The payments system in the UK

1. What kind of Doughnuts will we need? Emerging challenges and solutions for ACHs
Nick Senechal, Strategy Lead
ICCI, Sofia, October 2014

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VocaLink: central to the UK economy
£6 trillion of value
10 billion transactions
BACS and Faster
Payments infrastructure
VocaLink’s safe and efficient services allow over 60 million bank accounts to work every day
Customer accounts Customer accounts
Banks Banks
Partnering to create commercial networks, deliver industry innovation and transform digital
1968-1985
2002
IP-Based
Payment
Capture Service
2008
UK Faster
Payments Service
2012
Immediate Payments
(Singapore),
Domestic clearing
(Sweden)
2011
National Mobile
Proxy Database
Mobile
Platform
6 billion BACS transfers 1 billion Faster Payments
2011 – 99.999% availability
3 billion ATM transactions
2006
OneVu
2007
Mobile Phone
Top Up

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The (American) Donut model

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The doughnut: is it ready for a comeback?
Bank B
Bank E
Bank C
Bank D
Bank A

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The ACH –traditionally more like an English Doughnut?

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Centralisation, simplification, efficiency
Bank B
Bank E
Bank C
Bank D
Bank A
ACH

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The difference: Jam in the middle…

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What was the jam? Why are we here
Advantage when ACHset up?
Advantage now?
Liquidity efficiency through netting
YES
YES
Single connection to allbanks
YES
?
Simplifiedrouting for banks
YES
?
Consistent service levels for all users
YES
?
Predictable cycle times
YES
?
Cost-effectiveshared services for banks
YES
?
Defined resilience
YES
YES
Is efficiency for banks still the answer, or something more?

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Regulation

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Regulators attracted to ACHs like cops to a donut shop
•Focus increasingly on competition in retail banking and access to payment services in order to benefit the customer
•At the European Union level –access for third party providers
Focussed on the banks
Answer may lie in the ACH (the “Payment System”)
•At a national level (UK as an example) –access for new “challenger banks”
Focussed on the “Payment System” directly
Existing bank control seen as a barrier
Regulator sees circumvention of the ACH as, potentially “a good thing”
In short, ACHs must learn to serve new as well as traditional customers

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Innovation

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Innovation –let a thousand flowers bloom
•Competitive innovation is driven by entrepreneurs at the beginning and end of the value chain
•Focussed on the customer, and what she wants to do
Payments are just a part
But need to be there
•Payments need to enable, not constrain
Cycle times
Opening hours
Unclearedfunds
Available channels
If the ACH doesn’t measure up, Innovators will find another way…

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UK –an example of “Overlay” innovation
Barclays “Pingit” (2012)
UK mobile PayM(“proxy database” 2014)
Zappe/m commerce (2015)
ZappBill pay service
(2015)
Zappsmall business (SME) service (2016)
Faster payments Direct Corporate access (2009)

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Overlays use the ACH, but are separate
Zapp
Request to pay service

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Competition

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Competition…
•Has ACH vs ACH competition materialised?
–Is collaboration a better path?
•Are ACH models competing for cards business?
–Ideal, MyBank, Zapp
•Are cards competing for ACH business
–Cards vs Direct Debits for utility payments
•Are alternative payment providers competing for ACH business?
–Aggregator models (PayPal)
•Do ACHs have the capabilities to compete?
–Interfaces for easy access
–Multiple customer propositions

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Internationalisation

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Internationalisation
•Cutomersare increasingly seeking a global payment solution
•New payment innovations and uses look to roll out internationally
•Card Schemes have seamless global coverage
–Payments method of choice for new developments –ApplePay
•ACH systems are still primarily domestic
–Although others using “overlays” to link ACHs –Earthport
–Linkage through bodies such as EACHA become increasingly timely
•Key issues:
–Standards
–Settlement models
–End customer proposition

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ACH interconnectivity must be a priority…
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Real-time interoperability model
R/T
ACH
1
R/T
ACH
2
Participant
1c
Settlement agent 1
For:
Participant 1a
Participant 1b
Participant 1c
R/T ACH 2 (2a,2b,2c)
Participant
1b
Participant
1a
Participant
2a
Participant
2c
Participant
2b
Settlement agent 2
For:
Participant 2a
Participant 2b
Participant 2c
R/T ACH 1 (1a, 1b, 1c)
Reciprocal
participation
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Real-time “hub of hubs” model
R/T
ACH
1
R/T
ACH
2
Participant
1c
Participant
1b
Participant
1a
Participant
2a
Participant
2c
Participant
2b
Common Settlement Agent/Service
R/T
Link
ACH For VocaLink the emphasis is on
real-time interoperability

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Real-time is a true domino effect…

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BEHAVIOURS
-Connected,
-Self-service,
-Instantly gratified
-Multi-mode
-Mobile
TECHNOLOGY
ENABLERS
-Processing power
-Bandwidth
-Mobile access
-Security
MARKET NEED
-Platform renewal
-New services
-Financial inclusion
-Regional pressure
-New participants
Real - time
Real-time, why now?

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Substitutes

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Substitutes are emerging now: are they viable?
Technology is challenging the role of a central ACH
•New ways of settlement –open ledgers
•New ways of participation –protocol-based crypto services
•Anonymous exchange via the internet
•Cheaper faster commoditised processing –why centralise?
The challenge is not yet mature, but must be faced. ACHs must ask:
•What do they offer the customer?
•How is our offer better?
•Are there elements of these new technologies the ACH should employ?

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In ten years time will we still be enjoying this?

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Will ACHs still be here in ten years? Yes if…
Requirednow?
Liquidity efficiency through netting
YES
Single connection for allPROVIDERS
YES
Simplifiedrouting for PROVIDERS including INTERNATIONALLY
YES
Consistent service levels for all users
YES
Consistent REAL-TIME services
YES
CAPABILITYTO SUPPORT NEW SERVICES and INNOVATIONS
YES
Definedresilience CONTINUES
YES

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