New payments architecture tipped to alter business behaviours

Out-Law News | 22 Oct 2018 | 10:17 am | 3 min. read

Businesses could be forced to rethink the way they manage their money as a result of forthcoming changes to the UK's payments architecture, an expert has said.

Tony Anderson of Pinsent Masons, the law firm behind Out-Law.com, said that the 'new payments architecture' reforms will cut the time it takes to process payments, and are aimed at ensuring the technology that supports trillions of pounds' worth of payments is secure, resilient and able to support future digital innovation.

On Thursday, Pay.UK, the body tasked with designing and implementing the new payments architecture, began the process of finding a "strategic partner" to "design, build, run and maintain a scalable and evolving world-class infrastructure" for payments on its behalf.

Anderson said that it would be wrong for businesses to view the new payments architecture reforms, set to be phased in in the early 2020s, as just another major technology project that will have little impact on them.

"The new payments architecture project is an ambitious plan to overhaul the existing infrastructure that supports the UK's three main retail payment systems – BACS, Faster Payments and the Cheque and Credit Clearing systems," Anderson said. "All three payment systems used to operate independently, but they have this year moved under the control of Pay.UK in the first stage of the reforms. The future steps, which the procurement exercise Pay.UK has initiated will support, promise to deliver real changes in the way payments are processed. A future of real-time, 24/7 transactions and innovative 'push payments' are among the biggest changes coming."

"For businesses, the prospect of payments being cleared and settled in real-time is likely to have a real impact on their behaviour, potentially accelerating the way business is conducted compared to now. At the moment, it will typically take three days for money transferred via BACS to move between accounts. Similarly, the cheque clearing process generally takes six days. If these payments are made in real-time, it will mean businesses will have to be even more conscious about how they manage cash flow and it could see them front load their accounts," he said.

Anderson said that the new payments architecture reforms will need to be supported by changes in legislation and regulation to recognise the new ways in which payments will be processed. He pointed to the introduction of new regulations in the UK to support the move to digital image clearing of cheques as an example of changes being made to accommodate the technological changes being made in the payments ecosystem.

"Regulation around clearing and settlement has been in place for decades, but it may not take account of the developments we have already seen in fintech and may see more of in future," Anderson said. "We can expect the Prudential Regulation Authority and Payment Systems Regulator to monitor developments and advise the government on legislative changes that may be needed."

According to Pay.UK's 'Strategic Partner Procurement Prospectus', the body will consider selecting a single supplier or a "prime-led consortium" to help it deliver the reforms. It intends to issue a pre qualification questionnaire later this year and said qualifying bidders will be asked to provide information to support their candidacy in February 2019. Formal proposals for the partnership contract will be invited in August next year, before final shortlisting takes place in early 2020. Pay.UK said it expects to select its partner in the second quarter of 2020.

Contained in the prospectus were details of how Pay.UK expects the new payments architecture (NPA) to be designed.

"The successful partner will be responsible for the design and build of the clearing and settlement layer of the NPA, which includes the provision of hardware, software, secure communications and security standards and operating environments," Pay.UK said. "The design of the infrastructure should be able to flex and accommodate future volume changes that arise as a result of the ‘internet of things’, PSD2, interoperability demands, the predicted consolidated traffic of Bacs and, potentially, cheque payments."

"In addition, the design should be: flexible so it can incorporate new thinking in payments services; a platform for innovation and competition in the UK payments ecosystem; and capable of supporting different end user propositions’ outcomes, as well as the maintenance and development of other critical payment instruments. Key to this stage will be delivering the design and build on time and to budget," it said.

Paul Horlock, chief executive of Pay.UK, said it will be a "unique undertaking" to deliver the new payments architecture envisaged for the UK, but said there is "a massive opportunity for potential partners to be involved in delivering the core of a next-generation retail payments ecosystem".

"This prospectus helps to set out the qualities required of potential partners who wish to be part of this, as well as explaining: what we want to procure; what we expect from them; how we are buying; when we are buying; how we will engage; and what the next steps are," Horlock said.

Charlie Clarence-Smith of Pinsent Masons said similar improvements are also being made to payment systems overseas.

He said: "In February 2018, Australia announced their New Payments Platform, a new national infrastructure for real-time payments. Similarly, Hong Kong and Singapore presented new faster payments systems which operate 24/7 where users can transfer funds between banks instantaneously. So far 21 banks, including Bank of China and HSBC and other payment service providers including Alipay and Octopus are signed up for the service. As the realisation of global real-time payments comes to fruition, expect to find other jurisdictions following suit."