Peter Harmston, Partner & Head of Payments Consulting, KPMG UK, and Imran Ali, Director, Payments Consulting, KPMG UK.
Amid much anticipation, the UK’s New Payments Architecture (NPA) for digital retail payments is gearing up for delivery. Given KPMG’s significant involvement in multiple implementations of real time payments systems around the world we have a unique insight into the challenges and opportunities that lie ahead. We’ve set out below six key considerations for banks to ensure they are prepared for the NPA transformation and the opportunities it brings.
At its heart, the NPA aims to streamline interbank payments into a single clearing and settlement system, replacing the numerous systems in place today. Initially, Faster Payments transactions will migrate to the NPA in 2024-2025, followed by BACS. It will be a new central infrastructure based on ISO 20022, making it the biggest shift in payment processing for a generation.
Although Faster Payments are not migrating until 2024-25, banks need to start preparing now for the first phase of the change: self-certification in 2023. Self-certification is the process by which banks confirm to Pay.UK that they are ready for Faster Payments migration.
1. Face up to the biggest challenge early on
One of the biggest challenges facing banks is adapting their systems to use the NPA’s ISO 20022 message standard for Faster Payments transactions, rather than the current ISO 8583 standard.
ISO 20022 is an XML format message. It carries a lot more information within it and is more flexible than the current standard. Banks need to ensure their systems can support inbound ISO 20022 messages and translate those messages for internal processing. The same goes for outbound messages. Their systems must be able to convert messages into ISO 20022 format to send to the central NPA system.
2. Learn from the past
The introduction of Faster Payments in 2008 is a useful illustration of the kinds of decisions that need to be made.
BACS, the incumbent system at the time, had an 18-character limit in the reference field. This is why bank statements or online banking logs generally use references of 18 characters or less.
Faster Payments allowed for an extended reference field in transactions, but most banks didn’t change their front-end systems to accommodate this.
With ISO 20022, the message can contain even more information, such as extended references and even documents such as invoices or bills. This is an opportunity for banks to revisit the whole end-to-end process in terms of how they carry that reference field all the way through their internal systems and display the full reference information to their customers.
3. Be adaptable to new payment types
In adapting systems for NPA transactions, banks should avoid making any changes that could create barriers going forwards. Banks should think strategically about system and infrastructure changes, ensuring there is enough flexibility to cope with later payment types, particularly BACS, which will have different data fields.
The NPA will also introduce new transaction types, like priority payments and same-day bulk transactions. These are not currently supported by Faster Payments, so banks need to ensure any changes they make to their infrastructure can accommodate these new types of transaction.
4. Upgrade the payments hub
When Faster Payments came in, most banks took the opportunity to upgrade their payments hub and core banking platform, because the impact on them was so significant. NPA is the next big opportunity to do this, to renew and upgrade the core payments infrastructure and increase both technical and operational efficiency. Think about how these connections internally are working, whether there’s a knock-on effect on other systems, such as the internal accounting system or the internal fraud system, too.
5. Ensure adequate risk management and control
There is also a risk management and control aspect. How are payments being managed all the way through the internal infrastructure? Are the right controls available and being acted upon? Faster Payments volumes are already over 3 billion annually, when BACS comes in that will add another 6.5 billion. Banks cannot afford not to have the right controls in place as the consequences are failed payments, upset customers, and reputational damage.
6. Build competitive advantage
Influenced by fintech innovators like Apple Pay and Google Pay, not to mention banks’ own digital propositions, customers have come to expect a fast and easy experience when making digital payments.
Forward-looking banks can use the NPA as a catalyst to transform not just their payments infrastructure, but their whole customer proposition for consumers, corporates and other financial institutions.
This could include better transaction information, new kinds of payments, and innovative overlay products like request to pay, richer data and data analytics that make more use of the data being processed and deliver improved services to customers.
Prepare for the long term
The phased nature of the introduction of the NPA means there are two main ways banks could approach this change. The first is a short-term approach that focuses on the immediate challenge of Faster Payments migration, dealing with the new message standard alone without fundamentally changing the current technology stack or customer proposition.
The second, potentially more expensive but ultimately more efficient option, is to take the opportunity now to overhaul the technology infrastructure, processes and customer proposition and develop a system that not only deals with Faster Payments, but is robust and flexible enough to manage later phases of the NPA programme, including potential overlay services and new transaction types.
The NPA is here for the long term. Banks need to think strategically and plan ahead to ensure they are, too.
