To get a better understanding of the latest changes affecting Bacs payments and Direct Debits in the UK, Rich Williams, host of the Payments Podcast, sat down with Marcus Hughes, Head of Strategic Business Development at Bottomline Technologies, to discuss the New Payments Architecture.
The way businesses and banks pay and get paid is changing rapidly. The payments industry is going through a period of unprecedented change. There is a range of dynamic factors which are driving this fast-moving environment, including:
- New regulations which encourage greater innovation and competition
- New entrants to the market, both challenger banks and non-bank fintechs
- New requirements for Anti-Money Laundering (AML) and Financial Crime Compliance
- New payment instruments and formats
- New technology, in particular the adoption of cloud
- And the widespread roll-out of real time payment systems around the world
With so much change, there has never been a time of greater need for trusted advisers who can make it easier and faster for banks and corporates to comply with these new requirements, while getting maximum benefit from the exciting opportunities presented by these changes.
Rich: Marcus, why is the New Payments Architecture important to banks and businesses?
Marcus: Over the next few years, the New Payments Architecture (NPA) will introduce radical changes and exciting new features to the UK payments landscape. The most significant of these changes will be the end of the Bacs three day clearing cycle. Bacs Direct Credits and Direct Debits, as well as Faster Payments, will all be replaced by a new credit transfer instrument which will clear in real time, 24/7, 365 days a year. This new credit transfer instrument will use the ISO 20022 file format. This will replace the Bacs Standard 18 format and the ISO 8583 format currently used by Faster Payments, which is actually a card format. Now despite all this change, I want to emphasise strongly that Direct Debits will continue to be widely used. But the way they are processed and cleared will undergo significant changes to make them easier, faster and more secure.
New Payments Architecture will also see the introduction of exciting new payment instruments, known as Overlay Services. These new payment instruments have names like Request to Pay, Enhanced Data and Confirmation of Payee.
Rich: Can you give us some background on how and why these changes are coming about?
Marcus: Yes, of course. New Payments Architecture is a natural extension of Open Banking. The program for New Payments Architecture is being driven by the UK’s Payment Systems Regulator, which is part of the Financial Conduct Authority. The program’s objective is to modernise UK payments and make them more secure, by replacing our rather complicated legacy systems and by ensuring that the UK has a more stable and resilient payments infrastructure. This ambitious program, which will be rolled out over the next 2-5 years, will bring radical change to the way businesses, banks and consumers pay and get paid.
I think we will start to see the impact of New Payment Architecture as early as this year, when we anticipate the launch of a number of market delivered solutions using Overlay Services such as Request to Pay. But we will not see the phasing out of some familiar payments schemes, such as 3 day Bacs, until 2021.
Rich: And who came up with the detail for all these changes?
Marcus: There has been a major consultation across the UK payments industry which involved the creation The Payments Strategy Forum. The group consisted of experts from banks, payment systems, Fintech firms and consultants who were tasked with designing a more modern and secure payment system. They wrote a New Payment Architecture “Implementation Plan Blueprint”. This large document sets out the vison for how the new payment system will operate. At the heart of the plan is a new Simplified Payments Platform. This new central infrastructure for payments will replace legacy systems, such as Bacs, Faster Payments Services and cheque clearing. All users of payments in the UK will need to migrate to this Simplified Payments Platform between 2021 and 2023, 2 to 5 years from now.
Rich: What has been done so far in the New Payments Architecture program?
Marcus: Although, it is probably not visible to many normal businesses, a lot of work has been going on in the background. An entity initially called The New Payment System Operator was formed a few years ago. This entity, whose role will be to create and run the Simplified Payments Platform, was re-branded as Pay.UK at the end of 2018. As a major first step towards consolidation of the payment systems, Pay.UK now has control of the UK’s existing retail payment systems; that is Bacs, Faster Payments and The Cheque and Credit Clearing Company. Bringing these organisations under the umbrella of the Pay.UK will make co-ordination easier and it will simplify migration to the Simplified Payments Platform.
Rich: You mentioned that there will be important changes to the way Bacs Direct Credits, Direct Debits and Faster Payments are processed. What are these changes? Can we start with Credit Transfers?
Marcus: Certainly. All these payment types will undergo important changes as businesses migrate to the Simplified Payment Platform between 2021 and 2023. At present, a business typically uses Bacs-approved software or a Bacs bureau to submit files to the Bacs central infrastructure or to the Faster Payments Service. Once the Simplified Payments Platform is launched, most businesses will need to use the services of a Third Party Service Provider. This is a new type of service provider which will enable access to the Simplified Payments Platform. In addition, these Third Party Service providers will deliver an exciting range of Overlay Services, which will make payments more secure and easier to use. It is expected that some banks and Fintech firms will decide to become Third Party Service Providers. Any party wanting to become a Third Party Service Provider will need to be accredited by Pay.UK.
In a significant change to existing Bacs processing today, when a customer submits a payment file, the Third Party Service provider will disaggregate that file; in other words, it will divide up payments into a separate file for each bank whose customers are due to get paid by that payment file. In this way, the Third Party Service Provider will probably need to create a separate payment file for NatWest, HSBC and Barclays and any other bank with customers getting paid. This is very different to the way Bacs files are processed today. Under the new system, these disaggregated files, separated by payee bank, will each be submitted to the Simplified Payments Platform. This disaggregation process by the Third Party Service Provider will make it easier for the Simplified Payment Platform to manage all clearing in real time.
The Third Party Service Provider will also perform checks for the Current Account Switching Service and will redirect payments to the new account of any party that has changed bank accounts.
As I mentioned at the start, a different format, known as ISO 20022, will be used for Bacs and Faster Payments. Recognising that many businesses are not familiar with this ISO 20022 file format, Third Party Service Providers will offer data transformation services into and out of ISO 20022, and provide mapping with more familiar formats, such as Standard 18, SAP iDocs etc. It is also expected that many businesses will submit their remittance data separately from the payment messages. Third Party Service Providers will therefore provide a service to incorporate remittance advice information data into the ISO 20022 format. This XML format has plenty of capacity to carry remittance information. In this way, the payment message and the remittance data, known as Enhanced Data, will travel together in a single message through the Simplified Payments Platform, and onto the receiving bank and the payment beneficiary.
At Bottomline, we have extensive expertise in providing data translation services for a wide range of formats, including ISO 20022. This XML format is already used in a number of international payment and financial messaging systems, such as SEPA and Target2 Securities. These data mapping skills which we already use for our Financial Messaging customers mean we are ideally placed to help customers adapt to ISO 20022 when this format is adopted in UK payment systems over the next few years.
Rich: And what changes are planned for the way Direct Debits are processed?
Marcus: For Direct Debits, the Third Party Service Provider will perform similar tasks to what I described for credit transfers, but with a couple of important differences. I’ve just explained how credit transfer files, divided up by payee banks, will be sent by the Third Party Service Provider to the Simplified Payments Platform for clearing. But Direct Debits will follow a different routing. For Direct Debits, the Third Party Service Provider will send disaggregated files direct to each bank where debtors hold their account; and not direct to the Simplified Payments Platform. Just to make this clear, I’ll repeat that process, because it is important. The Third Party Service Provider will take Direct Debit files from their customers and will disaggregate them. It will then create a new Direct Debit file for each paying bank, where debtors hold their accounts. These multiple Direct Debits files will be sent direct to each of these banks. This is instead of the current process of sending to Vocalink a single bulk file for all paying banks combined. Under the new system, it will then be the debtor’s bank or Third Party Service Provider that will push the payment files into the Simplified Payments Platform for clearing. In this way, all Direct Debits under New Payments Architecture will be “push payments”, as opposed to “pull payments”, as they currently operate today.
An important change to the way DDs are processed today is that, under the new system, only cleared funds will be sent to the Simplified Payment Platform. Any Direct Debits which cannot be debited to a customer’s account will be returned to the payments service user as an Advice of Non-Payment. In this way, the Direct Debit originator will only receive cleared funds into their account on the payment due date. This means that any unpaid Direct Debits will no longer be reversed from the payment service user’s account post-settlement. This is the way in which Direct Debits are processed today. The payment service user will be notified of any rejected payments and will therefore have an accurate view of cash flow at the end of the day on the payment due date. This is a significant improvement compared to the current situation where failed DDs are debited at a later date.
An important new service expected to be provided by TPSPs will be reconciliation services, in order to confirm that Direct Debits have been paid by their debtors. I know this all sounds complicated, but once payment service users become more familiar with this new process for Direct Debits, it is expected to be significantly more efficient and much faster than existing practices.
Rich: Do you think all existing providers of Bacs solutions and Bacs bureaux will manage all these processes for their customers?
Marcus: That’s a good question. The role of the Third Party Service provider will undoubtedly be more comprehensive and onerous than the functions currently performed by a typical Bacs Bureau. If you think back on all the changes I’ve just described and then compare it with many current Bacs bureau today, I think this step change could prove challenging for a number of existing players. They might lack the scale or broad range of skills required in the new world of New Payments Architecture. Similarly, banks generally do not provide Bacs Direct Debit services to their customers, so this may look like unfamiliar territory for them. It is therefore likely that the current large providers of cloud-based Bacs and Faster Payments solutions will have a major role to play in migrating customers across to the new systems for credit transfers and Direct Debits. We’ll see how this evolves over the next few years.
Rich: With all these changes to electronic payments, what’s going to happen to cheque clearing? It’s been in the press a few times lately, I think.
Marcus: That’s right. Slowly but surely, a new image-based cheque clearing system is being rolled out in the UK. One of the main benefits of the new system is that cheque processing will be speeded up. It means that if a customer pays in a cheque on a Monday to Friday and it is cleared via the new system, then they will be able to withdraw the funds by 11.59 at night, at the latest, on the next weekday. That excludes bank holidays. Some banks and building societies will offer their personal customers the option of using a secure mobile banking app to pay-in an image of their cheques. This is instead of having to go to a bank to pay it in. For business and charity customers, banks will provide desktop scanners linked to their online bank account, allowing them to pay-in digital images of any cheques they receive. It’s important to remember that the introduction of this new process means that when a cheque is cleared via the Cheque Image Clearing System, not only will the recipient receive the money in their account more quickly but the money will also be debited from the payer’s account in a faster timescale.
Stay-tuned for the next part of our Everything You Need to Know about the New Payments Architecture series. To be notified when Part 2: Overlay Services Explained is live, subscribe now and stay up-to-date on the latest payments tips, trends, and topics.
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