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UK payments reform could boost economy by $98b -- more enthusiasm at the back, please

UK payments reform to make all payments real-time could boost the UK’s economy by up to $98.0 billion in 2026, or 2.7% annually. That's according to a new report from ACI Worldwide, Global Data, and the Centre for Economics and Business Research. It comes as UK policymakers work with banks and other partners on delivering a long-delayed, much-reworked “New Payments Architecture” (NPA) that would dramatically upgrade the 17-year-old Faster Payments infrastructure, which currently uses the ISO 8583 cards messaging format.

The report comes as the Bank of England (BoE) also continues work on a rearchitecture of its -- currently misnamed -- Real Time Gross Settlement (RTGS) system, which is central to the reform of broader UK payments infrastructure. (In 2017, the Bank of England opened direct access to its settlement accounts to "non-bank Payment Service Provider" fintechs, but as of mid-2022 the number of those approved was still in single digits.)

Controversial handling of the NPA early on (including aborted procurement) caused cynicism among many stakeholders about the ambitious plans, but further delays could undermine the UK’s economy, the new report suggests. The NPA programme originally targeted consolidation of all payment types, including Faster Payments, Banker’s Automated Clearing Systems (BACS), Clearing House Automated Payments System (CHAPS), and Cheque and Credit Clearing (C&CCC), into a single, central, modern ISO 20022 architecture that comes with richer data sets and new capabilities. It is now focussed initially just on Faster Payments reform.

“Real-time payments are at the heart of the new global payments landscape and have the potential to play a key role in unlocking economic growth. As it stands, emerging countries are leading the way and are outpacing developed nations in real-time adoption, growth, and the associated economic benefits. This is largely down to the agility and flexibility of the modernised payments infrastructure in those countries and the new, innovative payments services that are being offered to consumers and businesses because of it,” said ACI's Craig Ramsey.

“If the UK is to truly capitalise on the potential economic benefits of real-time payments over the coming years, then it must address the urgent need to modernise its ageing payments infrastructure and embrace the New Payments Architecture with open arms. The onus is on government and industry to work together to increase adoption, otherwise... the UK risks falling even further behind the rest of the world" he added today.

Policy makers have been urging reluctant banks to get more involved, saying “upgrading the bank-side interfaces to the NPA without consideration for other parts of the bank’s payments infrastructure, will deliver little benefit and the result will be ‘forced compliance’ at significant cost. Investment needs to be applied to more than simply how a bank connects to the NPA… The NPA will better enable banks to serve their customers but only by leveraging the long-term benefits that come from the investment. The use of LEIs (Legal Entity Identifiers) will enable banks to process payments at lower risk and cost. Meanwhile, UETR (Unique End-to-end Transaction Reference) data will enable more accurate, faster processing, and Purpose Codes will improve payment prioritisation and reduce financial crime.  richer data will simplify reconciliation and enable greater accuracy…”

RTGS reform is also coming...

Work on the NPA comes as the Bank of England also continues work on its Real Time Gross Settlement (RTGS) programme. That will see CHAPS payments also migrate to enhanced ISO 20022 messaging in April 2023, followed by the switchover of the core settlement engine in Spring 2024. The new RTGS platform will have the capability to extend operating hours to 22/5, and with further changes, to near 24/7 operation. (Market participants continue to be frustrated by the BoE’s limited operating hours window for settlements.)

RTGS is an accounting system that allows eligible institutions to hold reserves balances at the Bank, and settle obligations to each other. Over £700 billion settles in the UK RTGS every working day. The Bank provides sterling settlement services for Bacs, CHAPS, Cheque & Credit, CREST, Faster Payments, LINK and Visa.

Despite the name, it is far from real-time: Bacs net settlement takes place once a day. Cheque & Credit operates on a three-day cycle. Faster Payments settles three times every business day in RTGS, LINK in 24-hour cycles and Visa likewise. The RTGS renewal programme aims to speed this up and improve access.

As the BoE's Victoria Cleland, Executive Director for Payments, put it in a speech earlier this year: "[RTGS reform will let us] offer a more accessible, functional and resilient platform for digital settlement in central bank money. While we are developing it on centralised infrastructure, it will be able to interface with innovative payment systems and providers, including those based on Distributed Ledger Technology."

As one market observer, Bob Lyddon, earlier told The Stack's founder: "The BoE is the most critical single-point-of-failure in the UK financial system but it cannot do the basics, such as process all of its payments in real-time or open an account without involving the IT department. For the BoE, opening a Settlement Account is an IT change that needs to go through a full testing cycle. This policy was introduced after the CHAPS outage in 2014 to ensure that BoE’s systems did not fall over again, these systems being of “systemic importance” to the UK’s financial and economic system. One IT change can be done per week. As there are IT freezes over the summer and over Christmas/New Year, and as there are 13 meetings of the Monetary Policy Committee that might result in a Base Rate change (also an IT change), this leaves only a small number of slots available for new accounts."

He added: "This indicates a comically antiquated IT infrastructure at the BoE."

IT modernisation continues however at the BoE and recent job postings give a flavour of a cloud and microservices-centric direction. The recent criteria for one recent role, for example, includes "extensive Kubernetes experience, including production support; understanding and practical implementation of both CI and CD; extensive cloud automation experience [AWS, GCP or Azure]; extensive experience with Linux based systems".

What are your views on how both the NPA and RTGS reform are being handled?

We'd welcome your thoughts, on or off-the-record. Get in touch.

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