impact would they have on rea-time payments?

Julian Sawyer: So, I think open banking, almost by definition, requires real-time payments. You’ve also mentioned the new payments architecture that is coming out, so in two, three years’ time, all of the infrastructure around Faster Payments, and also the BACS payment scheme is going to be replaced by a whole new environment. If you’re directly connected to any of those schemes, you’re going to have to have a complete rebuild of your payments infrastructure. That, as you can imagine, is a very, very costly and high-risk activity for any institution to do.

So, by this model, it enables us to provide an insulating layer for our clients, that they don’t need to worry too much about all this infrastructure change that’s happening with the industry, and we can continue to provide real-time Faster Payments.

Rich Williams: That’s great, thank you. For the listeners, we will have separate podcasts on these topics in future, for anyone who wants further information. Ed, what’s Bottomline’s role in all of this, and how are they helping to support the model? What’s the proposition?

Ed Adshead-Grant: So, Bottomline is offering what we call the [Real-Time Payments Express 0:07:03], which is part of our Universal Aggregator Suite. What does that all mean? That means we are supporting and investing into the indirect model. So, we can go to market with our partners, like Starling Bank, and actually introduce for the first time a real, real-time 24/7 service for payments.

Given that we now have this way of working, now we’ve moved on from the new access model that had some challenges that we covered, in terms of, there was just too much demand for the supply on that model.

So, it’s an exciting time to improve the service offering to the customers of our customer. We offer, literally, a switch-on, because a lot of people are already connected to Bottomline, with all of our connectivity in the marketplace. So, it’s a fairly frictionless project for those who really want to start competing in the market, on a real-time payments solution.

Rich Williams: Have you noticed that customers are changing their business needs in regard to real-time payments?

Ed Adshead-Grant: I think customers have to change. The days of three-day cycles, or sponsored cycles with so much outage that it becomes heavy on the call centre from complaints and poor service, they are just moving out of the industry.

So, to be competitive nowadays in the technology market, you consume by the click. People aren’t that interested in heavy armies of IT inside a business when IT isn’t their primary business. They can focus on the customer. They can focus on their message. In the background, with a partner like Bottomline running a payments express service, all of that compliance, all of that criticality, is taken care of, and that opens up all kinds of options for customers to move forward.

Julian Sawyer: So, I think what we’re seeing are two mindsets. First of all, people going, “Yes, it would be nice to have real-time payments.” I don’t think that, really, is the opportunity. The real opportunity is when people are looking at the business models and going, “How do I do things differently?” So, “If I’ve just applied for a loan, can I get my money instantly? Not at the end of the day. Now. Do I get paid differently?”

Salaries, traditionally, have been through banks as direct credits. That takes three days. That means the company has got three days’ worth of float that’s stuck in the banking system. “Could I pay my employees two days early? Does that create opportunities for retention, for reward, etc. Why do I have to wait for the end of the month before I get paid my salary? If I have worked a week, why can’t I have my week’s salary?”

So, what we’re seeing are a lot of really interesting clients, who are looking at their business and saying, “How can I use real-time payments to do something fundamentally different?” Not just, “I want to make it quicker,” but changing their business model, changing how they pay their suppliers, how they collect money from their customers and how they pay their staff. I think that is the really interesting thing.

I don’t think we’ve seen all the examples, to date, and I think there’re going to be some really, really interesting and exciting clients between us, where we see innovation coming out through the real-time payments mechanism.

Rich Williams: Julian, that flows on really nicely to my next question, which is that Ed mentioned earlier that Starling is one of the banks using the Faster Payments service capability. Now, how did you gain access to real-time payments?

Julian Sawyer: So, when we started the bank in 2014, 2015, we realised very, very quickly that we wanted and needed real-time Faster Payments. We needed to be in total control of the payments infrastructure, because of some of the challenges that we’ve spoken about already, within this podcast. So, what we didn’t want to do was to sit behind one of the incumbent banks’ mainframes, and whenever there was an outage we would be at the bottom of the queue to be fixed.

So, we absolutely needed to do that. We bought and purchased the Bottomline gateway, which enabled us to have access into the scheme. That enables us, for our consumers and for our SMEs, access into real-time Faster Payments, and we joined the scheme at the beginning of 2017.

What emerged very, very soon after announcing that we had joined was that other companies started to phone us up and ask whether we would sponsor. That really started to get us thinking about how we can provide this service and this capability to other parties.

The exciting part is, again, when you start talking about Faster Payments, everybody thinks, “Oh, it’s the banks, it’s the big banks,” etc. Actually, if you’re a fintech, if you’re an e-money institution, this is absolutely an amazing proposition, to be able to get access to real-time Faster Payments, and also without a massive technology play. This should not be the critical path for you to launch your proposition, and we’re taking payments out of that critical path.

It’s also really important for corporates as well, and they’ve been hampered by having to work with the banks, having to work with old infrastructure, and file formats, and everything else, to be able to make their payments. This is about putting corporates in control of their payment flows.

So, for us, this has been a journey that we’ve been on for three or four years with Bottomline, in terms of getting that capability to the scheme, and then growing that capability wider in the marketplace to offering to other organisations.

Rich Williams: What were the main drivers, and your business needs, I suppose, for being able to offer this real-time payments service?

Julian Sawyer: So, I think if you look at consumers, they absolutely understand that they can download movies, music on a click of a button, and they get frustrated when they have to wait. I’m old enough to remember dial-up, and getting my emails by plugging into the phone lines. Today’s generation, we are absolutely educated to the fact that everything is real-time, and yet payments aren’t.

While we talk about Faster Payments, it is not always fast because you’ve got all these other banks that are not directly connected. So, therefore, you’ve got a huge expectation gap in terms of, I can do an awful lot of my stuff in the digital world absolutely in real-time, but payments are not.

That really became evident as we launched our current account in 2017, in terms of, that was a base requirement. What we’re trying to do now is offer that service to other people, to enable them to make payments in real-time.

Rich Williams: How does this bring you a competitive advantage?

Julian Sawyer: So, for us, it is one of our three business units within Starling Bank. So, we have our consumer current account. We have our SME current account, and we also have Banking Services, which is the provision of this to a B2B environment, as we said earlier, to banks, FIs and also into corporates.

Ed Adshead-Grant: Just to add to that, that it’s great to see the success of both the relationship that we had here from… From three years ago, I remember when Julian and I first got together, and we talked about some visions and some dreams of where this might go. We were up for it, and we spent time together, and invested, even before the licence had arrived for Starling Bank.

Now, to see the volumes grow, and just recently to see the remediation funds come through, where Starling had just been awarded £100m to further innovate and, in particular, support the SME market. So, it fits very nicely with our position of helping businesses pay, and get paid. We’ve now got an active partner who is opening up new propositions for corporates and other customers. So, all is well.

Rich Williams: Well, that’s all we have time for today. Ed, thank you for wrapping it up so concisely. Julian, thank you for your time as well, it’s much appreciated. For anyone listening, you can check out our website for more information.

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