Faster Payments Agency Banks

Faster Payments and Agency Banks

The Faster Payments scheme will be open to all banks to join as full members, but many will not want the obligations of maintaining and running settlement processes with the Bank of England. They will prefer to join the Faster Payments scheme as Agencies, sponsored by a member bank, (as they are for the other UK payment schemes). Examples of Agency Banks are small building societies or subsidiaries of Foreign banks. The following questions aim to clarify what Faster Payments mean for such banks.

What is the minimum an Agency Bank has to do?
Why would an Agency Bank want to make Faster Payments?
What are the IT and Project Implications for an Agency Bank?
What are the options for an Agency Bank?
What is the difference between a direct and an indirect agency?

These are questions that should help bank staff deal with customer enquiries or bank staff who are new to the bank's Faster Payments project get up to speed with Faster Payments.

How does Faster Payments Compare with BACS?
Are There Different Types of Faster Payments?
Why Are Faster Payments Being Introduced?
What Currencies Are Supported?
Why Would a Customer Use a Faster Payment?
Are All Banks In the Faster Payments Scheme?
When Will Faster Payments Be Available?
How Much Will Faster Payments Cost?
How Does Faster Payments Compare with CHAPS?
How Will Faster Payments Affect Bank Staff?
Will Large Corporate Billers like Utilities and Telco's be affected?
How will this affect Customer Balances?
How does Faster Payments related to SEPA and other Payment Initiatives?

The following are more specialised areas which assume a greater level of knowledge on the part of the reader.

FP Testing (Suitable for both business and IT project managers)
FP Programme Management FAQs (Suitable for staff setting up and project managing all or part of a Faster Payments Programme)
Credit Management FAQs (Suitable for staff modifying credit policies, processes and systems to cope with the advent of faster Payments)
IT FAQ's (suitable for IT staff having to build the infrastructure to support Faster Payments)

What is the minimum an agency bank has to do?

When it comes to receiving payments Agency Banks may wish to make some changes. This is because they are the recipients of many of the standing order banking payments that are converting to Faster Payments, (e.g. standing order payments into savings accounts or for paying off a loan).

Currently, these payments are routed via the 3-day BACS processes into "settlement" accounts for the Agency Bank. For a variety of technical factors too complex to explain here, the reduction from 3 day payments to same day/real time Faster Payments will mean a change in the treasury, operations and credit departments of many Agency Banks. For more detail, contact us.

In addition to the above there is a degree of regulatory push on the Agency banks to remove float from their standing order, internet and telephone banking payments. Whether an Agency Bank uses Faster Payments to remove float or some other techniques (e.g. changing customer accounting processes) will be a decision for each Agency Bank.

Why would an Agency Bank want to make Faster Payments?

There are a number of reasons why an Agency Bank would want to develop a Faster Payments capability.

Keeping their internet/telephone banking operations competitive with banks that can offer faster payments.
Exploit Faster Payments to improve specific customer propositions (e.g. a truly instant access savings account)
In back office processes to replace CHAPS payments and save costs.

What are the IT and Project Implications for an Agency Bank?

2006 - Obligatory; understand what needs to be done to receive faster payments and make associated 2007 budget provisions.

Obligatory; understand the impact of incoming (and any outgoing) faster payments on the credit and operational processes of the Agency Bank and plan changes necessary for 2007.

Optional; understand opportunities to exploit Faster Payments. If the Agency Bank chooses to offer making Faster Payments to its customers, then many of the issues that concern member banks will need planning and addressing. Examples would be enhanced security in channels, intra day balance capabilities and 24 x 7 infrastructure services

2007 - Obligatory; develop new processes to deal with incoming Faster Payments in conjunction with your bank (probably involves IT and testing with the bank).

Obligatory; Implement the necessary changes to credit and operational processes and systems to cope with incoming faster payments.

Optional; develop new processes to make Faster Payments (probably involves IT and testing with the clearing bank).

There is a fuller description of some of the credit process implications of Faster Payments in the page " what is the impact of Faster Payments on Credit Processes?".

What are the Options for an Agency Bank?

For handling incoming payments, the Agency Bank can use a service provided by the clearing bank (e.g. a settlement account service or current account service). This is likely to be a mostly batch/file based service. In addition some, probably the largest, Agency Banks may find a real time service from the Central Infrastructure of use.

For making Faster Payments Agency Banks will have three options

Agency Banks will have the ability to make Faster Payments by the internet banking/electronic banking services of their clearing bank. This may be single payment or file based and the interface options will depend on what is offered by the clearing bank.
Agency Banks will be offered a capability to make real time payments directly into the Central Infrastructure of the scheme, probably only of interest to the largest Agency Banks.
Finally, Agency Banks will also be offered an ability to submit a file of Faster Payments directly to the Central Infrastructure.

What is the difference between being a Direct Agency and an Indirect Agency?

The diagram below illustrates the essence of the relationship between a direct agency bank, the scheme central infrastructure and the sponsoring member bank.

Points to note in the Direct Agency model are:

The Direct Agency connects directly to the FP central infrastructure using the scheme message rules (i.e. ISO8583 message formats and scheme service level agreements on availability and near real-time response times). This is represented by the dark line in the diagram below.

infrastructure is also reflected in an account held at the sponsoring member bank. The member bank settles with the Direct Agency Bank bilaterally and settles with the other scheme members as if the Direct Agency were just one of the sponsoring member's customers. i.e., although the Direct Agency is plugged into the infrastructure and can make/receive the Near Real Time Payments like a member, it does not have the responsibility of settling with the Bank of England that a member does.

Each transaction sent or received to/from the central infrastructure is also reflected in an account held at the sponsoring member bank. The member bank settles with the Direct Agency Bank bilaterally and settles with the other scheme members as if the Direct Agency were just one of the sponsoring member's customers. i.e., although the Direct Agency is plugged into the infrastructure and can make/receive the Near Real Time Payments like a member, it does not have the responsibility of settling with the Bank of England that a member does.
A Direct Agency can sponsor a corporate customer into the scheme (via a mechanism called Direct Corporate Access - DCA). When a corporate submits a file of Faster Payments for processing, the Central Infrastructure will send an authorisation request to the Direct Agency who must respond in Near Real Time.

The second diagram (left) illustrates the essence of the relationship between an Indirect Agency Bank, the scheme Central Infrastructure and the Sponsoring member bank.

Points to note with the Indirect Agency model are:
The interface between the Indirect Agency and the member bank, illustrated by the ladder like line in the diagram, will vary from member to member- this is a competitive issue. For example, it could be file based or message based; it could be SWIFT format based or some proprietary format owned by the member bank.

The end to end response times and availability to the end user of the Indirect Agency will not be governed by scheme rules and will generally be slower than those experienced by a Direct Participant. e.g. it is unlikely that a user will get a confirmation of their payment (positive or negative) in near real time.
In theory an Indirect Participant can sponsor a corporate into the scheme via DCA but we remain unconvinced this is actually practical. The problem lies in the file authorisation check described previously. If the Agency Bank is indirect, the Central Infrastructure will check for authorisation against the Agency Bank's account with its member bank. (This is illustrated by the dotted line in the diagram above). Thus, the check will be made against the available funds/limits that member bank associates with the whole Agency Bank not just for the submitting corporate. This is unlikely to be viable from a credit risk/operational risk perspective to an Agency bank.

How does Faster Payments Compare with BACS?

BACS is a scheme for moving a number of different types of payments between banks (and large companies). Faster Payments will replace some of the payments currently run over the BACS scheme, specifically

Standing Order Payments
Internet Banking and Telephone Banking Payments

It does not replace all BACS payments by any means. Specifically;

Direct Debits are unaffected
Direct Credits (where a company sends payments directly to BACS not via a bank are unaffected - e.g. Payroll Bureau).

Where a payment was made by BACS and now uses Faster Payments the most noticeable difference is the speed. BACS payments take 3 days to process (from instruction being sent to the beneficiary receiving cleared funds). Faster Payments will be either Near Real Time or Same Day depending on the payment type.

Are There Different Types of Faster Payments?

Yes. From the payer's point of view there are three types of payment instruction.

Immediate Payments - These are payments that the payer wants to make straight away (e.g. an immediate phone transfer to my son at university a hundred miles away).
Diarised Payments - These are single payments with a date for sending other than today (e.g. an instruction to pay my credit card bill in a week's time).
Standing Orders - A Mandate for the bank to make a payment of a specific amount to a specific beneficiary for a number of future dates or on a regular basis indefinitely.

Faster Payments treats these types of payment differently.

	Immediate Payment	Diarised Payment	Standing Order
When are they paid?	24 hours a day, 7 days a week (i.e. including Saturdays, Sundays and Bank Holidays) whenever the payer wants to make the payment.	In principle these can run 24 x 7 however, many banks may restrict them to the same dates/ times as Standing Orders.	These will be paid on bank working days. They will be scheduled to run between midnight and 6:00 am on the day of payment.
Amounts allowed	There will be a limit on the size of such a payment. The initial scheme limit will be £10K. Individual banks may impose lower limits for Fraud or Credit reasons.	The initial scheme limit is also £10K. There is no reason why this has to be the same as Immediate Payments limit.	This will have an individual payment limit of £100K.
Speed	The whole process from initiating the payment to getting the acceptance/rejection response from the other bank will normally take a few seconds.	Most banks will deal with Diarised Payments according to the same service levels as Standing Orders.	The payments will be made on the diarised date, and 95% or more will be paid by 06:00 on that date but no guarantee is made about an individual payment.

Why Are Faster Payments Being Introduced?

The principal reason is that the UK banking industry feels that a low value, high volume, 24 x 7, real time payment system will become an important part of the economy of the 21 st century. As the world we live in increasingly becomes 24 x 7, an electronic payment system that reflects that speed and availability is important. By introducing this payment system the banks hope to gain income directly from payment charges and indirectly by making the UK an attractive place to do business and so gaining from a growing economy.

A secondary reason is that the banks will use the new payment system to replace those payments which currently incur float. (Float is where paying customers are debited on day 1 but the beneficiary is not credited with the payment until day 3; the banks thereby earn two days interest on the payment). Float is a legacy of the older BACS payment systems for inter bank payments and has been an issue with the banking regulators for a while.

Finally, the UK banks believe that a thoroughly modern payment system will place them well to win payment processing business as the Single European Payments Area (SEPA) develops.

What Currencies Are Supported?

This is a GBP (£) only system. Payments can only be made in sterling to and from UK bank accounts. (The scheme has been designed to be easily extendable to other currencies in the future, e.g. the payment message has a currency field which at launch will always be GBP)

Why Would a Customer Use a Faster Payment?

Firstly some customer payments may be automatically converted to Faster Payments "behind the scenes" on the customer's behalf. For example, those that currently incur float might convert to Faster Payments. These include

Internet and Telephone Banking Payments
Standing Orders

Beyond this set of changes different features of Faster Payment may appeal to different customers; possible examples might include:


Price	Low value CHAPS payments might be made via Faster Payments because Faster Payments would be cheaper; similarly credit or debit card purchases for high value items might lend themselves to Faster Payments as being cheaper for the seller.
Speed	Some company's customer services departments might want to refund money in "real time" to a customer's account. Urgent Benefit claims could also be paid into an account instead of giving out a Bank Giro or cash.
24 x 7	For example, transferring money at night or at weekend may be important in a weekend trading environment instead of cheques.
Certainty	Traders or individuals (e.g. a private individual selling a second hand car) can see in seconds if the money has arrived in their account by internet/phone banking and know it is irrevocably paid. There is no risk of a payment bouncing as with a cheque.

Are All Banks In the Scheme?

Twelve banking groups (Barclays, HBOS, HSBC, RBSG, Lloyds TSB, Nationwide, Alliance & Leicester, Co-op Bank, Abbey, National Australia Bank, Northern Rock, Citigroup) have committed to implement the scheme. Between them they represent 95% of the payments made in the UK. The other banks and building societies will be making decisions on how, when and if to join the scheme over the next year or so.

When Will Faster Payments Be Available?

The Banking Industry via APACS has committed to launch the scheme in November 2007

How Much Will Faster Payments Cost?

Charging for faster payments is a commercial matter that will be determined by market forces. There is an expectation that given the payments initially being replaced are part of the BACS interbank scheme (i.e. high volume, low value) that the market pricing will come out much closer to current BACS payment pricing than current CHAPS (low volume, high value) pricing. Thus one might reasonably expect the price to be measured in pence (as for BACS today) as opposed to pounds (as for CHAPS today).

How Does Faster Payments Compare with CHAPS?

There are a number of general characteristics that are the same between CHAPS and Faster Payments.

The service level is Near Real Time/Same Day
The payment is irrevocable once sent

However, there are some important differences

	CHAPS	Faster Payments
Settlement (this is a complex point but leads to the next line.	CHAPS is a Real Time Gross Settlement System	Faster Payments will be a Net Settlement System
Transaction size	There is no upper limit to the size of payment, hence CHAPS will continue to be used for house purchases and large company payments.	There will be a transaction limit on the size of each payment (£10K for an immediate payment, or £100K for a Standing Order).
Price	Typically measured in pounds.	Typically measured in pence.
Availability	CHAPS payments can be made between 08:00 and 16:00 on UK banking days	Faster Payments can be made 24 x 7 x 365
Feedback Time	A receiving bank does not have to confirm whether a payment has been received to the beneficiary account.	A receiving bank is able to confirm that the payment has been paid to the beneficiary account in seconds.
Protocols Used (this is a complex point that is important to international and investment banks)	CHAPS is based on SWIFT messages and formats	Faster Payments is based around the ATM/debit card messages called ISO 8583.

How Will Faster Payments Affect Bank Staff?

This is a very broad question which will depend a lot on what type of staff in the bank we are talking about. We highlight three areas in particular.

Credit management - whether the customer is personal, small business or corporate there is a major speeding up of the payment cycle with Faster Payments moving payments from 3 days to Near Real Time (NRT) or Same day. Many banks use the 3-day cycle to make human and system based pay/no pay decisions. There will not be time using the current processing for these payments to be assessed. This will be a big change for most banks. However, the old processes will continue to be needed for those payments not migrating to Faster Payments (e.g. direct debits and cheques).
Payment Back Office work and Query Handling - This should be a major improvement as the near real time nature of the payments means that customers can seek near real time feedback on whether the payment has successfully reached the beneficiary account, hence eliminating lots of "where is my payment?" type queries. The payments being irrevocable will reduce the work associated with payment recalls.
Large Corporates and Agency Bank customer facing staff. - There are a number of special features and options within the Faster Payments scheme designed for large Corporates and Agency Bank customers. This will involve the relationship managers and support staff having to understand these offerings.

Will Large Corporate Billers like Utilities and Telco's be affected?

Yes. As companies receiving large numbers of payments from individuals and commercial companies they will have to change their Treasury and Accounts Receivable processes. This is because a large number of the payments currently made to these companies (e.g. Standing orders, internet banking payments and telephone banking payments) will convert to Faster Payments.

In addition these companies (and other large companies such as retailers) are high volume payers and there are a number of attractions to them to use Faster Payments for at least some of these payments.

How will this affect Customer Balances?

This is difficult to forecast but in principle it should be easier and cheaper to move money around fast. Hence a customer of a bank with a low/zero interest paying current account can move money into a high interest bearing account with another bank one day and send it back the next with no loss of interest. Currently such a transaction would take 6 days (as a minimum) to transact during which time the funds involved would get no interest. Hence it would seem logical that banks that compete hard for savings may well offer Faster Payments to make it easier for customers of big clearing banks to move money out of their non interest bearing accounts.

How does Faster Payments relate to SEPA and other Payment Initiatives?

Faster Payments and SEPA are completely different projects and schemes;

Faster Payments is a UK sterling only payments scheme, essentially for credit transfers
SEPA is a scheme covering payments in euros only in 25 countries, including credit transfers and direct debits
Faster Payments is a real time, message based service
SEPA is multi day cycle based

For a UK bank the SEPA project will affect different system components, customer propositions and business processes to the Faster Payments project. It will be a completely different project.

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