Banking

Cheat Sheet: Faster Payments Services

From the best part of a week, to two hours

The combination of the words 'faster' and 'payment' can only be a good thing, right?
Indeed. Way back in 2000, The Cruikshank Report, a review sponsored by the Treasury, recommended that payment transactions between banks be made quicker and more transparent.

The initiative went on to become the Faster Payments Service (FPS), launched in May this year. Under the new system, which is overseen by UK payments association Apacs and operated by payment processor VocaLink and Chaps Clearing Company, payments can appear in the recipient's bank account up to two hours after they were made. It's a big difference to the conventional Bankers Automated Clearing Services (Bacs) process, where payments can take up to three days to show up.

Faster is better but is it really going to make that much of a difference?
For consumers it's a nice thing to have and it makes them feel better that the banks aren't earning millions of pounds in interest on a float of other people's money. For businesses, it means a much better grasp of day-to-day finances, which can mean more accurate budget predictions and so less financial risk. The advent of Faster Payments does, however, spell the end of an oft-used excuse: with FPS, debtors will no longer be able to delay payments by saying the cheque is in the post.

Yes, that old chestnut. Never used it myself, ahem… So companies can use this service now?
Not quite yet. There are currently 13 member banks signed up, with one more joining in November, but not all of them have launched a faster payments service. Some banks however have been providing FPS to their individual customers for telephone and internet transactions since it went live earlier this year.

Corporate FPS isn't yet being offered by the banks but it's expected in the next six months.

While consumer FPS has so far been free, corporate FPS is likely to attract a charge, expected to be more expensive than the Bacs equivalent. Such charges will apply to corporates if they take a service through their bank - what companies can do to cut costs, however, is connect to the central processing system directly. Direct Corporate Access (DCA) is likely to go live around March 2009, once the stakeholders have completed usability pilots.

The differences between corporate and consumer FPS don't stop at costs. The other big thing is that although consumer FPS is 24/7, the corporate version has three two-hour settlement cycles within banking hours.

Why's that then?
Well, both consumer and corporate FPS is limited in most instances to £10,000 (standing orders are limited to £100,000). The risk on consumer transactions is deemed low enough to risk clearing them outside banking hours, even though the participating banks won't settle their accounts with the Bank of England (BoE) until the next available settlement cycle the following morning.

Because corporates will be sending through big batches of sub-£10,000 transactions, the actual amount being dealt with could reach billions and so the BoE isn't prepared to underwrite that sort of risk.

Do you need to buy in some tech to join in with FPS? When do the IT suppliers get a chance to make a bob or two out of the whole affair?
To sign up for DCA, corporates will need to avail themselves of software from a supplier such as Albany or Dovetail and connect it to their own accounting applications. In theory, many corporates will already be using Bacs gateway software and the intention is that technology has been designed so there will be no discernable difference between the two services, with FPS operations looking and feeling similar to Bacs.

All in all, FPS operations will be an add-on, rather than a complete implementation exercise.

So, no big IT spend then. Sounds like FPS is coming up trumps all round.
Not necessarily - FPS is a horse for a particular course. Initially, it looks like it might be a more expensive option for end users, but there will be a strong lobby to get the price reduced to a few pence per transaction.

Compared to FPS, Bacs is the slower option, but each transaction can be for an unlimited amount - it's not capped at £10,000 like FPS. Another thing to remember is that FPS has no cancellation feature: once the payment has been made, it is irrevocable. With Bacs, those making the payment can withdraw the payment right up until the processing day. FPS users can't yet make future-dated payments either, whereas with Bacs payments can be specified 70 days in advance.

Is the UK the only country on the FPS bandwagon?
EU countries are obliged to comply with the Payments Services Directive, which it adopted in 2007, but with a deadline for member countries to implement the service of 1 November 2009.

In the UK, we've been used to a three-day wait, but in other European banking systems it's not uncommon to have to wait a number of weeks. When cross-European faster payments comes in, it will really free up a lot of cash for any business that exports or imports, or pays employees within the EU.

As the UK is already a year ahead of its EU counterparts, companies here should be well placed to take an early advantage of the new regulations.

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